-----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, Hu2v/HozUYtP3bdybGMu+KkJCG0dozDX5iUqSlnHTF4WbRKp1AsSlu3dQyqnfOAJ 4srkeLneC/jKtRkqr4fA4g== 0000936392-98-001089.txt : 19980807 0000936392-98-001089.hdr.sgml : 19980807 ACCESSION NUMBER: 0000936392-98-001089 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19980806 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGNAL PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001029201 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 943174286 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-52901 FILM NUMBER: 98678011 BUSINESS ADDRESS: STREET 1: 5555 OBERLIN DR CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195587500 MAIL ADDRESS: STREET 1: 5555 OBERLIN DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 S-1/A 1 AMENDMENT #2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1998 REGISTRATION NO. 333-52901 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ SIGNAL PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 8731 94-3174286 (Prior to reincorporation) (Primary Standard Industrial (I.R.S. Employer DELAWARE Classification Code Number) Identification No.) (After reincorporation) (State or jurisdiction of incorporation or organization)
5555 OBERLIN DRIVE SAN DIEGO, CALIFORNIA 92121 (619) 558-7500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------------ ALAN J. LEWIS, PH.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER SIGNAL PHARMACEUTICALS, INC. 5555 OBERLIN DRIVE SAN DIEGO, CALIFORNIA 92121 (619) 558-7500 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------------ Copies to: FREDERICK T. MUTO, ESQ. J. STEPHAN DOLEZALEK, ESQ. MICHAEL A. NEWMAN, ESQ. TIMOTHY R. CURRY, ESQ. COOLEY GODWARD LLP BROBECK, PHLEGER & HARRISON LLP 4365 EXECUTIVE DRIVE TWO EMBARCADERO PLACE SUITE 1100 2200 GENG ROAD SAN DIEGO, CA 92121 PALO ALTO, CA 94303 (619) 550-6000 (650) 424-0160
------------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. 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 of 1933, 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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID 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 AUGUST 6, 1998 PROSPECTUS 2,500,000 SHARES LOGO COMMON STOCK All of the 2,500,000 shares of Common Stock offered hereby are being sold by 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 of the Common Stock will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol SIGL. The DuPont Merck Pharmaceutical Company ("DuPont Merck") has entered into a collaborative agreement with the Company. As part of such collaboration, DuPont Merck has agreed to purchase $2.0 million of the Company's Common Stock in a private transaction concurrent with the closing of this offering at a price per share equal to the initial public offering price. See "Business--Research and Development Partners." ------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING 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 SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------------- Per Share........................ $ $ $ - ------------------------------------------------------------------------------------------------------------- Total(3)......................... $ $ $ - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $600,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about , 1998, at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST BANCAMERICA ROBERTSON STEPHENS LEHMAN BROTHERS , 1998 3 [Graphic depicting the integrated discovery of gene regulating targets and drugs and the gene regulating drug discovery programs of the Company. The left side of the graphic depicts the progression from target discovery to drug discovery to drug commercialization. The right side of the graphic depicts the progression of cellular models of disease from identification and validation of gene regulating targets to high throughput screening to combinatorial, computational and structural chemistry to gene regulating drugs. The base of the graphic elucidates the Company's gene regulating drug discovery programs: autoimmunity, inflammation, bone metabolism, neurology, cardiovascular, cancer and virology.] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR OVER-ALLOTMENTS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." Signal Pharmaceuticals(TM) and the Company's stylized logo are trademarks of the Company. All other trade names or trademarks appearing in this Prospectus are the property of their respective owners. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." THE COMPANY Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated target and drug discovery company focused on identifying new classes of small molecule drugs that regulate genes and the production of disease-causing proteins. The Company applies advanced cellular, molecular and genomic technologies to map gene regulating pathways in cells and to identify proprietary molecular targets that activate or deactivate genes and result in disease. Signal is advancing the application of genomics beyond identifying and elucidating the functions of genes to designing novel classes of disease-modifying drugs that selectively regulate the activation of disease-causing genes. The Company conducts its target and drug discovery programs both independently and with its five collaborative partners: Ares Trading S.A. ("Ares-Serono"), an affiliate of Ares-Serono S.A.; the Roche Bioscience division ("Roche Bioscience") of Syntex (U.S.A.) Inc., a member of the Roche Group of Companies; Nippon Kayaku Co., Ltd. ("Nippon Kayaku"); N.V. Organon ("Organon"), a business unit of Akzo Nobel N.V.; and The DuPont Merck Pharmaceutical Company ("DuPont Merck"). Signal's target and drug discovery programs are focused on intracellular gene regulating pathways that play a fundamental role in controlling cell proliferation, cell metabolism and cell death, as well as the replication of viral pathogens. These pathways provide important new targets for treating autoimmune and inflammatory diseases, diseases associated with bone metabolism, neurological and cardiovascular diseases, cancer and viral infections. Pathways targeted by Signal include the Nuclear Factor-kB ("NF-kB") pathway, the jun N-terminal kinase ("JNK") and p38 mitogen-activated protein kinase ("MAP kinase") pathways, an estrogen-regulated gene ("ERG") pathway and five viral pathways. These pathways provide multiple drug targets for therapeutic intervention, many of which regulate the activation of multiple genes involved in disease. The Company pursues patent exclusivity for its drug targets and related drug leads, and owns or has licensed five issued U.S. patents relating principally to MAP kinase pathways, 21 pending U.S. patents and 43 pending foreign patents. Signal has developed an integrated target and drug discovery platform that enables the Company to proceed rapidly from target identification and validation through lead discovery and optimization. Signal's target discovery capabilities combine proprietary human cell lines with molecular biology and functional genomic and proteomic technologies to identify key gene regulating pathways and associated drug targets. To date, Signal has built a portfolio of 18 clinically important drug targets, including IkB kinases ("IKKs"), JNKs and p38-2 (a subtype of p38). The Company's drug discovery capabilities include proprietary biochemical and cell-based screening assays and high throughput screening systems for rapid, target-directed screening of diverse compound libraries. The Company develops drug leads by integrating combinatorial and computational chemistry with structure-based drug design technologies to optimize the activity of drug leads on gene regulating targets. Applying its expertise in gene regulating kinase targets, Signal has developed a kinase array screening technology ("KAST") and a signaling kinase inhibitor library ("SKIL") to enhance the speed and quality of Signal's drug discovery activities. The Company has initiated screening in 16 drug discovery assays and has demonstrated efficacy of certain of its drug leads in animal models of arthritis and osteoporosis. Signal's business objective is to develop and commercialize a broad pipeline of clinically important drug targets and drug candidates, initially in collaboration with pharmaceutical partners and academic institutions. These collaborations facilitate the discovery of targets and drug leads in multiple therapeutic fields, significantly expanding the Company's commercial opportunities and diversifying Signal's scientific risk. Pharmaceutical partners also provide Signal with multiple sources of revenue, as well as substantial development, manufacturing and marketing resources, which reduce the Company's financial risk. In addition to its five current pharmaceutical partners, Signal has target discovery 3 5 collaborations with researchers at 24 academic institutions. The Company's strategy is to retain U.S. co-commercialization rights in certain of its pharmaceutical collaborations. To date, Signal has secured U.S. co-commercialization rights in its collaboration with Ares-Serono and worldwide co-commercialization rights (excluding Japan) in its drug development collaboration with Nippon Kayaku. On a select basis, Signal plans to independently develop and commercialize drugs for specialty clinical markets in the U.S., principally in the fields of oncology and inflammation. To date, Signal has entered into collaborative discovery agreements with five pharmaceutical partners: Ares-Serono for the discovery and development of small molecule modulators of the NF-kB pathway to treat autoimmune, cardiovascular and neurodegenerative diseases and cancer; Roche Bioscience for the development of human neuronal cell lines for use in discovering new classes of drugs for the treatment of pain and other disorders of the peripheral nervous systems ("PNS"); Nippon Kayaku for the optimization of drug leads for the treatment of PNS disorders, including neuropathies resulting from diabetes and cancer chemotherapy; Organon for the identification of genomic targets and the development of screening assays for neurological, cardiovascular, gynecological and other diseases; and DuPont Merck for the identification of new classes of anti-viral drugs that inhibit gene regulating targets of the hepatitis C virus ("HCV") and the human immunodeficiency virus ("HIV"). Signal also has licensed worldwide rights for a drug lead discovered by the Company to a sixth partner, Tanabe Seiyaku Co., Ltd. ("Tanabe"), for the treatment of autoimmune, inflammatory and other diseases. The Company has multiple additional partnering opportunities in its other drug discovery programs. The Company was incorporated in California in July 1992 and intends to reincorporate in Delaware prior to the completion of this offering. Unless the context otherwise requires, references in this Prospectus to "Signal" and the "Company" refer to Signal Pharmaceuticals, Inc., a Delaware corporation, and, where applicable, to its California predecessor. The Company's offices are located at 5555 Oberlin Drive, San Diego, California 92121, and its telephone number is (619) 558-7500. THE OFFERING Common Stock offered by the Company............................. 2,500,000 shares Common Stock to be outstanding after the offering................ 9,433,929 shares(1) Use of proceeds..................... For research and development, including internal discovery programs and joint research and development with corporate and academic collaborators, the acquisition of research and development technologoies, compound screening libraries and product rights, capital investments and working capital and general corporate purposes Proposed Nasdaq National Market Symbol.............................. SIGL 4 6 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenue......................... $ -- $ 22 $ 299 $ 3,933 $ 7,579 $ 1,549 $ 4,644 Expenses: Research and development... 682 3,799 5,173 7,724 10,337 2,459 3,288 General and administrative........... 603 1,288 1,937 2,471 2,791 671 1,203 ------- ------- ------- ------- ------- ------- ------- Total expenses........... 1,285 5,087 7,110 10,195 13,128 3,130 4,491 ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations... (1,285) (5,065) (6,811) (6,262) (5,549) (1,582) 153 Interest income (expense), net........................... (45) 161 329 53 (192) (92) 182 ------- ------- ------- ------- ------- ------- ------- Net income (loss)............... $(1,330) $(4,904) $(6,482) $(6,209) $(5,740) $(1,673) $ 335 ======= ======= ======= ======= ======= ======= ======= Pro forma net income (loss) per share, basic and diluted...... $ (1.20) $ 0.05 ======= ======= Shares used in computing pro forma net income (loss) per share(2): Basic...................... 4,776 6,628 Diluted.................... 4,776 6,875
MARCH 31, 1998 ------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 20,671 $ 49,971 Working capital............................................. 14,635 43,935 Total assets................................................ 24,755 54,055 Long-term obligations (including current portion)........... 2,661 2,661 Accumulated deficit......................................... (24,410) (24,410) Total stockholders' equity.................................. 15,649 44,949
- ------------------------------ (1) Based on the number of shares outstanding at March 31, 1998. Includes the sale of 166,666 shares of Common Stock to DuPont Merck in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share. Excludes 1,581,097 shares of Common Stock reserved for issuance under the Company's stock option plans, of which 662,676 shares were subject to outstanding options as of March 31, 1998 at a weighted average exercise price of $0.87 per share. Subsequent to March 31, 1998, the Company granted options to purchase an aggregate of 221,525 shares of Common Stock at a weighted average exercise price of $2.00 per share. Also excludes 62,500 shares of Common Stock reserved for issuance upon exercise of outstanding warrants as of March 31, 1998 at an exercise price of $8.40 per share. See "Capitalization," "Management--Equity Incentive Plan" and Note 5 of Notes to Financial Statements. (2) Computed on the basis described in Note 1 of Notes to Financial Statements. (3) As adjusted to reflect the receipt of $1,999,992 from DuPont Merck in exchange for 166,666 shares of Common Stock to be issued in a private transaction concurrent with the closing of this offering and the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share and the receipt of the estimated proceeds therefrom. See "Use of Proceeds" and "Capitalization." ------------------------------ Except as otherwise noted, all information in this Prospectus assumes: (i) no exercise of the Underwriters' over-allotment option, (ii) a 4-for-1 reverse split of the Common Stock and the Company's reincorporation in Delaware, both to be effected prior to the completion of this offering, and (iii) the conversion of all outstanding shares of Series A, B, C, C-1, D, E and F Preferred Stock (collectively, the "Preferred Stock") into shares of Common Stock, which will occur upon the closing of the offering. See "Description of Capital Stock," "Underwriting" and Notes to Financial Statements. 5 7 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. The following risk factors should be considered carefully in addition to other information in this Prospectus before purchasing the shares of Common Stock offered hereby. See "Special Note Regarding Forward-Looking Statements" on page 17 of this Prospectus. Limited Operating History; Early Stage of Development. The Company was formed in 1992, has a limited operating history and is at an early stage of development. All of the Company's active compounds are in the research stage, and there can be no assurance that any such compounds will enter clinical trials, be commercialized or will generate revenue in the future. The Company has experienced significant operating losses since inception and, as of March 31, 1998, had an accumulated deficit of approximately $24.4 million. The Company expects to continue to incur significant operating losses for the foreseeable future as it continues to incur increasing costs of research and development, acquisition of technologies, compound libraries and product rights, expansion of its operations and initiation of clinical trials. The Company has completed less than six years of operations, and its business is subject to all of the risks inherent in the establishment of a new business enterprise, including all of the problems, expenses and delays frequently encountered in connection with the development of pharmaceutical products, the utilization of unproven technology and the competitive environment in which the Company operates. Accordingly, the extent of future losses and the time required to achieve profitability, if ever, is highly uncertain. Payments, if any, from corporate collaborators, interest income, and academic and governmental grants are expected to be the Company's only sources of revenue for the foreseeable future. The Company has not yet received any milestone payments under its collaborative agreements. Royalties or other revenue from commercial sales of products based upon any target or compound identified by the Company are not expected for a number of years, if at all, and are dependent on the Company's ability, alone or with others, to successfully research, develop, obtain regulatory approval for, manufacture and market its products under development. See "--Dependence on Pharmaceutical and Biopharmaceutical Collaborations and Milestone Payments," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Research and Development Partners." Technological Uncertainty. Target and drug discovery and development methods directed toward intracellular signaling pathways and gene regulation are relatively new. The Company is working on a number of costly long-term discovery and development projects which involve experimental and unproven methods and which may ultimately prove unsuccessful. There is limited scientific understanding relating to the role of genes in most diseases, and relatively few products based on gene discoveries have been developed and commercialized. In addition, the Company is not aware of any drugs that have been developed and commercialized that were designed specifically to target intracellular signaling pathways. There can be no assurance that the Company's techniques for elucidating intracellular signaling pathways and identifying drug targets will lead to the discovery or development of commercial pharmaceutical products. Moreover, as the technology of the Company and its competitors continues to evolve, the Company will need to continue to develop novel and innovative technologies, enter into relationships with additional corporate collaborators and aggressively pursue patent and other protection for the Company's proprietary rights. The Company's failure to properly address the changing technological landscape, enter into collaborations to pursue development of its technologies or develop additional competitive technologies could have a material adverse effect on the Company's business, financial condition and results of operations. Uncertainties Associated with Product Development. The development of new pharmaceutical products is highly uncertain and subject to a number of significant risks. Lead compounds and drug candidates that appear to be promising at early stages of development may not advance to and through clinical trials and reach the market for a number of reasons. Such reasons include the possibilities that the drug candidates will be found ineffective or cause harmful side effects during preclinical testing or 6 8 clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical, fail to generate market demand or be precluded from commercialization by proprietary rights of third parties. To date, none of the compounds generated by the Company or through its collaborations has been approved for clinical testing, and there can be no assurance that any of such current or proposed compounds will be submitted for clinical testing. In addition, the safety and efficacy of compounds generated by the Company or through its collaborations has not been conclusively demonstrated in animal models or humans. If any potential products are identified by the Company, either independently or through its collaborations, such products will require significant additional development, extensive preclinical and clinical testing, regulatory approval and additional investment in manufacturing scale-up and sales and marketing prior to their commercialization, and there can be no assurance that any of these efforts will be successful. No assurance can be given that any of the Company's discovery and development programs will be successfully completed, any investigational new drug application ("IND") will be accepted by the United States Food and Drug Administration (the "FDA") or other applicable regulatory authorities, clinical trials will commence or be completed as planned, required regulatory approvals will be obtained on a timely basis, if at all, or any products for which approval is obtained will be commercially successful. If any of the Company's or its collaborators' development programs are not successfully completed, required regulatory approvals are not obtained or products for which approvals are obtained are not commercially successful, the Company's business, financial condition and results of operation could be materially adversely affected. Dependence on Pharmaceutical and Biopharmaceutical Collaborations and Milestone Payments. The Company's strategy for the discovery, development and commercialization of new gene regulating targets and drugs involves the formation of multiple collaborations in addition to focused internal development efforts. To date, substantially all revenue received by the Company has been from its collaborations, and the Company expects that substantially all revenue for the foreseeable future will be generated by collaborations. The Company has not yet entered into collaborations for a number of its existing or prospective programs. The Company's ability to continue to fund its research and development programs, maintain adequate capital reserves and, ultimately, achieve profitability will be dependent upon the ability of the Company to achieve certain milestones under existing collaborations with Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon and DuPont Merck, and under an existing license agreement with Tanabe, and its ability to enter into additional collaborations. Because pharmaceutical and biopharmaceutical companies engaged in drug discovery activities have historically conducted target and drug discovery through their own internal research departments, these companies must be convinced that the Company's technologies and research discoveries justify entering into collaborative agreements with the Company. The Company also must compete with other companies for the limited number of existing opportunities to enter into such collaborative arrangements with pharmaceutical and biopharmaceutical companies. There can be no assurance that the Company will be able to negotiate additional collaborative agreements in the future on acceptable terms, if at all, that current or future collaborative agreements will be successful, or that current or future collaborators will not pursue or develop alternative technologies either on their own or in collaboration with others, including the Company's competitors, as a means for identifying targets or lead compounds. To the extent the Company chooses not to or is unable to enter into such agreements, it will require substantially greater capital to undertake the research, development, clinical testing, manufacturing, sales and marketing of products at its own expense. In the absence of such collaborative agreements, the Company may be required to delay or curtail its research and development activities to a significant extent. The Company has not received any milestone payments from its corporate collaborators to date. The Company's future revenue will depend in part on its ability to realize milestone payments and royalties triggered by the development and commercialization of drugs identified through the use of the Company's technologies. The Company's research and development efforts may result in developed and commercialized pharmaceutical products generating milestone payments and royalties only after lengthy and costly preclinical and clinical development efforts, the receipt of requisite regulatory 7 9 approvals, the development and integration of manufacturing capabilities, the receipt of patents and successful marketing efforts. The Company's collaborators are not obligated to develop or commercialize potential products identified through the use of the Company's technologies. Development and commercialization of potential products will therefore depend not only on the achievement of research and development objectives by the Company and its collaborators, which cannot be assured, but also on each collaborator's own financial, technical, competitive, marketing and strategic considerations, all of which are outside the Company's control. Such strategic considerations may include the relative advantages of alternative products being marketed or developed by the Company's collaborators and others, including relevant patent and proprietary positions. There can be no assurance that the interests and motivations of the Company's collaborators are, or will remain, aligned with those of the Company, that current or future collaborators will not pursue alternative technologies or potential products in preference to those of the Company or that such collaborators will successfully perform their development, regulatory, compliance, manufacturing or marketing and sales functions. In general, should the Company or a collaborator fail to develop or commercialize a potential product identified through the use of the Company's or its collaborators' technologies, or should such a potential product be determined to be unsafe, of no therapeutic benefit, uneconomical, or not sufficiently superior to competing products, the Company may not receive any future milestone payments or royalties associated with such potential products, and the Company may have only limited or no rights to independently develop and commercialize such potential products. There can be no assurance that any potential product will be developed and commercialized as a result of such collaborations, that any such development or commercialization would be successful or that disputes will not arise over the application of payment provisions to such potential products. Modification or termination of the Company's existing or future collaborative agreements, or the failure to enter into a sufficient number of additional collaborative agreements on favorable terms, could result in loss of anticipated revenue as well as potential delay or curtailment of ongoing research and development activities and have a material adverse effect on the Company's business, financial condition and results of operations. The Company's collaborations may generally be terminated upon a breach by either party. Moreover, certain of the Company's collaborations may be terminated by its collaborators if Signal fails to achieve certain research and development milestones. The Company has in the past encountered, and may in the future encounter, difficulty in satisfying certain milestones under its collaboration agreements due to the early stage of development of the Company's technology, the inherent uncertainties associated with product development and the aggressive discovery and developmental timetables presented by certain milestones. Accordingly, the Company has in the past renegotiated, and may in the future need to renegotiate, its collaboration agreements to modify the timing and requirements of certain milestones. There can be no assurance that the Company would be able to renegotiate any milestone requirements in the future, and any failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. In March 1998, Signal and Tanabe mutually agreed to conclude their research collaboration and Tanabe paid an additional license fee to Signal for an exclusive worldwide license to a lead compound that was discovered during the collaboration. Moreover, regardless of whether Signal satisfies future milestone obligations, beginning in August 1998, Roche Bioscience can terminate its collaboration agreement with the Company at its discretion upon ninety days' written notice. Additionally, Organon may terminate its funding of certain Signal research effective January 1999 if the Company does not meet specified milestones by October 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Research and Development Partners." Future Capital Requirements; Uncertainty of Additional Funding. The Company has expended and will continue to expend substantial funds to continue the research, development and testing of its potential products. The Company's future capital requirements will depend on, and could increase substantially as a result of, many factors, including progress in its research and development programs; the scope, prioritization and number of programs; the acquisition and development of enabling technologies; the expansion or initiation of academic licensing arrangements; the acquisition of potential products; the progress of preclinical and clinical testing; the Company's ability to enter into 8 10 additional collaborations; the receipt of milestone, royalty and other payments from its collaborations; the modification or termination of any of the Company's current corporate collaborations or any future collaborations; the time and costs involved in obtaining regulatory approvals; the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent claims; competing technological and market developments; the costs of establishing manufacturing facilities for clinical or commercial production; and the costs inherent in retaining and developing commercialization rights for certain compounds. The Company currently depends on its corporate collaborators for substantially all of its research and development funding. As of March 31, 1998, the Company had received approximately $20.8 million from its collaborators. There can be no assurance that the Company will continue to receive funding under its existing collaborative agreements or that the Company's existing or potential future collaborative arrangements will be adequate to fund the Company's operations. The Company also may seek alternative sources of financing or financing structures in the future to efficiently discover and develop its potential products, and there can be no assurance that such alternative financing arrangements will be available, and if available, will lead to the successful development of potential products. The Company believes that the net proceeds of this offering, together with its existing capital resources, committed revenue from its existing collaborations and interest income should be sufficient to fund its anticipated operating expenses and capital requirements through the end of the year 2000. The Company intends to raise additional funds through additional equity or debt financings, research and development financings, collaborative relationships or other joint venture relationships and may seek to finance certain of its programs through other financing mechanisms. Because of its long-term capital requirements, the Company may seek to access the public or private equity markets whenever it deems conditions to be favorable, even if it does not have an immediate need for additional capital at that time. There can be no assurance that any such funding will be available to the Company, or, if available, that it will be available on acceptable terms. If additional funds are raised by issuing equity securities, further dilution to stockholders may result, and debt financing, if available, may involve restrictive covenants. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research, development or clinical programs which would materially adversely affect the Company's business, financial condition and results of operations. The Company also may be required to seek funds through arrangements with collaborative partners or others that require the Company to relinquish rights to certain of its technologies, potential products, products or marketing territories that the Company would otherwise seek to retain, develop or commercialize itself. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Patents and Proprietary Rights. The Company's success will depend in part on its ability to obtain and retain patent protection for its proprietary technologies, targets and potential products, effectively preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Because of the substantial length of time and expense associated with bringing potential products through the development and regulatory approval processes to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Accordingly, the Company seeks patent protection for its proprietary technology, targets and potential products. As of April 30, 1998, the Company owned or had licensed five issued U.S. patents, 15 notices of allowance from the U.S. Patent and Trademark Office, no corresponding issued foreign patents, 21 pending U.S. patent applications, as well as seven corresponding international filings under the Patent Cooperation Treaty, and 43 pending foreign national patent applications. However, there can be no assurance that the Company or its collaborators have developed or will continue to develop potential products or processes that are patentable or that patents will issue from any of the Company's pending applications, including patent applications that have been allowed. There also can be no assurance that the Company's or its collaborators' current patents, or patents that issue on pending applications, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to the Company. Patent applications in the United 9 11 States are maintained in secrecy until patents issue, patent applications are not generally published until many months or years after they are filed and publication of technological developments in the scientific and patent literature often occurs long after the date of such developments. Accordingly, the Company cannot be certain that it or one of its collaborators was the first to invent the subject matter covered by the patent applications or that it or one of its collaborators was the first to file patent applications for such inventions. Further, there can be no assurance as to the success or timeliness in obtaining any patents, that the breadth of claims obtained, if any, will provide adequate protection of the Company's proprietary technology, targets or potential products, or that the Company or its licensors will be able to or will in fact adequately enforce any such claims to protect its proprietary technology, targets or potential products. Patent law relating to the scope and enforceability of claims in the fields in which the Company operates is still evolving. The patent positions of biopharmaceutical and pharmaceutical companies, including the Company, are highly uncertain and involve complex legal and technical questions for which legal principles are not firmly established. The degree of future protection for the Company's proprietary rights, therefore, is highly uncertain. In this regard, there can be no assurance that independent patents will issue from the Company's and its licensors' patent applications, which include many interrelated applications directed to common or related subject matter. Further, there may be issued patents and pending applications owned by others directed to technologies relevant to the Company's, its licensors' or its collaborators' research, development and commercialization efforts. There can be no assurance that the Company's or its collaborators' technology can be developed and commercialized without a license to such patents or that such patent applications will not be granted priority over patent applications filed by the Company, its licensors or one of its collaborators. Furthermore, there can be no assurance that third parties will not independently develop similar or alternative technologies to those of the Company, its licensors or any of its collaborators, duplicate any of the Company's, its licensors' or its collaborators' technologies or design around the patented technologies developed by the Company, its licensors or its collaborators, any of which may have a material adverse effect on the Company's business, financial condition and results of operations. The commercial success of the Company depends significantly on its ability to operate without infringing the patents and proprietary rights of third parties, and there can be no assurance that the Company's, its licensors' and its collaborators' technologies do not and will not infringe the patents or proprietary rights of others. A number of pharmaceutical companies, biopharmaceutical companies, independent researchers, universities and research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned, optioned by or licensed to the Company or its collaborators. For instance, a number of patents may have issued and may issue in the future on certain targets or their use in screening assays that could prevent the Company and its collaborators from developing screens using such targets, compounds relating to such targets or relate to certain other aspects of technology utilized or expected to be utilized by the Company. In addition, the Company is unable to determine all of the patents or patent applications that may materially affect the Company's or its collaborators' ability to make, use or sell any potential products. The Company is aware of one allowed U.S. patent application relating to certain methods for transcriptional modulation. The Company believes that it has not infringed, and is not currently infringing, the claims of the allowed application. Nonetheless, the Company may in the future be required to obtain a license to such allowed patent, and there can be no assurance that such a license will be available on commercially reasonable terms, if at all. In addition, the Company is aware of an issued U.S. patent claim for certain human MAP kinases, including MAP kinases in the p38 pathway, which may be useful as targets for drug discovery. The Company is negotiating a license to patent rights covering such MAP kinase targets that may be useful in the Company's research programs, although there can be no assurance that such a license will be available on commercially reasonable terms, if at all. Any conflicts resulting from third-party patent applications and patents could significantly reduce the coverage of the patents owned, optioned by or licensed to the Company or its collaborators and limit the ability of the Company or its collaborators to obtain meaningful patent protection. If patents are issued to third parties that contain competitive or conflicting claims, the 10 12 Company, its licensors or its collaborators may be enjoined from pursuing research, development or commercialization of potential products or be required to obtain licenses to these patents or to develop or obtain alternative technology. There can be no assurance that the Company or its collaborators will not be so enjoined or will be able to obtain any license to the patents and technologies of third parties on acceptable terms, if at all, or be able to obtain or develop alternative technologies. If the Company or any of its collaborators is enjoined from pursuing its research, development or commercialization activities or if any such license is or alternative technologies are not obtained or developed, the Company or such collaborator may be delayed or prevented from commercializing its potential products, which would result in a material adverse effect on the Company's business, financial condition and results of operations. The drug discovery industry has a history of patent litigation and there will likely continue to be numerous patent litigation suits concerning drug discovery technologies and potential products. The patent positions of pharmaceutical, biopharmaceutical and drug discovery companies, including the Company, generally are uncertain and involve complex legal and factual questions. Litigation to establish the validity of patents, to defend against patent infringement claims of others and to assert infringement claims against others can be expensive and time consuming, even if the outcome is favorable. An outcome of any patent prosecution or litigation that is unfavorable to the Company or one of its licensors or collaborators may have a material adverse effect on the Company. In particular, litigation may be necessary to enforce any patents issued or licensed to the Company, its licensors or its collaborators, to protect trade secrets or know-how of the Company, its licensors or its collaborators, or to determine the scope and validity of a third party's proprietary rights. The Company could incur substantial costs if litigation is required to defend itself in patent suits brought by third parties, if the Company participates in patent suits brought against or initiated by its licensors or collaborators or if the Company initiates such suits, and there can be no assurance that funds or resources would be available to the Company in the event of such litigation. Additionally, there can be no assurance that the Company, its licensors or its collaborators would prevail in any such action. An adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent office could subject the Company to significant liabilities, require disputed rights to be licensed from or to other parties or require the Company, its licensors, or its collaborators to cease using certain technology, any of which may have a material adverse effect on the Company's business, financial condition and results of operations. In addition to patent protection, the Company also relies on copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of trade secrets and proprietary information, the Company requires employees, consultants and certain collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with the Company. These agreements generally provide that all confidential information developed or made known to the individual by the Company during the course of the individual's relationship with the Company will be kept confidential and not disclosed to third parties except in specific circumstances. The agreements also generally provide that all inventions conceived by the individual in the course of rendering services to the Company shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets, confidential information or inventions in the event of unauthorized use or disclosure of such information or that adequate remedies would exist in the event of such unauthorized use or disclosure. The loss or exposure of trade secrets possessed by the Company could materially adversely affect its business. Like many high technology companies, the Company may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by the Company. Although the Company requires its employees to maintain the confidentiality of all confidential information of previous employers, there can be no assurance that the Company or these individuals will not be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. See "Business--Patents and Proprietary Rights." 11 13 Substantial Competition. Competition among pharmaceutical and biopharmaceutical companies to identify drug targets and drug candidates for development is intense and is expected to increase. In the pharmaceutical industry, the Company competes with the research and development departments of pharmaceutical and biopharmaceutical companies and other commercial enterprises, as well as numerous academic and research institutions and governmental agencies. In addition, the pharmaceutical and biopharmaceutical industries are subject to rapid and substantial technological change. Pharmaceutical and biopharmaceutical companies and others are conducting research in various areas which overlap with the Company's technology platform, either on their own or in collaboration with others. There can be no assurance that pharmaceutical and biopharmaceutical companies which compete with the Company in specific areas will not merge or enter into collaborations or joint ventures or other alliances with one or more other such companies or academic and research institutions and become substantial competitors or that the Company's collaborators will not initiate or expand their own internal target and drug discovery and development efforts. At the present time, the Company has not conducted any clinical trials and has no commercial manufacturing capability, sales or marketing force. Many of the Company's competitors and potential competitors have substantially greater capital resources, research and development resources, manufacturing, sales and marketing experience and production facilities than does the Company. Additionally, many of these competitors have significantly greater experience than does the Company in undertaking target and drug discovery, preclinical product development and testing and clinical trials of new pharmaceutical products and obtaining FDA and other regulatory approvals. Smaller companies also may prove to be significant competitors, particularly through proprietary research discoveries and collaborative arrangements with large pharmaceutical and established biopharmaceutical companies. Many of these competitors have significant products that have been approved or are in development and operate large, well funded research and development programs. Academic institutions, governmental agencies and other public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for the discovery, development and commercialization of potential products. In addition, these companies and institutions compete with the Company in recruiting and retaining highly qualified scientific and management personnel. There can be no assurance that the Company's competitors will not discover lead compounds, develop more effective, safer, more affordable or more easily administered potential products or achieve patent protection or commercialize potential products sooner than the Company. Failure to compete effectively could 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," "Business--Signal's Drug Discovery Programs" and "--Competition." Attraction and Retention of Key Employees and Consultants. The Company's success is highly dependent on the principal members of its scientific and management staff, as well as its scientific advisors and consultants. The loss of one or more of these individuals could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not maintain "key person" insurance on any of its employees. The Company's future success also will depend in part on its ability to identify, recruit and retain additional qualified personnel. There is intense competition for such 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 personnel with the advanced technical qualifications 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--Scientific Advisory Board" and "Management." Government Regulation; No Assurance of Regulatory Approvals. The Company's and its collaborators' research, preclinical testing and clinical trials of their respective potential products, if any, and the manufacturing and marketing of their potential products, will be subject to extensive and rigorous regulation by numerous government authorities in the United States and in other countries where the Company and its collaborators intend to test, manufacture and market their potential products. Prior to marketing any product developed by the Company, the Company or its collaborators, as applicable, 12 14 must undergo an extensive regulatory approval process. This regulatory process, which includes preclinical testing and clinical trials of each potential product to establish its safety and efficacy, will take many years and require the expenditure of substantial resources, and also may include post-marketing surveillance. Data obtained from preclinical testing and clinical trials are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, delays or rejection may be encountered based upon changes in FDA policy for drug approval during the period of product development and FDA regulatory review of each submitted new drug application ("NDA") or product license application ("PLA"). Similar delays or rejection also may be encountered in foreign countries. There can be no assurance that regulatory approval will be obtained for any potential products developed by the Company or its collaborators. Moreover, regulatory approval may entail limitations on the indicated uses of a drug. Further, even if regulatory approval is obtained, a marketed drug and its manufacturer are subject to continuing review, and discovery of previously unknown problems with a drug or manufacturer can result in the withdrawal of a drug from the market or a significant decrease in market demand, which would have an adverse effect on the Company's business, financial condition and results of operations. Violations of regulatory requirements at any stage, including preclinical testing and clinical trials, the approval process or post-approval, may result in various adverse consequences including a delay by the FDA or other applicable regulatory authority in approving or its refusal to approve a potential product, withdrawal of an approved drug from the market and the imposition of criminal penalties against the manufacturer and NDA or PLA holder. Neither the Company nor its collaborators has submitted any IND applications for any potential product of the Company, and none has been approved for commercialization in the United States or internationally. No assurance can be given that the Company or its collaborators will be able to obtain FDA or other applicable regulatory authority approval for any potential products. Failure to obtain requisite regulatory approvals or failure to obtain approvals of the scope requested will delay or preclude the Company or its collaborators from marketing the Company's or its collaborators' products or limit the commercial use of the potential products and would have material adverse effect on the Company's business, financial condition and results of operations. See "Business--Government Regulation." Expansion of Operations; Management of Growth. The Company will need to expand and effectively manage its operations and facilities in order to successfully complete its existing corporate collaborative agreements, facilitate additional pharmaceutical and biopharmaceutical collaborations and pursue future internal research, development and commercialization efforts. There can be no assurance that the Company will be able to manage its growth, to meet the staffing requirements of current or additional collaborative relationships or internal programs or to successfully assimilate, train and manage its new employees. In addition, the Company will be required to expand its management capabilities, enhance its operating and financial systems and expand its facilities to manage its growth effectively. If the Company continues to grow, there can be no assurance that the management or scientific skills, systems and facilities currently in place will be adequate or that the Company will be able to manage any additional growth effectively. Failure to achieve any of these goals could have a material adverse effect on the Company's business, financial condition and results of operations. No Manufacturing Experience; Reliance on Third-Party Manufacturing. To date, the Company has not manufactured any products for preclinical, clinical or commercial purposes and does not have any manufacturing facilities. The Company intends to utilize third-party contract manufacturers or its corporate collaborators for the production of material for use in preclinical and clinical trials and for the manufacture of future products for commercialization. In the event that the Company is unable to secure such outside manufacturing capabilities, it will not be able to conduct preclinical product development, clinical trials or commercialize its potential products as planned. Even if the Company were able to establish its own internal manufacturing capability, doing so would require the expenditure of significant resources which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company or any outside manufacturers can produce potential products of suitable quality in sufficient quantity in a cost-effective manner, if at all. The manufacture of the Company's potential products for preclinical 13 15 and clinical trials and commercial purposes is subject to current Good Manufacturing Practices ("cGMP") regulations promulgated by the FDA and other applicable domestic and foreign regulations. No assurance can be given that in the future the Company or any outside manufacturers can maintain full compliance with cGMP regulations or other applicable regulations. See "Business--Research and Development Partners" and "--Manufacturing." Possible Volatility of Stock Price. The market prices for securities of comparable companies have been highly volatile, and the market in general has experienced significant price and volume fluctuations that often are unrelated to the operating performance of particular companies. Announcements of technological innovations, collaborations or new products by the Company or its competitors, disputes or other developments concerning proprietary rights, including patents and litigation matters, publicity regarding actual or potential results with respect to technologies, collaborations or products under development by the Company, its collaborators or its competitors, changes in the terms or status of the Company's collaborations, regulatory developments in both the United States and foreign countries, public concern as to the feasibility of new technologies, changes in recommendations of securities analysts, general market conditions, as well as quarterly fluctuations in the Company's revenues and financial results and other factors, may have a significant impact on, and may cause significant fluctuation in, the market price and liquidity of the Common Stock. In particular, the realization of any of the risks described in these "Risk Factors" could have a dramatic and materially adverse impact on such market price. Hazardous Materials. The research and development processes of the Company involve the controlled use of hazardous materials, including microbial organisms and other biological materials, chemicals and various radioactive compounds. 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. 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. 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. Uncertainty of Pharmaceutical Pricing and Reimbursement. The Company's business and the availability of capital in the future may be materially adversely affected by the continuing efforts of government and third-party payors to contain or reduce the costs of health care through various means. 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 government control on pricing or profitability of prescription pharmaceuticals in such jurisdictions. In addition, an increasing emphasis on managed care in the United States has put, and will continue to put, pressure on pharmaceutical pricing and product demand. Such initiatives and proposals, if adopted, could decrease the demand or the price that the Company receives for any products it or its collaborators may develop and sell in the future, and thereby have a material adverse effect on the Company's business, financial condition and results of operations. Further, to the extent that such proposals or initiatives have a material adverse effect on other pharmaceutical companies that are collaborators or prospective collaborators for certain of the Company's potential products, the Company's ability to commercialize its potential products may be materially adversely affected. The ability of the Company and its collaborators to commercialize products may depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payors. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third-party payors are increasingly challenging the prices charged for medical products and services. There can be no assurance that any third-party insurance coverage will be available to patients for any products developed by the Company or its collaborators. Government and other third-party payors are increasingly attempting to contain health care costs by limiting both 14 16 coverage and the level of reimbursement for new therapeutic products, and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA or other applicable regulatory authorities have not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third-party payors for the Company's or its collaborators' products, the market acceptance of these products would be materially adversely affected. Potential Product Liability Exposure and Limited Insurance Coverage. The use of any of the Company's or its collaborators' drug candidates in clinical trials, and the sale of any approved products, may expose the Company to liability claims resulting from the use of its products. These claims might be made directly by consumers, consumer groups, health care providers, pharmaceutical companies, governmental agencies or others selling such products. The Company intends to obtain limited product liability insurance coverage for clinical trials and plans to expand any such insurance coverage to include the sale of commercial products if marketing approval is obtained for any products in development and intends to receive certain indemnities from its collaborators. However, insurance coverage is becoming increasingly expensive and difficult to obtain, and no assurance can be given that the Company will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect the Company against losses due to liability. A successful product liability claim or series of claims brought against the Company could have a material adverse effect on its business, financial condition and results of operations. Control By Management and Existing Stockholders. Upon completion of this offering, the Company's principal stockholders, executive officers, directors and affiliated individuals and entities together will beneficially own approximately 55.5% of the outstanding shares of Common Stock (53.4% if the Underwriters' over-allotment option is exercised in full). As a result, these stockholders, acting together, will be able to influence significantly and possibly control most matters requiring approval by the stockholders of the Company, including approvals of amendments to the Company's Certificate of Incorporation, mergers, a sale of all or substantially all of the assets of the Company, going private transactions and other fundamental transactions. In addition, the Company's Certificate of Incorporation, as it is proposed to be amended and restated concurrently with the closing of this offering (the "Restated Certificate"), does not provide for cumulative voting with respect to the election of directors. Consequently, the present directors and executive officers of the Company, together with the Company's principal stockholders, will be able to control the election of the members of the Board of Directors of the Company. Such a concentration of ownership could have an adverse effect on the price of the Common Stock, and may have the effect of delaying or preventing a change in control of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. See "Management" and "Principal Stockholders." No Prior Public Market for Common Stock. Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price will be determined by negotiations between the Company and the representatives of the Underwriters and may not be indicative of the market price at which the Common Stock of the Company will trade after this offering. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. Availability of Preferred Stock for Issuance; Anti-Takeover Provisions. The Restated Certificate authorizes the Board of Directors of the Company, without stockholder approval, to issue additional shares of Common Stock and to fix the rights, preferences and privileges of and issue up to 5,000,000 shares of Preferred Stock with voting, conversion, dividend and other rights and preferences that could adversely affect the voting power or other rights of the holders of Common Stock. The issuance of Preferred Stock, rights to purchase Preferred Stock or additional shares of Common Stock may have the effect of delaying or preventing a change in control of the Company. In addition, the possible issuance of Preferred Stock or additional shares of Common Stock could discourage a proxy contest, make more difficult the acquisition of a substantial block of the Company's Common Stock or limit the 15 17 price that investors might be willing to pay for shares of the Company's Common Stock. Further, the Restated Certificate provides that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by written consent. Special meetings of the stockholders of the Company may be called only by the Chairman of the Board of Directors, the Chief Executive Officer of the Company, by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors or by the holders of 10% of the outstanding voting stock of the Company. The Restated Certificate also provides for staggered terms for the members of the Board of Directors. These and other provisions contained in the Restated Certificate and the Company's Bylaws, as well as certain provisions of Delaware law, could delay or make more difficult certain types of transactions involving an actual or potential change in control of the Company or its management (including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices) and may limit the ability of stockholders to remove current management of the Company or approve transactions that stockholders may deem to be in their best interests and, therefore, could adversely affect the price of the Company's Common Stock. See "Description of Capital Stock--Preferred Stock" and "--Delaware Anti-Takeover Law and Certain Charter Provisions." Shares Eligible for Future Sale and Potential Adverse Effect on Market Price. Sales of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon completion of this offering, the Company will have 9,433,929 shares of Common Stock outstanding, assuming no exercise of currently outstanding options or warrants. Of these shares, the 2,500,000 shares sold in this offering (plus any additional shares sold upon exercise of the Underwriters' over-allotment 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. The remaining 6,933,929 shares of Common Stock held by existing stockholders are restricted securities as that term is defined in Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act. As a result of agreements limiting the resale of such shares (the "Lock-up Agreements") and the provisions of Rules 144 and 701, additional shares will be available in the public market as follows: (i) no Restricted Shares will be eligible for immediate sale on the effective date of this offering; (ii) 6,677,325 Restricted Shares (plus 623,687 shares of Common Stock issuable upon exercise of vested stock options) will be eligible for sale upon expiration of Lock-up Agreements 180 days after the date of this Prospectus; and (iii) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods, and could be sold earlier if the holders exercise any available registration rights. The holders of 6,058,449 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 beginning at the end of the 180-day lock-up period. 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 a registration statement on Form S-8 registering shares of Common Stock subject to outstanding stock options or reserved for issuance under the Company's stock option plans. Such registration statement is expected to be filed and to become effective as soon as practicable after the effective date of this offering. Shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described above. See "Management," "Description of Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." Immediate and Substantial Dilution. Purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of their investment 16 18 from the initial public offering price. Additional dilution will occur upon exercise of outstanding options and outstanding warrants. See "Dilution" and "Shares Eligible for Future Sale." Broad Discretion in Application of Net Proceeds. The net proceeds to the Company from the sale of the shares of Common Stock offered hereby plus the sale of shares of Common Stock to DuPont Merck to be issued in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share are estimated to be approximately $29.3 million ($33.5 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds from this offering principally for research and development, including internal discovery programs and joint research and development with corporate and academic collaborators, the acquisition of research and development technologies, compound screening libraries and product rights, capital investments and working capital and general corporate purposes. The Company's management and Board of Directors have broad discretion with respect to the application of such proceeds, and the amounts actually expended by the Company for working capital purposes may vary significantly depending on a number of factors, including the amount and timing of revenues from the Company's current or future collaborators, including any amendments of the terms of such collaborative arrangements, the expense incurred in pursuing the Company's research and development programs and the amount of cash, if any, generated by the Company's operations. See "Use of Proceeds." Year 2000 Compliance. Some older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than 2000. This failure to use four digits to define the applicable year has created what is commonly referred to as the "Year 2000 Issue" and could cause a system failure or miscalculations causing disruption of operations, including a temporary inability to process transactions or engage in similar normal business activities. The Company recognizes the need to ensure that its operations will not be adversely impacted by the Year 2000 Issue. The Company does not believe that it has material exposure to the Year 2000 Issue with respect to its own information systems since its existing systems correctly define the Year 2000. Any required expenditures will be expensed as incurred. The Company intends to assess its position regarding the Year 2000 Issue with respect to external information systems by the end of 1998. This process will entail communications with significant business partners, customers, suppliers, financial institutions, insurance companies and other parties that provide significant services to the Company. There can be no assurance that any of such third parties are using systems that are Year 2000 compliant or will address any Year 2000 issues in a timely fashion, or at all. Any Year 2000 compliance problems of either the Company or the third parties with whom the Company does business or from whom it receives services, could have a material adverse effect on the Company's business, operating results and financial condition. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained or incorporated by reference in this Prospectus, including without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The safe harbor provided in the Reform Act for such forward-looking statements does not apply to initial public offerings. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the Company's plans to continue development of its current potential products; conduct clinical trials with respect to potential products; evaluate potential products under development for subsequent clinical development; utilize the Company's capital resources and the net proceeds from this offering and the 17 19 time periods related thereto; seek regulatory approvals; engage third-party contract manufacturers to supply its clinical trials and commercial requirements; and establish a marketing and distribution capability. These forward-looking statements may be found in the "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Forward-looking statements not specifically set forth above may also be found in these and other sections of this Prospectus. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 18 20 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,500,000 shares of Common Stock offered by the Company hereby and the sale of shares of Common Stock to DuPont Merck to be issued in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share are estimated to be approximately $29.3 million ($33.5 million if the Underwriters' over-allotment option is exercised in full) after deducting the underwriting discount and estimated offering expenses payable by the Company. The Company intends to use the net proceeds from this offering primarily for research and development, including internal discovery programs and joint research and development with corporate and academic collaborators, the acquisition of research and development technologies, compound screening libraries and product rights, capital investments and working capital and general corporate purposes. The amounts actually expended by the Company for working capital purposes will vary significantly depending on a number of factors, primarily the amount and timing of revenues from the Company's current or future collaborators, including amendments of the terms of such collaborative arrangements. The Company's management will retain broad discretion in the allocation of the net proceeds of this offering. The Company also may use a portion of the net proceeds to fund acquisitions of complementary technologies, products or businesses, although the Company has no current agreements or commitments for any such acquisition. Pending such uses, the Company intends to invest the net proceeds of this offering in interest-bearing, investment-grade securities. The Company believes that the net proceeds of this offering, together with its existing capital resources, interest income and committed revenue from its existing collaborations should be sufficient to fund its anticipated operating expenses and capital requirements at least through the end of the year 2000. DIVIDEND POLICY The Company has never declared nor paid any cash dividends on its Common Stock. The Company currently intends to retain any earnings for funding growth and, therefore, does not intend to pay any cash dividends on its Common Stock in the foreseeable future. In addition, the Company is prohibited from paying any dividends and making any distributions, and also is limited in its ability to repurchase stock, pursuant to the terms of a secured loan to the Company by MMC/GATX Partnership No. 1. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 19 21 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1998 (i) on an actual basis and (ii) as adjusted to reflect the automatic conversion of all shares of Preferred Stock, the receipt of $1,999,992 from DuPont Merck for the purchase of 166,666 shares of Common Stock to be issued in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share, and the sale by the Company of the 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share and the application of the estimated net proceeds therefrom. This table should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1998 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term obligations, less current portion(1).............. $ 1,344 $ 1,344 -------- -------- Stockholders' equity: Convertible Preferred Stock, $.001 par value; 6,113,485 shares authorized and 6,050,949 shares issued and outstanding, actual; 5,000,000 shares authorized and no shares issued or outstanding, as adjusted.......... 6 -- Common Stock, $.001 par value; 8,750,000 shares authorized and 716,314 shares issued and outstanding, actual; 25,000,000 shares authorized and 9,433,929 shares issued and outstanding, as adjusted(2)......... 1 9 Additional paid-in capital............................. 41,433 70,731 Deferred compensation.................................. (1,387) (1,387) Accumulated other comprehensive income................. 6 6 Accumulated deficit.................................... (24,410) (24,410) -------- -------- Total stockholders' equity........................ 15,649 44,949 -------- -------- Total capitalization......................... $ 16,993 $ 46,293 ======== ========
- ------------------------------ (1) See Note 3 of Notes to Financial Statements for a description of the Company's long-term obligations. (2) Excludes 1,581,097 shares of Common Stock reserved for issuance under the Company's stock option plans, of which 662,676 shares were subject to outstanding options as of March 31, 1998 at a weighted average exercise price of $0.87 per share. Also excludes 62,500 shares of Common Stock reserved for issuance upon exercise of outstanding warrants as of March 31, 1998 at an exercise price of $8.40 per share. Subsequent to March 31, 1998, the Company granted options to purchase an aggregate of 221,525 shares of Common Stock at a weighted average exercise price of $2.00 per share. See "Management-- Equity Incentive Plan," "Description of Capital Stock" and Note 5 of Notes to Financial Statements. 20 22 DILUTION As of March 31, 1998, the pro forma net tangible book value was $15,649,014, or $2.31 per share. Pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities divided by 6,767,263 shares of Common Stock outstanding after giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock. Pro forma net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the offering and the pro forma net tangible book value per share of Common Stock immediately after completion of this offering. After giving effect to the sale of the 2,500,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share and the application of the net proceeds therefrom and the receipt of $1,999,992 from DuPont Merck for the purchase of 166,666 shares of Common Stock to be issued in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $12.00 per share, the Company's pro forma net tangible book value at March 31, 1998 would have been $44,949,006, or $4.76 per share. This represents an immediate increase in pro forma net tangible book value of $2.45 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $7.24 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $12.00 Pro forma net tangible book value per share as of March 31, 1998............................................... $2.31 Increase per share attributable to new investors.......... 2.45 ----- Pro forma net tangible book value per share after this offering.................................................. 4.76 ------ Net tangible book value dilution per share to new investors.............................................. $ 7.24 ======
The following table summarizes, on a pro forma basis as of March 31, 1998, the differences between existing stockholders and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION ------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing stockholders.... 6,767,263 71.7% $41,038,247 56.2% $ 6.06 New investors............ 2,666,666 28.3 31,999,992 43.8 12.00 --------- ----- ----------- ----- Total.......... 9,433,929 100.0% $73,038,239 100.0% ========= ===== =========== =====
Other than as noted above, the foregoing computations assume the exercise of no stock options or warrants after March 31, 1998. As of March 31, 1998, options to purchase 662,676 shares of Common Stock were outstanding, with a weighted average exercise price of $0.87, and warrants to purchase 62,500 shares of Common Stock were outstanding, with an exercise price of $8.40 per share. Subsequent to March 31, 1998, the Company granted options to purchase an aggregate of 221,525 shares of Common Stock at a weighted average exercise price of $2.00 per share. To the extent these options and warrants are exercised, there will be further dilution to new investors. See "Risk Factors -- Immediate and Substantial Dilution," "Capitalization," "Management," "Description of Capital Stock" and Note 5 of Notes to Financial Statements. 21 23 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statements of operations for the years ended December 31, 1995, 1996 and 1997 and with respect to the Company's balance sheet at December 31, 1996 and 1997, are derived from the financial statements of the Company that have been audited by Ernst & Young LLP, independent auditors, which are included elsewhere herein and are qualified by reference to such financial statements. The Company's statement of operations data for the years ended December 31, 1993 and 1994 and the balance sheet data at December 31, 1993, 1994 and 1995 have been derived from the financial statements audited by Ernst & Young LLP, independent auditors, which are not included herein. The statement of operations data for the three-months ended March 31, 1997 and 1998 and the balance sheet data at March 31, 1998 have been derived from unaudited financial statements also appearing herein which, in the opinion of the management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the unaudited interim periods. The operating results for the three months ended March 31, 1998 are not indicative of the results that may be expected for the full fiscal year ending December 31, 1998 or for any subsequent period. 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.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Collaborative agreements: Related party................... $ -- $ -- $ -- $ -- $ 250 $ -- $ 750 Unrelated parties............... -- -- -- 3,586 7,065 1,476 3,794 Grant income......................... -- 22 299 347 264 72 100 ------- ------- ------- ------- ------- ------- ------- -- 22 299 3,933 7,579 1,548 4,644 Expenses: Research and development............. 682 3,799 5,173 7,724 10,337 2,459 3,288 General and administrative........... 603 1,288 1,937 2,471 2,791 671 1,203 Income (loss) from operations........... (1,285) (5,065) (6,811) (6,262) (5,549) (1,582) 153 ------- ------- ------- ------- ------- ------- ------- 1,285 5,087 7,110 10,195 13,128 3,130 4,491 ------- ------- ------- ------- ------- ------- ------- Interest income......................... 8 237 453 187 326 60 283 Interest expense........................ (53) (76) (124) (134) (517) (152) (101) ------- ------- ------- ------- ------- ------- ------- Net income (loss)....................... $(1,330) $(4,904) $(6,482) $(6,209) $(5,740) $(1,674) $ 335 ======= ======= ======= ======= ======= ======= ======= Pro forma net income (loss) per share, basic and diluted(1)................. $ (1.20) $ 0.05 ======= ======= Number of shares used in computing pro forma net income (loss) per share(1): Basic.............................. 4,776 6,628 Diluted............................ 4,776 6,875
DECEMBER 31, ---------------------------------------------------- MARCH 31, 1993 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term $ 614 $ 11,384 $ 4,211 $ 5,460 $ 20,866 $ 20,671 investments............................ Working capital........................... 259 10,294 3,616 2,606 15,379 14,635 Total assets.............................. 1,756 13,669 6,866 9,047 23,838 24,755 Long-term obligations (including current 264 791 1,011 3,793 2,832 2,661 portion)............................... Accumulated deficit....................... (1,410) (6,314) (12,796) (19,005) (24,745) (24,410) Total stockholders' equity................ 1,188 12,065 5,574 1,512 15,164 15,649
- ------------------------------ (1) Computed on the basis described in Note 1 of Notes to Financial Statements. 22 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Financial Data" and the Financial Statements and Notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed in "Risk Factors," as well as those discussed elsewhere herein. See "Special Note Regarding Forward-Looking Statements" on page 17 of this Prospectus. OVERVIEW The Company was incorporated in July 1992 and has devoted substantially all of its resources since that time to research and development in order to identify proprietary drug targets and discover novel small molecule drugs that regulate genes and the production of disease-causing proteins. Signal, through both internally funded programs and in collaboration with its pharmaceutical and biopharmaceutical partners, is working to identify gene regulating drug targets and potential products for treating autoimmune and inflammatory diseases, diseases associated with bone metabolism, neurological and cardiovascular diseases, cancer and viral infections. The Company has incurred significant losses since inception, with an accumulated deficit of $24.4 million as of March 31, 1998, due primarily to ongoing expenditures related to its research programs. The Company expects to continue to incur a substantial increase in expenditures and operating losses for at least the next several years as it expands its target and drug discovery and development efforts. Such expansion will result in increases in research and development expenses, general and administrative expenses and related capital expenditures. The Company's results of operations have fluctuated from period to period and likely will continue to fluctuate substantially in the future based upon the timing and composition of funding under various collaborative agreements, the initiation and expansion of research and development programs, the acquisition of technologies, compound libraries and product rights, as well as the progress of its research and development programs. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. See "Risk Factors--Limited Operating History; Early Stage of Development," "--Technological Uncertainty," "--Uncertainties Associated with Product Development," "--Dependence on Pharmaceutical and Biopharmaceutical Collaborations and Milestone Payments," "--Future Capital Requirements; Uncertainty of Additional Funding" and "--Governmental Regulation; No Assurance of Regulatory Approvals." A key element of the Company's strategy is to enter into collaborations with pharmaceutical and biopharmaceutical companies in order to enhance certain of its target and drug discovery programs and to fund its capital requirements. The Company's principal sources of revenue for the next several years are expected to consist of license fees and upfront payments, research funding and milestone payments under such collaborations, payments from future collaborations, licensing arrangements, government grants, if any, and interest income. To date, the Company's revenue has been attributable primarily to collaborative arrangements with the following partners: Tanabe, which was entered into in March 1996 and concluded in March 1998; Organon, which was entered into in July 1996; Roche Bioscience, which was entered into in August 1996; Ares-Serono, which was entered into in November 1997; DuPont Merck, which was entered into in December 1997; and Nippon Kayaku, which was entered into in February 1998. See "Risk Factors--Dependence on Pharmaceutical and Biopharmaceutical Collaborations and Milestone Payments" and "Business--Research and Development Partners." Under the Company's collaborative arrangements, the Company has received payments of $20.8 million to date, of which $15.4 million has been recognized as revenue. To date, the Company has 23 25 received no milestone payments from its collaborators. In 1995, the Company received $167,910 in government grants and no license fees, upfront payments or research payments from its collaborators. In 1996, the Company recognized an aggregate of $335,414 in license fees and upfront payments and $3.2 million in research payments from its collaborators and $170,380 in government grants. In 1997, the Company recognized an aggregate of $264,579 in license fees and upfront payments and $4.3 million in research payments from its collaborators and $90,449 in government grants. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Revenue. Since its inception, Signal has received revenue principally from its corporate collaborators, as well as from government research grants, and has received no revenue from product sales. Revenue for the three months ended March 31, 1998 increased to $4.6 million from $1.5 million for the three months ended March 31, 1997. The increase was attributable primarily to (i) the additional collaborative agreements that were in place during 1998, which resulted in the Company's recognition of additional revenue from license fees and research funding; (ii) the Amendment to the Collaborative Development and Licensing Agreement with Tanabe which resulted in the one-time recognition of additional research funding; and (iii) increased research funding from Tanabe, Organon and Roche Bioscience as a result of increased staffing under their respective research programs. Timing and amount of revenues from corporate collaborations is expected to vary on a quarterly basis. Research and Development Expenses. The Company's research and development expenses for the three months ended March 31, 1998 increased to $3.3 million from $2.5 million for the three months ended March 31, 1997. The increase was due largely to the hiring of additional personnel, increased travel expenses, equipment depreciation expenses, facility expansion, patent-related activities, the initiation of additional academic research collaborations and amortization of deferred compensation. The Company also recognized $83,000 in deferred compensation expense related to research and development personnel for the three months ended March 31, 1998, as compared to no such deferred compensation expense for the three months ended March 31, 1997, and expects to recognize $481,000 in deferred compensation expense for the remainder of 1998. The Company expects research and development expenses to increase significantly in the future. General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 1998 increased to $1.2 million from $671,000 for the three months ended March 31, 1997. The increase was due primarily to the hiring of additional personnel, equipment depreciation expenses, legal fees, fees associated with new business development activities and amortization of deferred compensation. The Company also recognized $60,000 in deferred compensation expense related to general and administrative personnel for the three months ended March 31, 1998, as compared to no such deferred compensation expense for the three months ended March 31, 1997, and expects to recognize $245,000 in deferred compensation expense for the remainder of 1998. The Company expects general and administrative expenses to increase in the future to support the expansion of its research and business development activities and increased expenses associated with being a public company. Interest Income (Expense), Net. Net interest income for the three months ended March 31, 1998 increased to $182,000 from a net interest expense of $92,000 for the three months ended March 31, 1997. The increase was due primarily to increased income as a result of higher average cash balances and lower interest expense as a result of lower average capital lease and debt obligations. Net Income (Loss). Net income for the three months ended March 31, 1998 increased to $335,000 from a net loss of $1.7 million for the three months ended March 31, 1997. The Company's profitability during the three months ended March 31, 1998 was due largely to the one-time recognition of additional research funding resulting from the amended agreement with Tanabe. The Company does not expect continued profitability in the near future. 24 26 COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Revenue. Revenue for the year ended December 31, 1997 increased to $7.6 million from $3.9 million and $299,000 for the years ended December 31, 1996 and 1995, respectively. The increase in 1997 from 1996 was attributable primarily to the Company's recognition of an aggregate of $7.3 million in revenue from license fees and research funding from Ares-Serono, Tanabe, Roche Bioscience and Organon during 1997, a 104% increase over the $3.6 million recognized during 1996. Revenue for 1995 was comprised solely of a research grant from the National Institutes of Health (the "NIH"). Research and Development Expenses. The Company's research and development expenses for the year ended December 31, 1997 increased to $10.3 million from $7.7 million and $5.2 million for the years ended December 31, 1996 and 1995, respectively. These increases were due primarily to the hiring of additional personnel, facility expansion, equipment depreciation expenses, increased patent-related activities, acquisition of compound libraries, the purchase of research materials and laboratory supplies for expansion of the Company's research programs and the initiation of additional academic research collaborations. The Company recognized $58,000 in deferred compensation expense related to research and development personnel in 1997 and expects to recognize $564,000, $611,000, $419,000, $226,000 and $48,000 as a result of the amortization of such deferred compensation in the years ended December 31, 1998 through 2002, respectively. General and Administrative Expenses. The Company's general and administrative expenses for the year ended December 31, 1997 increased to $2.8 million from $2.5 million and $1.9 million for the years ended December 31, 1996 and 1995, respectively. These expenses increased primarily as a result of increased compensation paid to executive management, the hiring of additional personnel, facility expansion and related amortization expenses. The Company recognized $46,000 in deferred compensation expense related to general and administrative personnel in 1997 and expects to recognize $305,000, $300,000, $202,000, $105,000 and $18,000 as a result of the amortization of such deferred compensation in the years ended December 31, 1998 through 2002, respectively. Interest Income (Expense), Net. Net interest income (expense) for the years ended December 31, 1997, 1996 and 1995 was $(191,000), $53,000 and $329,000, respectively. The decrease in net interest income from 1996 to 1997 was primarily due to an increase in interest expense attributable to a $3.0 million secured promissory note used for general corporate purposes and working capital during 1997. The decrease in net interest income from 1995 to 1996 resulted primarily from lower average cash balances during 1996. Net Income (Loss). Net loss for the years ended December 31, 1997, 1996 and 1995 was $5.7 million, $6.2 million and $6.5 million, respectively. Income Taxes. At December 31, 1997, the Company had federal and state net operating loss carryforwards of approximately $23.3 million and $4.8 million, respectively. The federal and state tax loss carryforwards will begin expiring in 2007 and 1998, respectively, unless previously utilized. The Company has provided a 100% valuation allowance against the related deferred tax assets as realization of such tax benefits is not assured. Future utilization of these carryforwards may be limited in any one fiscal year pursuant to the Internal Revenue Code and similar state provisions; however, the annual limitation will not prevent the entire amount of the carryforwards from being used during the carryforward period. Therefore, the Company does not believe any such limitation will have a material effect upon the utilization of these carryforwards. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through private placements of Preferred Stock, funds provided under the Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon, DuPont Merck and Tanabe collaborative agreements, and, to a lesser extent, through debt and equipment financings, government research grant revenue and interest income. As of March 31, 1998, the Company had received $39.6 million in net proceeds from the sales of equity securities, 25 27 $20.8 million under its collaborative agreements, $5.3 million in debt and equipment financings, $1.0 million in research grants from the NIH and $1.5 million in interest income. As of March 31, 1998, the Company had approximately $20.7 million in cash, cash equivalents and short-term investments. Net cash used in operations was $2.3 million, $2.4 million and $6.7 million in 1997, 1996 and 1995, respectively. Net cash used in operations after 1995 declined due primarily to initial license payments and research funding under the Company's collaborative agreements, coupled with a lower net loss during 1997. As of March 31, 1998, the Company had invested $5.4 million in property and equipment, primarily for facility improvements and laboratory and office equipment. The Company has financed substantially all of its equipment through capital leases and equipment note obligations. At March 31, 1998, the Company had outstanding long-term debt of $2.1 million under its Secured Promissory Note held by MMC/GATX Partnership No. 1 issued on December 2, 1996 (the "Secured Promissory Note"). The principal amount of the Secured Promissory Note is payable in monthly installments of $88,334, with the final monthly payment scheduled for May 31, 2000. The Secured Promissory Note is secured by substantially all of the Company's assets except for the Company's intellectual property. The terms of the loan limit the Company's ability to incur additional debt, repurchase its stock and pay dividends. The Company was in compliance with all covenants under the arrangement as of March 31, 1998. The Company believes the net proceeds of this offering, together with its existing capital resources, committed revenue from its existing collaborations and interest income should be sufficient to fund its anticipated operating expenses and capital requirements at least through the end of the year 2000. These funding requirements include continued and increased expenditures for research and development activities, as well as expenditures related to leasehold improvements, the purchase of additional laboratory and other equipment, the purchase of technology, compound libraries and product rights and the repayment of debt. The Company has not entered into any formal commitments to use the proceeds from the offering for increased personnel, capital expenditures or any other purpose. There can be no assurance that changes in the Company's research and development plans and collaborations, the acquisition of additional technology, compound libraries and product rights, or other changes affecting the Company's operating expenses will not result in the expenditure of available resources before such time, and in any event, the Company will need to raise substantial additional capital to fund its operations in future periods. The Company intends to seek additional funding through collaborative arrangements, public or private equity or debt financings, equipment financings or other financing sources that may be available. If additional funds are raised through the sale of equity securities, substantial dilution to existing stockholders may result, and debt financing, if available, may involve restrictive covenants. Further, there can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, or reduce the scope of, or eliminate one or more of its research or development programs or to obtain funds through strategic collaborations that are on unfavorable terms or that may require the Company to relinquish rights to certain of its technologies, product candidates, products or marketing territories that the Company would otherwise seek to retain. The failure of the Company to raise capital when needed could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Future Capital Requirements; Uncertainty of Additional Funding." IMPACT OF YEAR 2000 Some older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than 2000. This failure to use four digits to define the applicable year has created what is commonly referred to as the "Year 2000 Issue" and could cause a system 26 28 failure or miscalculations causing disruption of operations, including a temporary inability to process transactions or engage in similar normal business activities. The Company recognizes the need to ensure that its operations will not be adversely impacted by the Year 2000 Issue. The Company does not believe that it has material exposure to the Year 2000 Issue with respect to its own information systems since its existing systems correctly define the Year 2000. Any required expenditures will be expensed as incurred. The Company intends to assess its position regarding the Year 2000 Issue with respect to external information systems by the end of 1998. This process will entail communications with significant business partners, customers, suppliers, financial institutions, insurance companies and other parties that provide significant services to the Company. The Company is currently unable to predict the extent the Year 2000 Issue will affect these parties or the extent to which the Company would be vulnerable to any such party's failure to remediate any Year 2000 Issue on a timely basis. 27 29 BUSINESS Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated target and drug discovery company focused on identifying new classes of small molecule drugs that regulate genes and the production of disease-causing proteins. The Company applies advanced cellular, molecular and genomic technologies to map gene regulating pathways in cells and to identify proprietary molecular targets that activate or deactivate genes and result in disease. Signal is advancing the application of genomics beyond identifying and elucidating the functions of genes to designing novel classes of disease-modifying drugs that selectively regulate the activation of disease-causing genes. The Company conducts its target and drug discovery programs both independently and with its five collaborative partners, Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon, and DuPont Merck. BACKGROUND THE ROLE OF GENES IN HEALTH AND DISEASE Genes control all cellular functions responsible for maintaining human health by serving as blueprints for the production of proteins in cells. When activated, usually in response to specific stimuli, a gene is expressed and produces a protein. Proteins, including receptors, enzymes, cytokines and hormones, initiate and carry out biochemical reactions that direct a cell's normal biological functions. These functions include cell growth and differentiation, cell activation and cell death. Recent advances in cellular and molecular biology have shown that malfunctions in gene expression either cause or predispose humans to most diseases. Such malfunctions cause cells to produce inappropriate amounts or types of proteins. For example, the uncontrolled proliferation of cells characteristic of inflammatory diseases and cancer is the result of over-activation of specific genes and the subsequent over-production of proteins, such as cytokines and regulatory enzymes. Conversely, under-expression of critical genes and their protein products, such as tumor suppressors and growth factors, also may give rise to disease, including cancer and neurological disorders. THE ROLE OF INTRACELLULAR SIGNALING IN GENE REGULATION Genes are selectively activated and suppressed when molecules such as neurotransmitters, hormones or growth factors bind to, and activate, cell surface receptors. This event initiates a cascade of biochemical reactions within a cell, termed "intracellular signaling," in which distinct sets of gene regulating enzymes (typically, kinases and phosphatases) are activated serially to relay information from surface receptors to proteins in the nucleus. These cascades of biochemical reactions culminate in the activation or deactivation of specialized nuclear proteins, known as "transcription factors," that act as molecular switches by binding to the regulatory regions of specific genes to control the level and duration of gene activation and protein production. Together, these cascades of gene regulating enzymes and transcription factors comprise gene regulating, or intracellular signaling, pathways. Recent advances in molecular biology and genomics are facilitating the identification of new gene regulating pathways and specific molecules in these pathways that may serve as novel targets for drug discovery. 28 30 INTRACELLULAR SIGNALING AND GENE REGULATION PATHWAYS [Graphic depicting intracellular signaling and gene regulation pathways. Text down the right side of the graphic identifies the location in the pathways where receptors are stimulated, gene regulating enzymes are activated, transcription factors activate genes, gene expression are initiated, and normal and disease-associated proteins are produced.] Many transcription factors maintain normal expression of essential genes. In response to certain stimuli, transcription factors are activated or "induced" by gene regulating enzymes to increase the level, duration and sets of genes expressed. Gene regulation is a highly coordinated process in which the estimated 100,000 genes that comprise the human genome are switched on and off in specific tissues. The pathways which regulate these genes enable cells to respond to combinations of stimuli by integrating signals from multiple receptors to regulate distinct sets of genes. These pathways are highly interlinked and, when correctly controlled, maintain the body's essential functions. The activity of these pathways varies depending on cell type, permitting the activation of only those subsets of genes that are relevant to a specific cell or tissue type. Normally functioning pathways precisely modulate the level and duration of gene expression, ensuring that cells respond to extracellular stimuli in the appropriate manner. However, when activation of a gene regulating pathway triggers either an under-or over-production of certain proteins, a broad range of diseases can result. LIMITATIONS OF CONVENTIONAL TARGET AND DRUG DISCOVERY Conventional drug discovery efforts principally are focused on identifying compounds that modulate readily accessible extracellular targets, such as cell surface receptors and secreted proteins. Drugs directed toward these extracellular targets have a number of potential limitations in treating complex diseases where molecular mechanisms are located within cells. Therefore, such complex diseases may not be effectively treated using receptor activators or inhibitors. Many diseases, such as inflammatory, neurological and cardiovascular diseases and cancer, continue to represent large unmet medical needs due to difficulties in identifying and targeting the underlying intracellular mechanisms of these diseases. Recent advances in genomics have the potential to significantly improve drug discovery. While initial genomics efforts were directed principally toward the mapping and sequencing of genes, current initiatives also are focused on discerning the functions of specific genes in health and disease. However, there remains a gap between the generation of genomic information and its effective application to drug discovery. An increased understanding of the pathways that regulate the expression of disease-related genes has paved the way for a new drug discovery process. In this process, individual genes and their regulatory pathways may be targeted to prevent the onset and progression of disease. The ability to identify proprietary drug targets in gene regulating pathways provides a method for applying genomic information to disease therapy. Drugs designed to intervene at pivotal points in a gene regulating 29 31 pathway can have a major impact on the downstream production of proteins which cause disease. This approach provides the opportunity to design novel classes of disease-modifying drugs that can alter the course of a disease by targeting underlying mechanisms of disease rather than providing only symptomatic relief. Additionally, drugs can be designed that selectively target gene regulating pathways responsible for abnormal gene expression and disease without affecting healthy cells. SIGNAL'S APPROACH: GENE REGULATING DRUGS Signal is a leader in identifying and elucidating gene regulating pathways and specific targets in these pathways for use in drug discovery. The Company's drug discovery efforts are focused on identifying new classes of small molecule drugs designed to regulate genes through their intracellular signaling pathways. These potential drugs may have wide-ranging clinical application by modulating abnormal expression of genes which cause disease. Several leading pharmaceuticals are now known to function as regulators of gene expression, including cyclosporine for organ transplantation, tamoxifen for cancer therapy and estrogen for osteoporosis. A fundamental advantage of Signal's approach is the ability to target pivotal junctures in specific gene regulating pathways, following the integration of signals from multiple cellular receptors and prior to the production of abnormal levels of proteins. Signal has developed an integrated target and drug discovery platform to identify gene regulating pathways, targets and drug candidates with several important features: Multiple Targets for Therapeutic Intervention. Signal's target discovery efforts are focused on identifying cascades of gene regulating enzymes that activate or suppress genes in a broad range of cell types and disease states. Each of these pathways contains multiple potential drug targets for therapeutic intervention. The Company believes that identifying multiple targets in each of its therapeutic programs increases the likelihood of successfully discovering novel drugs. For example, Signal and its collaborators have identified four gene regulating enzymes in the NF-kB pathway (IKK1, IKK2, NF-kB inducing kinase ("NIK") and inhibitor of kB ("IkB") ligases) which are current or planned targets for the Company's autoimmunity and inflammation, cardiovascular disease and cancer programs. Individual Targets Modulate Multiple Disease-Related Genes. Signal is designing drugs that may be effective in treating diseases where a single target regulates the activation of multiple genes involved in disease. For instance, by targeting a pivotal molecule in a signaling cascade, such as JNK in its autoimmunity and inflammation disease program, the Company is screening for compounds which block the production of a broad set of pathogenic levels of proteins, such as interleukin-2, gamma interferon and tissue-destructive enzymes. In addition, Signal has identified and licensed to Tanabe a lead compound that has demonstrated, in vitro and in animal models, the ability to modulate multiple genes regulated by the AP-1 and NF-kB signaling pathways. Targets Selective for Specific Cell Types. While most gene regulating enzymes, along with the genes they control, are present in each cell of the body, many subtypes of these enzymes and genes function only in specific cell types. Signal is using several approaches to identify drug targets, their specific subtypes and corresponding drug leads which function in a cell-specific manner. For example, Signal researchers and collaborators have shown that JNK3 principally is expressed in brain tissue. When activated, JNK3 has been shown to play a key role in neuronal cell death and in animal models of epilepsy. Targets Selectively Regulate Abnormal Gene Expression. Signal's drug discovery programs principally target inducible gene regulating pathways that may cause abnormal gene expression and give rise to disease. These discovery initiatives focus on regulating genes functioning in an over- or under- activated state, without interfering with normal levels of gene expression required to maintain essential cellular functions. For example, Signal's autoimmunity and inflammation disease program focuses on MAP kinase gene regulating pathways that are selectively induced by cytokines and other stress molecules in response to tissue injury. 30 32 SIGNAL'S STRATEGY The Company's goal is to be a leader in the discovery of small molecule drugs that target gene regulating pathways fundamental to disease processes. To accomplish this goal, the Company pursues the following technology and business strategies: Integrate Advanced Target and Drug Discovery Technologies. Signal integrates an extensive set of target and drug discovery technologies to expedite the application of genomics to the discovery of important new classes of drugs. These technologies include proprietary human cell lines, functional genomics and proteomics, high throughput biochemical and cell-based screening and combinatorial and computational chemistry. Signal believes this extensive set of discovery and preclinical development capabilities provides the Company and its partners with a distinct combination of tools and technologies for target and drug discovery. Applying these capabilities, the Company has successfully elucidated the structure and functions of several clinically important gene regulating pathways, including the NF-kB, AP-1 and p38 pathways, developed a portfolio of 18 drug targets and demonstrated efficacy of its drug leads in animal models of arthritis and osteoporosis. Leverage Targets Across Multiple Diseases. Signal seeks to identify multiple targets within each gene regulating pathway and to select for drug discovery those targets which can be validated in multiple clinical indications. In addition to enhancing the clinical potential of each pathway, this strategy also serves to limit the Company's scientific risk in any one gene regulating pathway or drug target. For example, Signal and its collaborators have demonstrated the role of specific JNK subtypes in mediating key cellular events that give rise to, or exacerbate, autoimmune, inflammatory and neurological diseases and cancer. Build Partner-Funded Business. Signal aggressively pursues collaborations with pharmaceutical partners to fully develop and exploit its pipeline of targets and lead compounds, as well as its discovery technologies. These collaborations provide Signal with multiple potential sources of revenue, enable the Company to diversify scientific and financial risk, and provide access to its collaborators' substantial development, manufacturing and marketing resources. By focusing its efforts on drug discovery and utilizing corporate collaborations to fund the progression of programs from discovery into the clinic, the Company intends to maintain a sustainable level of net cash flow. As these programs mature or any additional corporate collaborations are initiated, the Company may increase its funding of research and development programs. To date, Signal has collaborative agreements with five pharmaceutical partners, has licensed worldwide rights for a drug lead to a sixth partner and has several additional target and drug discovery programs available for future corporate collaborations. Retain Significant Product Commercialization Rights. The Company has retained certain commercialization rights in two of its existing corporate collaborations. These include co-commercialization rights in the U.S. in the Company's collaboration with Ares-Serono and joint worldwide commercial rights, excluding Japan, with Nippon Kayaku. The Company expects to seek to retain certain additional commercialization rights in future corporate collaborations. SIGNAL'S TARGET AND DRUG DISCOVERY TECHNOLOGIES Signal has developed complementary technology platforms designed to identify proprietary drug targets and discover novel drugs active on these targets. The Company believes that, together, these integrated target and drug discovery capabilities enable it to proceed rapidly from target identification to compound screening and lead optimization. To date, the Company and its collaborators have identified 18 drug targets, are working to identify seven additional targets and are continuing to elucidate new gene regulating pathways and their targets. The Company has developed and initiated screening in 16 drug discovery assays and is optimizing drug leads in three therapeutic areas. 31 33 Signal's integrated discovery capabilities are depicted below: INTEGRATED PLATFORM FOR THE DISCOVERY OF GENE REGULATING TARGETS AND DRUGS [Graphic depicting Signal's integrated platform for the discovery of gene regulating targets and drugs. The graphic is a flowchart depicting Signal's capabilities in (1) target discovery as proprietary human cell lines, functional genomics and proteomics, gene regulating target discovery and target validation, and (2) drug discovery as assay development and compound libraries, lead discovery, lead optimization, and gene regulating drug candidates.] DISCOVERY PLATFORM FOR GENE REGULATING TARGETS Signal is developing and applying advanced cellular, molecular and genomic technologies to discover clinically important targets that are the focus of the Company's drug discovery programs and corporate collaborations. These discovery technologies include: Proprietary Human Cell Lines. The Company has developed a proprietary technology to immortalize and perpetualize human cells. Signal uses these human cell lines to identify and validate novel gene regulating pathways and drug targets, and in screening assays for drug discovery. These cell lines are designed to include the full set of functional genes and related pathways involved in both normal and pathogenic cellular functions. Signal uses proprietary human cell lines to develop in vitro models of important disease processes, including neurodegeneration, bone formation and resorption and 32 34 vascular disease. Signal's proprietary human bone cell co-culture system closely mimics the natural environment of bone metabolism, and is used by Signal for target identification and validation, as well as for testing drug leads prior to preclinical evaluation in animal models. Functional Genomics and Proteomics. In many of its corporate collaborations, Signal utilizes functional genomics and proteomics to elucidate the role genes and their protein products play in health and disease. Signal has implemented advanced genomic technologies to expedite the identification and prioritization of disease-associated gene targets. These include proprietary methods for differential gene display, subtraction hybridization and gene chip arrays. To decipher the gene regulating pathways involved in specific diseases, Signal is developing highly sensitive protein microanalysis capabilities that integrate peptide chromatography, microfluidics and mass spectrometry for identification of potential drug targets that regulate specific disease pathways. Signal utilizes these gene and protein discovery tools, in combination with the Company's proprietary cell lines, to generate a more comprehensive profile of signaling pathways involved in diseases and to facilitate the rapid identification of novel and specific therapeutic targets. For example, Signal is applying functional genomics technologies to identify and characterize the role of certain genomic targets and their regulatory pathways in neuronal, cardiovascular and gynecological disease therapy. Target Discovery and Validation. The Company applies cellular and molecular biology techniques to elucidate the regulatory pathways of disease-related genes. An initial step in this process involves mapping the regulatory regions of disease-related genes to identify which transcription factors selectively activate or inhibit each gene's expression. Signal then utilizes genomics and proteomics to identify and characterize specific enzyme targets in a pathway that regulate the activation of these transcription factors. When novel gene regulating enzymes are identified, the Company applies bioinformatic tools to search proprietary and public gene databases and to identify subtypes of these targets with distinct therapeutic applications and specificity for different tissues. After a potential target has been identified, the Company utilizes antisense, mutant enzymes, gene knockout models, antibodies and other techniques to validate the role of the target in specific disease processes and its utility for drug discovery. Such target validation is a critical step before committing resources to assay development and screening for target-specific drug leads. DISCOVERY PLATFORM FOR GENE REGULATING DRUGS Signal develops and integrates several advanced technologies for lead discovery and optimization. The Company's lead discovery platform permits rapid, target-directed screening of diverse compound libraries in a broad range of high throughput assays. The Company optimizes drug leads by integrating combinatorial and computational chemistry with technologies for profiling the effects of drug leads on specific targets in cellular pathways. This facilitates the design of drugs that properly regulate gene expression and protein production. These drug discovery activities are coordinated using an integrated cheminformatics and bioinformatics data management system to facilitate library design, primary and secondary screening and the subsequent design and synthesis of optimized drug candidates. Assay Development. Signal develops and utilizes proprietary biochemical and cell-based assays to screen for compounds that regulate gene expression in a target- and cell-specific manner. Signal researchers have designed modular systems for developing biochemical and cell-based assays, enabling the Company to substitute different drug targets into standardized assay formats for use in various discovery programs. Signal develops and uses biochemical assays to screen compounds for activity on specific drug targets. These biochemical assays are designed to mimic the functional activity of a drug target in its native cellular environment. The Company's cell-based assays facilitate the identification of compounds that modulate gene transcription through distinct intracellular pathways and in specific cell types. Active compounds identified in these primary assays are rapidly qualified in a series of secondary pharmacological assays which provide further information regarding a compound's clinical potential. These secondary assays measure the effects of potential drug leads on disease-related genes and proteins, including inhibition of specific gene regulating enzymes, inhibition of abnormal protein 33 35 production, cytotoxicity, potency and target selectivity. Signal has developed and initiated screening in 16 drug discovery assays and also is developing additional new high throughput screening assays. High Throughput Screening and Compound Library. Signal utilizes robotics-based high throughput screening systems for rapid, target-specific screening of diverse compound libraries. These automated systems enhance the precision, reproducibility and integration of chemical and biological data. The Company's screening library currently consists of approximately 350,000 diverse compounds, which include small molecule, natural product and combinatorial compounds. For example, Signal currently screens more than 60,000 compounds per month on four kinase targets and plans to significantly increase its screening throughput and drug targets. To expedite lead identification, Signal researchers have developed a KAST that enables the Company to screen on multiple kinase targets in parallel. The KAST system provides activity and specificity data across multiple kinase targets for a given screening library. Lead Optimization: Combinatorial, Computational and Structural Technologies. Combinatorial chemistry involves the rapid synthesis of large and diverse compound libraries by sequentially adding different molecular building blocks to a core chemical structure. Signal has developed a proprietary SKIL based on structures of both known kinase inhibitors and data generated by its internal screening programs. The SKIL is being applied in these programs with the goal of rapidly identifying more selective and potent inhibitors of gene regulating kinases. The Company uses combinatorial chemistry techniques principally to expedite the optimization of lead compounds and also to build target-based combinatorial libraries for subsequent screening. Signal's combinatorial chemistry capabilities also may help strengthen the Company's patent position in a particular chemical series by generating a relatively large analog library around an active compound. To expedite the lead optimization process, Signal also uses computational chemistry to guide the design and synthesis of new compounds. Computational chemistry involves the use of computer-based algorithms to model the structure of an active compound and its interaction with a drug target to generate directed libraries for screening. Alternatively, computational chemistry can be used to construct "virtual libraries" around core chemical structures, providing a method for examining large numbers of potential analogs prior to synthesizing representative compounds for screening. Signal researchers have designed a computer-generated three-dimensional model of the JNK enzyme's structure and its active site. Using computer-based simulation, a chemical database of more than 700,000 compounds has been "virtually" screened to identify potential JNK inhibitors. Signal plans to use this technology to develop other target-directed libraries. These structure-based drug design efforts are intended to further enhance a lead compound's potency, selectivity, bioavailability and safety. SIGNAL'S GENE REGULATING PATHWAYS The Company is conducting target and drug discovery programs directed toward five mammalian gene regulating pathways. Many of these pathways regulate the activation of multiple disease-related genes and have multiple drug targets, allowing the Company to pursue a diverse number of therapeutic programs for each pathway. The Company expects that ongoing efforts to map and sequence the human genome, including Signal's internal genomics initiatives, will lead to an expansion in the number of known disease-related genes and further enhance the Company's ability to identify additional gene regulating pathways and drug targets. In addition, the Company is conducting target and drug discovery programs directed toward five viral gene regulating pathways. 34 36 SELECTED HUMAN GENE REGULATING PATHWAYS TARGETED BY SIGNAL [Graphic depicting selected human gene regulating pathways targeted by Signal, specifically the NF-kB pathway, MAP kinase pathways and estrogen-regulated gene pathway. The graphic depicts a flow chart for each pathway showing the stimuli, intracellular signaling, gene activation and protein production.] NF-KB GENE REGULATING PATHWAY NF-kB plays a pivotal role in autoimmune, inflammatory and cardiovascular disease processes by regulating cytokine genes, such as TNF-a, IL-1, IL-2, IL-6, IL-8, along with genes which code for cell adhesion molecules and the COX-2 and iNOS enzymes. In addition, studies published in Science link NF-kB to increased cancer cell resistance to radiation and chemotherapies and demonstrate the ability of NF-kB inhibitors to enhance the sensitivity of cancerous cells to these therapies. NF-kB is a family of transcription factors held in the cytoplasm of cells by IkB. In response to extracellular stimuli, IkB is degraded, allowing NF-kB to migrate into the nucleus and activate select genes which elicit important immunological and proliferative responses. Signal researchers and collaborators have identified three proprietary drug targets which regulate NF-kB activation by processing IkB prior to its degradation: (i) two IkB kinases which Signal terms "IKK1" and "IKK2" and (ii) an IkB ligase, which Signal currently is cloning and characterizing. The discovery of IKK1 and IKK2 by Signal researchers and collaborators was reported in 1997 in the journals Science, Nature and Cell. In addition, as part of its collaboration with Ares-Serono, the Company has obtained rights to a fourth novel target in the NF-kB pathway, NIK. The Company believes that drugs which inhibit IKK1 and IKK2, NIK and IkB ligases will prevent NF-kB activation and the subsequent expression of select disease-associated genes. Signal has filed patent applications for the IKK1 and IKK2 and an IkB ligase, and Ares-Serono's research 35 37 collaborator, the Weizmann Institute, has filed patent applications for the NIK gene regulating enzyme. MAP KINASE GENE REGULATING PATHWAYS Signal has established a leading position in the discovery of proprietary drug targets in mitogen-activated protein kinase, or MAP kinase, pathways. MAP kinase pathways consist of distinct cascades of regulatory enzymes that serially activate one another to control the expression of specific sets of genes in response to growth factors, cytokines, tumor promoters and other biological stimuli. These pathways control cell proliferation and metabolism and cell survival in response to tissue injury, infection, malignancy and other diseases. MAP kinase gene regulating pathways provide novel targets for drug discovery in a wide range of disease processes, including autoimmune and inflammatory diseases, diseases associated with bone metabolism, neurological and cardiovascular diseases and cancer. Signal's researchers, scientific founders and academic collaborators have identified nine proprietary targets in MAP kinase pathways, including targets in the JNK and p38 MAP kinase pathways. JNK Gene Regulating Pathway Activation of the JNK gene regulating pathway increases the expression of a set of autoimmune and inflammatory genes, including IL-2 and gamma interferon. There are multiple subtypes of the JNK regulatory enzyme, each of which induces the expression of genes in a cell- and stimulus-specific manner. In 1993, Dr. Michael Karin at the University of California, San Diego, a scientific founder of the Company, and Dr. Roger Davis at the University of Massachusetts, a Scientific Advisor of the Company, discovered two novel kinases in the JNK pathway. These regulatory enzymes (termed "JNK1" and "JNK2") are pivotal activators of c-Jun, a component of AP-1 and other transcription factors, and genes under c-Jun's control. Signal researchers subsequently have cloned and sequenced the upstream activator of the JNK regulatory enzymes, termed JNKK, which also may serve as a target for drug discovery. The over-activation of JNK causes numerous diseases, including autoimmune, inflammatory and neurological diseases and proliferative cancers. Drugs which inhibit JNK activation are expected to selectively block the over-activation of inducible genes, and not affect normal cellular functions, since JNKs do not regulate normal gene expression. One of the Company's collaborators, Dr. Roger Davis, reported in 1997 in the journal Nature that mice engineered to be deficient in the brain-specific JNK subtype, JNK3, are resistant to experimentally induced seizure and associated neuronal cell death. JNK3 inhibitors therefore may have therapeutic value for treating epilepsy, as well as neurodegeneration associated with Alzheimer's disease, Parkinson's disease, stroke and head trauma. The Company has exclusively licensed certain rights to three issued U.S. patents and related patent applications with regard to JNK and its use in drug discovery. p38 Gene Regulating Pathway Activation of the p38 gene regulating pathway causes the expression of multiple cytokine genes, including IL-1, IL-6, IL-8 and TNF-a, which regulate the development and proliferation of cells in response to disease and tissue injury. To date, the Company and its academic collaborators have identified three proprietary drug targets in the p38 pathway. One such target is p38-2, a subtype of p38, which is highly expressed in heart and skeletal muscle and which is activated by stress-inducing stimuli and proinflammatory cytokines. The second target discovered in the p38 pathway is MEK6, a novel MAP kinase which activates p38 in vivo and which is highly expressed in skeletal muscle. Signal researchers have validated the role of MEK6 in regulating the production of IL-1 and TNF-alpha cytokines. The third target in the p38 pathway, MKK3, specifically activates p38 and p38-2 in response to stress stimuli and pro-inflammatory cytokines. When defective, the p38 pathway is believed to play an important role in diseases arising from abnormal production of cytokines, including autoimmune and inflammatory diseases, diseases associated with bone metabolism and neurological and cardiovascular diseases. The Company has licensed exclusive worldwide rights covering MKK3 use in drug discovery and has filed patent applications for p38-2 and MEK6. 36 38 c-Fos Gene Regulating Pathway The transcription factor c-Fos controls the development and activation of certain bone-resorbing cells, termed osteoclasts. These cells continually remove older bone material so that new bone can be deposited in its place. Mice lacking c-Fos demonstrate reduced bone resorption, thereby validating c-Fos as a drug target. Signal researchers have developed a proprietary human bone cell co-culture system to further validate the role of c-Fos in bone metabolism and to evaluate c-Fos inhibitors identified in its screens. The Company believes that drugs which inhibit the expression or activation of c-Fos will slow the overactive bone resorption associated with osteoporosis. Signal is working to map the c-Fos signaling pathway and identify key molecular targets that regulate increased c-Fos expression. In addition to regulating bone metabolism, c-Fos also plays a critical role in tumor formation and cancer metastasis by regulating several properties of malignancy, including the activation of matrix metalloproteinase ("MMP") genes which cause tumors to metastasize. This role of c-Fos has been validated, in part, by animal studies in which tumors induced in mice lacking c-Fos did not metastasize. Conversely, over-expression of c-Fos in mice resulted in the proliferation and spread of highly aggressive forms of cancers. Based on these findings, the Company believes that inhibitors of c-Fos expression and activation may represent an important new class of drugs for cancer therapy. OTHER GENE REGULATING PATHWAYS Estrogen-Regulated Gene Pathway Signal researchers have discovered a novel estrogen-regulated gene pathway by which estrogen inhibits production of IL-6, a cytokine that causes bone resorption. Signal has validated the role of IL-6 in the activation of bone resorption using a proprietary human bone cell co-culture system and in animal models of osteoporosis. This validation is consistent with published studies demonstrating that bone loss can be prevented in mice where the IL-6 gene was deleted. The Company believes that drugs which inhibit IL-6 will slow overactive bone resorption associated with osteoporosis. Viral Gene Regulating Pathways Viral infections occur when viruses insert their genetic material into a host cell and then use the infected cell's biochemical machinery to express viral proteins and produce new viruses. Viral transcription and translation events regulate the production of these viral proteins. Signal and its collaborators have determined the molecular mechanisms of action of key viral transcription factors responsible for replication of HCV, HIV, human papillomavirus ("HPV"), cytomegalovirus ("CMV") and herpes simplex virus ("HSV"). The Company has validated these viral gene regulation factors as drug targets by using genetically modified viruses and antisense oligonucleotides which block viral infections in cells. Signal and its collaborators also have determined the mechanism of action of translational regulation of a key HCV protein and have cloned and expressed another important regulatory enzyme responsible for HCV replication. In addition, one of Signal's academic collaborators has identified a novel function for a key HIV target which may facilitate the discovery of novel HIV inhibitors. 37 39 SIGNAL'S DRUG DISCOVERY PROGRAMS Signal's drug discovery programs are directed toward autoimmunity and inflammation, bone metabolism, neurological disease, cardiovascular disease, cancer and viral infections, and are summarized in the following table:
PROGRAM/TARGET CURRENT INDICATIONS(1) STATUS(2) COMMERCIAL RIGHTS(3) - ---------------------- ------------------------------- ------------------ -------------------- AUTOIMMUNITY AND INFLAMMATION AP-1 / NF-kB........ Lead Optimization Tanabe JNK1 and 2.......... Rheumatoid Arthritis Lead Optimization Signal IKK1 and 2.......... Osteoarthritis Screening Signal, Ares-Serono p38-2............... Allergy Screening Signal NIK................. Asthma Assay Development Signal, Ares-Serono MEK6................ Inflammatory Bowel Disease Assay Development Signal MKK3................ Psoriasis Assay Development Signal JNKK1 and 2......... Transplant Rejection Assay Development Signal IkB Ligases......... Target Discovery Signal, Ares-Serono BONE METABOLISM IL-6................ Osteoporosis Lead Optimization Signal c-Fos............... Paget's Disease Assay Development Signal Bone Mitogenesis.... Bone Repair Target Discovery Signal NEUROLOGY PNS................. Peripheral Neuropathies Lead Optimization Signal, Nippon Kayaku JNK1 and 2.......... Neurodegeneration Screening Signal JNK3................ Neurodegeneration Assay Development Signal CNS Cell Lines...... Neurodegeneration, Stroke, Head Assay Development Trauma Target Discovery Signal PNS Cell Lines...... Assay Development/ Pain, Incontinence Target Discovery Roche Bioscience CNS Genomic Neurodegeneration, Targets............... Psychiatric Diseases Target Discovery Organon CARDIOVASCULAR JNK1 and 2.......... Ischemia Lead Optimization Signal IKK1 and 2.......... Atherosclerosis Screening Signal, Ares-Serono p38-2............... Ischemia Screening Signal NIK................. Atherosclerosis Assay Development Signal, Ares-Serono JNK3................ Ischemia Assay Development Signal MEK6................ Ischemia Assay Development Signal IkB Ligases......... Atherosclerosis Target Discovery Signal, Ares-Serono Vascular Genomic Targets............... Atherosclerosis, Ischemia Target Discovery Organon CANCER JNK1 and 2.......... Lead Optimization Signal IL-6................ Lung Cancer Lead Optimization Signal IKK1 and 2.......... Breast Cancer Screening Signal, Ares-Serono NIK................. Ovarian Cancer Assay Development Signal, Ares-Serono JNKK1 and 2......... Myeloma Assay Development Signal c-Fos............... Leukemia Assay Development Signal IkB Ligases......... Target Discovery Signal, Ares-Serono VIROLOGY Various............. Hepatitis C Virus Assay Development Signal, DuPont Merck Various............. Human Immunodeficiency Virus Assay Development Signal, DuPont Merck ICP4................ Herpes Simplex Virus (Types 1, 2) Screening Signal IE86................ Cytomegalovirus Screening Signal E2.................. Human Papillomavirus Screening Signal
- ------------------------------ (1) All diseases referenced by brackets are potential clinical indications for each target listed in the respective therapeutic program. (2) LEAD OPTIMIZATION indicates that Signal and/or its pharmaceutical partners are applying combinatorial and computational chemistry, as well as structure-based drug design, to enhance the potency, selectivity, bioavailability, safety and other pharmaceutical properties of active compounds. SCREENING indicates that Signal is testing libraries of organic small molecules and natural products in biochemical and/or cell-based assays to identify compounds which either inhibit or induce activation of a drug target. ASSAY DEVELOPMENT indicates that Signal is creating biochemical and/or cell-based in vitro assays which incorporate a specific drug target and are used to identify compounds which regulate the drug target. TARGET DISCOVERY indicates that Signal is identifying new disease-related genes and their protein products, cloning and characterizing novel enzymes and other proteins which regulate activation of disease-related genes and is validating the utility of these regulatory proteins as drug targets. (3) See "--Research and Development Partners." 38 40 AUTOIMMUNE AND INFLAMMATORY DISEASE PROGRAM The human immune system is comprised of cells and biochemical mediators which protect the body from infectious organisms, physical injury and abnormal cellular events such as cancer. Key components of the immune system, such as white blood cells, mount a localized protective or inflammatory response at sites of injury and disease. Autoimmune and inflammatory diseases arise from the over-activation of the immune system resulting in the over-production of immune cells, inflammatory cytokines and tissue-destructive enzymes. These cells and proteins attack and destroy healthy tissue, giving rise to a number of diseases such as rheumatoid arthritis, osteoarthritis, allergies, asthma, inflammatory bowel disease and psoriasis, as well as transplant rejection. In 1996, the U.S. market for anti-inflammatory and immunosuppressive drugs used to treat these diseases totaled approximately $2.0 billion. Many current drugs are relatively non-selective and have dose-limiting side effects. More importantly, although these current drugs alleviate many symptoms of disease, they generally do not target the underlying mechanisms and therefore do not actually modify disease processes. Signal is identifying and cloning drug targets in key gene regulating pathways and screening for new classes of small molecule drugs which regulate autoimmune and inflammatory diseases at the level of gene function. The Company currently is screening for inhibitors of regulatory enzymes in three distinct pathways, NF-kB, JNK and p38. In November 1997, Signal initiated a three-year collaborative development and license agreement with Ares-Serono to discover novel anti-inflammatory, immunosuppressive and certain other drugs that regulate targets in the NF-kB gene regulating pathway. Additionally, in March 1998, the Company licensed to Tanabe worldwide rights to a dual AP-1/NF-kB drug lead with demonstrated oral efficacy in an animal model of arthritis. See "--Research and Development Partners." NF-kB Inhibitor Program NF-kB regulates the activation of multiple cytokine, adhesion molecule and other pro-inflammatory genes. Signal has developed and initiated high throughput screens for inhibitors of NF-kB using proprietary IKK1 and IKK2 biochemical assays and cell-based NF-kB screening assays. The Company also is developing secondary assays which profile the effects of active compounds on a number of other immune-inflammatory genes and proteins. The Company has identified several compounds active on the IKK1 and IKK2 targets. Signal plans to apply combinatorial, computational and structure-based drug design to develop NF-kB inhibitors with enhanced potency, specificity and bioavailability. Signal also is working with collaborators to develop high throughput screens for the NIK drug target and to clone and express the genes for IkB ligases as novel targets for drug discovery. MAP Kinase Inhibitor Program JNK and p38 pathways control the activation of cytokine and other pro-inflammatory genes during an inflammatory response. Company researchers have developed and initiated high throughput screening for JNK1, JNK2, JNK3 and p38 inhibitors using proprietary biochemical and whole cell gene transcription assays. Signal has identified several compounds which inhibit JNK activation with a high level of specificity. The Company is utilizing its SKIL library and a proprietary computer-generated homology model of JNK to design analog compounds with enhanced potency and selectivity. Additionally, Signal is working to validate the role of upstream activators of JNK, JNKK1 and JNKK2, which also may be valid targets for drug discovery. In the p38 pathway, the Company is developing biochemical high throughput screening assays for MEK6 and MKK3 drug discovery, and has initiated screening on its p38-2 target. Dual AP-1/NF-kB Inhibitor Program Signal researchers have identified a new class of compounds that inhibit genes regulated by both the AP-1 and NF-kB transcription factors. In vitro assays and in vivo animal studies indicate this series of compounds is highly selective for T-cells and has potent anti-inflammatory and immunosuppressive activity. Signal's most advanced lead compound has demonstrated efficacy, safety and oral bioavailability in an animal model of arthritis, and the Company has filed patent applications covering the molecule's structure. In March 1998, the Company licensed to Tanabe worldwide rights to this drug lead for autoimmune, inflammatory and other diseases. 39 41 BONE METABOLISM DISEASE PROGRAM Bone disease results from an imbalance in the bone remodeling process, causing either inadequate bone formation or excess bone loss. Diseases involving abnormal bone remodeling include osteoporosis, Paget's disease, hyperthyroidism and periodontal disease. Osteoporosis, which occurs primarily in post-menopausal women due to loss of estrogen, is an age-related disease characterized by persistent loss of bone mass. According to the National Osteoporosis Foundation, in 1997 this disease afflicted more than 28 million people in the United States and over 200 million people worldwide. In 1995, sales of therapeutics to treat osteoporosis totaled more than $6.5 billion. Most current osteoporosis treatments are intended to slow bone resorption. While estrogen replacement therapy remains the primary treatment for most women at risk for osteoporosis, it is associated with risks including cancer and heart disease, endometriosis and abnormal blood clotting. Presently, there are no FDA-approved therapies that increase bone formation. Signal has initiated a broad, multi-target approach to regulating both bone resorption and formation for the treatment of osteoporosis, bone fractures, periodontal disease and other disorders of bone metabolism. The Company is working to develop new classes of drugs that potently and selectively control the mechanisms of bone disease at the level of gene function. Signal has established a target and drug discovery program focused on identifying novel classes of drugs for treating osteoporosis that target the IL-6, c-Fos and certain novel gene regulating targets for inducing bone formation. See "--Research and Development Partners." IL-6 Inhibitor Program The cytokine IL-6 plays a fundamental role in the differentiation and activation of bone-resorbing osteoclasts in women following menopause. Signal has initiated a program to discover drugs that selectively inhibit the production of IL-6 in bone cells through a novel estrogen-regulated gene pathway. This new class of drugs is being designed to inhibit transcription factors responsible for inducing IL-6 gene expression and resulting bone resorption. These drugs, if successfully developed, would provide clinicians with an alternative, non-estrogen treatment for osteoporosis which may minimize some of the adverse side effects of traditional estrogen therapy and which may be used to treat both women and men. Signal has identified novel classes of compounds that inhibit IL-6 production in bone cells. These compounds have demonstrated biological activity in an animal model of osteoporosis and currently are undergoing further optimization. To expedite lead optimization, Signal has developed a series of secondary assays to examine the selectivity and potential side-effects of lead compounds by profiling the compounds' effects on gene and protein expression. c-Fos Inhibitor Program Utilizing its detailed understanding of the AP-1 and other MAP kinase signaling pathways, the Company is pursuing the discovery of drugs to prevent or treat osteoporosis through a c-Fos signaling mechanism. Recent studies have demonstrated that targeted knockout of the c-Fos transcription factor gene results in excess bone resorption and osteoporosis. These academic studies, along with data generated by Signal's in vitro bone co-culture model, establish that the development and activation of bone-resorbing osteoclasts is highly dependent on the presence of the c-Fos transcription factor. Based on these recent findings, the Company is developing a high throughput screening assay to identify novel, non-estrogenic compounds that inhibit c-Fos production and the subsequent over-activation of osteoclasts which cause excess bone loss. Bone Formation Program Signal also has initiated an osteogenic program to identify drugs that induce bone formation. Researchers at Signal have cloned key bone regulating factors and are applying their expertise in MAP kinase signaling to characterize novel pathways in osteoblasts that regulate genes involved in bone growth. To facilitate this process, the Company uses proprietary human bone cell lines to rapidly validate and evaluate drug targets and leads. This system can precisely measure the effects of new targets and leads on each stage of osteoblast cell development, including bone formation. Company 40 42 researchers presently are focused on isolating regulatory mechanisms in these pathways that would serve as targets for drug discovery. Small molecule drugs that regulate these potential targets would complement anti-resorptive therapies and have potentially broader application in treating multiple forms of osteoporosis, including post-menopausal, drug-induced and age-related forms of the disease. To date, no orally active drugs which induce bone formation are available for the treatment of bone diseases and disorders. NEUROLOGICAL DISEASE PROGRAM The human nervous system consists of two distinct components: the central nervous system ("CNS"), which includes the brain and spinal cord, and the PNS, which includes all nerves outside the CNS. Within the PNS, neurons transmit information such as pain to the CNS, and motor pathways transmit commands from the CNS to muscles. Defects or damage in the CNS can lead to Parkinson's disease, Alzheimer's disease, stroke or epilepsy, as well as psychiatric disorders such as depression and schizophrenia. PNS disorders can lead to acute and chronic pain, and peripheral neuropathies caused by diabetes and chemotherapy can cause chronic motor or sensory defects. In 1996, annual worldwide sales of neuropharmaceuticals totaled $8.5 billion, including pharmaceuticals such as anti-depressants, analgesics, psychotropics, anxiolytics and anti-epileptics. Many current CNS and PNS drugs exhibit undesirable side effects. There also are disorders such as chronic pain and Alzheimer's disease for which there are no effective treatments due to a limited understanding of neurological disease processes at the molecular and genomic levels. Signal researchers and collaborators have developed a proprietary cell immortalization technology for producing cloned human neuronal cells that are homogenous, stable and fully functional in vitro for use in target discovery and validation, and in drug screening. This technology is designed to overcome many current limitations of neuropharmaceutical research. Cell lines developed by Signal express the receptors, ion channels and cytochemical markers required to produce functional, morphologically mature human neurons. Signal's cell line technology also can be used to "lock in" human neuronal cells to a specific stage of maturation, providing a stable cell-based assay system for drug screening. To date, the Company has developed human neuronal and glial cell lines of the CNS and, it believes, the first human sensory neuronal cell lines of the PNS. Signal's human CNS cell lines can be differentiated into a variety of cell types, including neurons and astrocytes, and also can be induced to undergo cell death, in vitro, in model systems characteristic of stroke, traumatic head injury and neurological diseases. The Company plans to continue to develop proprietary CNS and PNS cell lines with corporate collaborators to identify and functionally validate specific genes and their regulatory pathways involved in neurological diseases. Signal believes genomic information obtained from these cell lines may provide a foundation for identifying novel drugs that regulate CNS genes involved in neurological diseases (Alzheimer's and Parkinson's disease, head trauma and stroke) and psychiatric diseases (anxiety, depression and psychosis), and that target disorders of the PNS (pain, incontinence and peripheral neuropathies). Applying the Company's functional genomics capabilities, researchers at Signal have generated a library of differentially expressed genes from an in vitro model of Alzheimer's disease. Signal also has developed a proprietary CNS whole cell screening assay for inhibitors of neurodegeneration induced by cytokines and growth factor withdrawal. Further, the Company is investigating the role of MAP kinase targets, including JNK and p38, in neurodegeneration. One such target, JNK3, has been validated in animal models and is being formatted in a high throughput screening assay for drug discovery. As part of its neurogenomics initiative, Signal is collaborating with Organon to discover genomic drug targets involved in neurological diseases. In September 1996, Signal commenced a three-year research collaboration with Roche Bioscience to develop human PNS cell lines for use in target and drug discovery directed toward the treatment of pain and incontinence. Signal subsequently developed and transferred to Roche Bioscience certain PNS cell lines for potential use in Roche Bioscience's target and drug discovery programs. Signal retains the right to use the PNS cell lines in other therapeutic areas, such as peripheral neuropathies. 41 43 In February 1998, Signal entered into a two-year research collaboration with Nippon Kayaku to optimize a lead compound discovered by Nippon Kayaku for use in treating diabetic and chemotherapy-induced peripheral neuropathies. See "--Research and Development Partners." CARDIOVASCULAR DISEASE PROGRAM Cardiovascular disease, including congestive heart failure, myocardial infarction and stroke, largely results from restricted blood flow caused by atherosclerosis and hypertension. Cardiovascular disease is the leading cause of death in the United States and Europe and results in an estimated 12 million annual deaths worldwide according to the World Health Organization. In the United States, approximately 58 million people are afflicted with cardiovascular disease, leading to an estimated 960,000 deaths each year. In 1998, pharmaceutical sales of cardiovascular drugs will exceed $14.8 billion in the United States, according to the American Heart Association. Several classes of cardiovascular drugs have been developed to prevent and treat chronic cardiovascular disease, including beta blockers, calcium channel blockers and ACE inhibitors designed to maintain proper blood vessel dilation and normal blood flow. While these drugs reduce disease morbidity and mortality, they also cause a number of adverse side effects such as depression, headaches and fatigue. None of these classes of cardiovascular drugs acts on the molecular mechanisms of cardiovascular disease which damage vessel walls and impair blood flow. Abnormalities in the expression of endothelial and smooth muscle genes in vascular tissue play a fundamental role in cardiovascular disease. When endothelial cells are activated by injury or trauma, these cells frequently overproduce such proteins as cell adhesion molecules, growth factors and cytokines, leading to the formation of lesions that block normal blood flow and cause vasculitis and atherosclerosis. Many of these proteins are controlled by the NF-kB, JNK and p38 gene regulating pathways. Activated or damaged endothelial cells also can induce genes in vascular smooth muscle cells. These genes cause the proliferation of smooth muscle cells, leading to vessel-wall thickening and impaired blood flow. NF-kB and MAP kinase pathways have been demonstrated to be over-activated in animal models of angioplasty-induced restenosis. The Company currently is using its KAST system to identify selective inhibitors of its IKK1 and IKK2, JNK and p38-2 targets. The Company has identified inhibitors of these targets in its biochemical screens, and certain of these compounds are undergoing lead optimization. Signal plans to evaluate active compounds in secondary assays which use proprietary human vascular cell lines to assess their cardioprotective effects. In July 1996, the Company entered into a three-year collaboration with Organon, amended in January 1998, to discover genomic drug targets in cardiovascular disease. In November 1997, the Company entered into a three-year collaboration with Ares-Serono to develop inhibitors of NF-kB for potential treatment of cardiovascular diseases. See "--Research and Development Partners." CANCER PROGRAM Cancer is characterized by uncontrolled growth, proliferation and migration of cells. Malignancies result from abnormalities in the expression of genes that regulate cell proliferation, migration and cell death. In 1997, cancer was the second leading cause of death in the United States with 560,000 deaths and an estimated 1.2 million new cancer cases. According to the American Cancer Society, the oncolytic drug market totaled approximately $1.6 billion in the United States and $4.7 billion worldwide in 1996. Signal is elucidating several gene regulating pathways which play a fundamental role in tumor growth and metastasis, including the JNK and c-Fos pathways, the NF-kB pathway regulated by IKK1 and IKK2, NIK and the IkB ligases, as well as the ERG pathway that controls IL-6 production. These pathways control the expression of specific sets of genes involved in cancer, including: (i) cytokines and growth factors which promote the growth of cancer cells, (ii) cell adhesion molecules and tissue-destructive enzymes which enable tumors to spread to distant sites in the body and invade normal 42 44 tissues and organs, (iii) angiogenic growth factors that vascularize and thereby facilitate the growth of newly established tumors, and (iv) certain other factors which make cancer cells resistant to chemotherapy and radiation therapy. Signal is designing new classes of drugs that target abnormalities in inducible gene regulating pathways to inhibit the transformation, growth and spread of cancer without affecting other essential gene regulating pathways. Applying its high throughput screening capabilities, the Company has identified a novel class of IL-6 inhibitors which demonstrate anti-proliferative activity in vitro in human breast cancer cells. The Company currently is optimizing small molecule inhibitors of IL-6, in addition to leads identified in Signal's screens for NF-kB and JNK pathway inhibitors. Additionally, Signal and its collaborators are developing a high throughput screening assay for c-Fos and are working to identify IkB ligase drug targets. Signal plans to evaluate active compounds in secondary assays that use tumor cell lines to assess anti-cancer effects. The Company believes that drugs which selectively inhibit these targets may be useful in treating several cancers, including lung, breast and ovarian carcinomas, myelomas and leukemias, and may cause fewer dose-limiting side effects than current chemotherapies. In November 1997, the Company initiated a three-year collaboration with Ares-Serono to develop drugs that target the NF-kB pathway for the potential treatment of certain cancers. See " --Research and Development Partners." VIROLOGY PROGRAM Viruses are pathogenic microorganisms that infect cells and subsequently use the biochemical machinery of their host cells to produce new viruses. An estimated 30 million people are infected with HIV and 50 million people are infected with HCV throughout the industrialized world. Other viral pathogens being transmitted at epidemic rates include the herpes simplex-2 virus and HPV, both of which cause chronic, lifelong genital infections, and afflict an estimated 31 million and six million people in the United States, respectively. Despite the high incidence of chronic viral infections, only a limited number of antiviral drugs have been approved to date. New classes of antivirals are needed which act on novel, virus-specific targets while overcoming problems of toxicity and viral resistance. Signal is applying its expertise in gene regulation to the discovery of small molecule antiviral drugs that selectively inhibit viral genes. The Company believes that gene regulating antivirals may provide more potent and selective therapy due to three factors: (i) viral gene regulating targets are structurally different from human factors and, therefore, potentially may be used to inhibit viral replication without interfering with normal human cellular functions, (ii) each virus possesses distinct transcription factors that distinguish it from other viruses, facilitating the design of virus-specific therapeutics, and (iii) drugs which target these mechanisms will be useful in the treatment of viruses resistant to current therapies. Signal's viral infection program is directed toward six viral gene regulating targets: two regulatory proteins for HCV, a transcription factor for HIV, the E2 transcription factor for HPV, the ICP4 transcription factor for HSV and the IE86 transcription factor for CMV. The Company and its collaborators have validated each of these targets in vitro. Signal has developed proprietary viral infection assays for identifying novel inhibitors of HPV, HSV and CMV gene activation. The Company is developing target-specific screening assays for small molecule HCV and HIV inhibitors as part of its three-year collaboration with DuPont Merck initiated in December 1997. Active compounds have been identified in the Company's HSV and CMV screens. See "--Research and Development Partners." RESEARCH AND DEVELOPMENT PARTNERS Partnerships with pharmaceutical and biopharmaceutical companies are an integral part of Signal's business strategy. To date, Signal has established a number of collaborative agreements and has received payments of $20.8 million thereunder. Signal's principal collaborative agreements are with Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon and DuPont Merck. In addition, the 43 45 Company has licensed worldwide rights for a drug lead to Tanabe. There can be no assurance that the Company will maintain its existing collaborative or licensing arrangements or establish any additional arrangements or that its current or future relationships, if established, will result in receipt by the Company of milestone payments, the development of marketable pharmaceutical products or receipt by the Company of significant royalties on sales of such products. ARES-SERONO In November 1997, Signal entered into a collaborative agreement with Ares-Serono, under which Ares-Serono agreed to fund certain research for an initial three-year period, which term will automatically be extended for additional three-year periods unless earlier terminated as described below. The Ares-Serono collaboration is focused on identifying compounds that modulate NF-kB gene regulating pathways to which Ares-Serono has rights for all clinical indications in all countries of the world excluding Asia. Ares-Serono S.A. has purchased approximately $10.0 million of Signal's Series E and Series F Preferred Stock. Ares-Serono also has agreed to provide Signal with annual research and development support for Signal's cost of this program at a percentage level approximating Ares-Serono's relative share of worldwide marketing rights. In addition, Ares-Serono is obligated to make payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales arising from the collaboration. Pursuant to an exclusive license granted by Signal, Ares-Serono will be solely responsible for preclinical and clinical development of drug candidates and the development and commercialization of any drugs arising from the collaboration in all countries of the world excluding Asia. Signal has co- commercialization rights for all products marketed in the United States, exercisable at any time during the term of the agreement and up to 30 days following receipt of notice from Ares-Serono of the filing of an NDA or equivalent regulatory application, with respect to products arising from the collaboration. In the event that Signal exercises co-commercialization rights, Signal will forego royalties in exchange for a share of product revenue, and a portion of revenue will be payable to Ares-Serono as reimbursement for development costs. Unless, at least six months prior to the expiration of the initial three-year term, Ares-Serono gives Signal notice of its decision to terminate the research being conducted pursuant to the collaboration agreement, such research and Ares-Serono's research support obligation will continue for an additional three-year period, subject to each party's early termination rights. Ares-Serono may terminate the agreement upon six months' notice any time after the end of the initial three-year term. ROCHE BIOSCIENCE In August 1996, Signal entered into a three-year collaborative agreement with Roche Bioscience. Under the agreement, Signal is applying its proprietary cell line development technology toward the development of human PNS cell lines for use by Roche Bioscience in target and drug discovery. Pursuant to an exclusive, worldwide, royalty-free license granted by Signal, Roche Bioscience may utilize these PNS cells to discover and commercialize drugs for treating pain, incontinence and peripheral vascular disease. Under the agreement, Signal retains the right to use the PNS cell lines for its internal target and drug discovery programs in other therapeutic fields. Roche Bioscience has paid Signal a license fee and has agreed to pay annual research and development support at a level approximating Signal's cost of the PNS cell line program. To date, Signal has developed and transferred to Roche Bioscience clonal human PNS cell lines as specified in the collaborative agreement. Roche Bioscience may terminate the agreement beginning in August 1998 at its discretion upon 90 days' written notice. If the collaboration agreement is terminated for any reason, the licenses granted to Roche Bioscience by Signal shall survive for as long as Roche Bioscience continues to pay annual license maintenance fees to Signal. As long as Roche Bioscience pays these annual license maintenance fees, Signal may not enter into any other collaborations with respect to cloned immortalized PNS cell lines in the covered fields of pain, incontinence and peripheral vascular disease. 44 46 NIPPON KAYAKU In February 1998, Signal entered into a collaborative agreement with Nippon Kayaku under which Nippon Kayaku agreed to fund certain research at Signal for two years. Under the agreement, Signal and Nippon Kayaku will develop and commercialize products based on or derived from a compound supplied by Nippon Kayaku for the treatment and prevention of diseases and disorders of the CNS and PNS. Signal will perform combinatorial chemistry and use its proprietary human neuronal cell lines to further optimize the compound and characterize its mechanism of action prior to the start of clinical studies. Nippon Kayaku has agreed to provide Signal with annual research and development support at a level approximating Signal's cost of the program. Each party also is obligated to pay the other royalties on future product sales arising from the collaboration. Pursuant to a commercialization agreement to be concluded by Signal and Nippon Kayaku following the initial research phase of the collaboration, Nippon Kayaku will be solely responsible for the development and commercialization of products in Japan for the treatment or prevention of diseases and disorders of the PNS and will receive co-commercialization rights in Japan with respect to products for the treatment and prevention of CNS diseases and disorders. Under such future commercialization agreement, development and commercialization rights for products outside Japan for the treatment or prevention of both PNS and CNS diseases and disorders will be agreed upon by the parties on a product-by-product basis, with Nippon Kayaku not guaranteed any minimum level of co-commercialization rights. Signal and Nippon Kayaku also have granted each other co-exclusive commercialization rights outside the field with respect to each analog compound arising from the collaboration which is developed and commercialized by one or both of the parties. ORGANON In July 1996, Signal entered into a collaborative agreement with Organon for the discovery of new genomic targets, under which Organon agreed to fund certain research at Signal for three years. Such agreement may be extended for up to two additional years by mutual consent of the parties. Pursuant to an amendment dated January 1998, Organon may terminate the research, effective in either January 1999 or July 1999, for failure to meet certain milestones by either October 1998 or January 1999, respectively. Initially, Signal will utilize its cellular, molecular and genomic technologies to identify and validate novel genes in certain target tissues. Signal will then develop high throughput screening assays for use by Organon in identifying small molecule drugs to treat cardiovascular, neurological, gynecological and certain other diseases. Pursuant to this collaboration, Organon has received rights for, and will be solely responsible for, the worldwide development and commercialization of any drugs arising from the collaboration. To date, Organon has paid Signal a license fee and annual research and development support payments at a level approximating Signal's cost of this program. In addition, Organon is obligated to make payments to Signal based on the achievement of certain research and development milestones, and Organon must pay Signal royalties on any future product sales arising from the collaboration. DUPONT MERCK In December 1997, Signal entered into a collaborative agreement with DuPont Merck, under which DuPont Merck agreed to fund certain research at Signal for three years. The agreement may be extended for up to three additional years at DuPont Merck's option. The DuPont Merck collaboration is focused on identifying compounds for the treatment or prevention of HCV and HIV infections. Signal also has granted DuPont Merck an option, exercisable through August 1998, to expand the collaboration to include the identification of compounds directed toward an additional viral target. Pursuant to this collaboration, Signal and Dupont Merck will be responsible for developing target specific screening assays and will be jointly responsible for identifying lead compounds. DuPont Merck will be solely responsible for lead optimization and the worldwide development and commercialization of any drugs arising from the collaboration. 45 47 DuPont Merck has paid Signal a license fee and has agreed to provide Signal with annual research and development support at a level approximating Signal's cost of these programs. DuPont Merck also is obligated to make payments to Signal and to purchase its Common Stock upon the achievement of certain research and development milestones, and to pay Signal royalties on any future product sales arising from the collaboration. In addition, DuPont Merck has agreed to purchase $2.0 million of Common Stock of Signal in a private transaction concurrent with the closing of this offering at a price per share equal to the initial public offering price. TANABE From March 1996 to March 1998, Signal and Tanabe were engaged in a collaborative program under which Tanabe funded certain research by Signal in target and drug discovery in the fields of inflammatory disease and osteoporosis. In connection with the collaboration, Tanabe paid Signal a license fee and reimbursed Signal for research and development costs. Tanabe also purchased shares of Signal's Series D Preferred Stock. In March 1998, Signal and Tanabe mutually agreed to conclude their research collaboration, and Tanabe licensed from Signal a lead compound that was discovered during the collaboration. This compound has been validated in animal models of arthritis, and may have application for the treatment of autoimmune, inflammatory and certain other diseases. Signal retained all other intellectual property rights, including rights to all other drug targets and drug leads, created before or during the collaboration. Tanabe paid an additional license fee to Signal for the exclusive worldwide license to the lead compound and is obligated to make payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales. LICENSE AGREEMENTS Signal has established a number of license agreements with academic institutions. Signal's principal license agreements are: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA In October 1993, Signal entered into a license agreement with The Regents of the University of California ("The Regents"), as amended in June 1997 and February 1998, pursuant to which Signal obtained a worldwide exclusive license for the JNK signaling enzyme based on the research of Dr. Michael Karin, a scientific founder and advisor of the Company. The license also covers methods for the production and screening of neuroblasts. In addition, Signal has secured from The Regents exclusive worldwide license rights to certain patents filed by Dr. Karin relating to specified NF-kB signaling molecules, IKK1 and IKK2. Under the license agreement, Signal has paid initial license fees, certain extension payments and issued Common Stock to The Regents, and is obligated to make certain royalty and milestone payments. The term of the license remains in effect for the life of the last-to-expire patent covered under the agreement. THE UNIVERSITY OF MASSACHUSETTS In October 1996 and 1997, Signal entered into worldwide exclusive license agreements with the University of Massachusetts ("U Mass"). Pursuant to the license agreements, Signal has exclusive rights under a certain patent application and nonexclusive worldwide rights under certain unpatented know-how to develop drugs targeting JNK and two intracellular signaling proteins in the p38 pathway, MKK3 and MKK4, based on the research of Dr. Roger J. Davis, a scientific advisor of the Company. Upon entering into both of the license agreements, Signal paid a license fee and issued shares of Common Stock to U Mass and is obligated to make certain royalty and milestone payments. The term of the licenses remains in effect for the longer of 10 years or the life of the last-to-expire patent under the agreements. 46 48 PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in part on its ability to obtain and retain patent protection for its proprietary technologies, targets and potential products, effectively preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Because of the substantial length of time and expense associated with bringing potential products through the development and regulatory approval processes to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Accordingly, the Company seeks patent protection for its proprietary technology, targets and potential products. As of April 30, 1998, the Company owned or had licensed five issued U.S. patents, 15 notices of allowance from the U.S. Patent and Trademark Office, no corresponding issued foreign patents, 21 pending U.S. patent applications, as well as seven corresponding international filings under the Patent Cooperation Treaty, and 43 pending foreign national patent applications. However, there can be no assurance that the Company or its collaborators have developed or will continue to develop potential products or processes that are patentable or that patents will issue from any of the Company's pending applications, including patent applications that have been allowed. There also can be no assurance that the Company's or its collaborators' current patents, or patents that issue on pending applications, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to the Company. Patent applications in the U.S. are maintained in secrecy until patents issue, patent applications are not generally published until many months or years after they are filed and publication of technological developments in the scientific and patent literature often occurs long after the date of such developments. Accordingly, the Company cannot be certain that it or one of its collaborators was the first to invent the subject matter covered by the patent applications or that it or one of its collaborators was the first to file patent applications for such inventions. Further, there can be no assurance as to the success or timeliness in obtaining any patents, that the breadth of claims obtained, if any, will provide adequate protection of the Company's proprietary technology, targets or products, or that the Company or its licensors will be able to or will in fact adequately enforce any such claims to protect its proprietary technology, targets or potential products. Patent law relating to the scope and enforceability of claims in the fields in which the Company operates is still evolving. The patent positions of biopharmaceutical and pharmaceutical companies, including the Company, are highly uncertain and involve complex legal and technical questions for which legal principles are not firmly established. The degree of future protection for the Company's proprietary rights, therefore, is highly uncertain. In this regard, there can be no assurance that independent patents will issue from the Company's and its licensors' patent applications, which include many interrelated applications directed to common or related subject matter. Further, there may be issued patents and pending applications owned by others directed to technologies relevant to the Company's, its licensors' or its collaborators' research, development and commercialization efforts. There can be no assurance that the Company's or its collaborators' technology can be developed and commercialized without a license to such patents or that such patent applications will not be granted priority over patent applications filed by the Company, its licensors or one of its collaborators. Furthermore, there can be no assurance that third parties will not independently develop similar or alternative technologies to those of the Company, its licensors or any of its collaborators, duplicate any of the Company's, its licensors' or its collaborators' technologies or design around the patented technologies developed by the Company, its licensors or its collaborators, any of which may have a material adverse effect on the Company's business, financial condition and results of operations. The commercial success of the Company depends significantly on its ability to operate without infringing the patents and proprietary rights of third parties, and there can be no assurance that the Company's, its licensors' and its collaborators' technologies do not and will not infringe the patents or proprietary rights of others. A number of pharmaceutical companies, biopharmaceutical companies, independent researchers, universities and research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned, optioned by 47 49 or licensed to the Company or its corporate collaborators. For instance, a number of patents may have issued and may issue in the future on certain targets or their use in screening assays that could prevent the Company and its collaborators from developing screens using such targets, compounds relating to such targets or relate to certain other aspects of technology utilized or expected to be utilized by the Company. In addition, the Company is unable to determine all of the patents or patent applications that may materially affect the Company's or its corporate collaborators' ability to make, use or sell any potential products. The Company is aware of one allowed U.S. patent application relating to certain methods for transcriptional modulation. Signal believes that it has not infringed, and is not currently infringing, the claims of the allowed application. Nonetheless, the Company may in the future be required to obtain a license to such allowed patent, and there can be no assurance that such a license will be available on commercially reasonable terms, if at all. In addition, the Company is aware of an issued U.S. patent claim for certain human MAP kinases, including MAP kinases in the p38 pathway, which may be useful as targets for drug discovery. The Company is negotiating a license to patent rights covering such MAP kinase targets that may be useful in the Company's research programs, although there can be no assurance that such a license will be available on commercially reasonable terms, if at all. Any conflicts resulting from third-party patent applications and patents could significantly reduce the coverage of the patents owned, optioned by or licensed to the Company or its collaborators and limit the ability of the Company or its collaborators to obtain meaningful patent protection. If patents are issued to third parties that contain competitive or conflicting claims, the Company, its licensors or its collaborators may be enjoined from pursuing research, development or commercialization of potential products or be required to obtain licenses to these patents or to develop or obtain alternative technology. There can be no assurance that the Company or its collaborators will not be so enjoined or will be able to obtain any license to the patents and technologies of third parties on acceptable terms, if at all, or be able to obtain or develop alternative technologies. If the Company or any of its collaborators is enjoined from pursuing its research, development or commercialization activities or if any such license is or alternative technologies are not obtained or developed, the Company or such collaborator may be delayed or prevented from commercializing its potential products, which would result in a material adverse effect on the Company's business, financial condition and results of operations. The drug discovery industry has a history of patent litigation and there will likely continue to be numerous patent litigation suits concerning drug discovery technologies and potential products. The patent positions of pharmaceutical, biopharmaceutical and drug discovery companies, including the Company, generally are uncertain and involve complex legal and factual questions. Litigation to establish the validity of patents, to defend against patent infringement claims of others and to assert infringement claims against others can be expensive and time consuming, even if the outcome is favorable. An outcome of any patent prosecution or litigation that is unfavorable to the Company or one of its licensors or collaborators may have a material adverse effect on the Company. In particular, litigation may be necessary to enforce any patents issued or licensed to the Company, its licensors, or its collaborators, to protect trade secrets or know-how of the Company, its licensors or its collaborators or to determine the scope and validity of a third party's proprietary rights. The Company could incur substantial costs if litigation is required to defend itself in patent suits brought by third parties, if the Company participates in patent suits brought against or initiated by its licensors or collaborators or if the Company initiates such suits, and there can be no assurance that funds or resources would be available to the Company in the event of such litigation. Additionally, there can be no assurance that the Company, its licensors or its collaborators would prevail in any such action. An adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent office could subject the Company to significant liabilities, require disputed rights to be licensed from or to other parties or require the Company, its licensors or its collaborators to cease using certain technology, any of which may have a material adverse effect on the Company's business, financial condition and results of operations. In addition to patent protection, the Company also relies on copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain 48 50 the confidentiality and ownership of trade secrets and proprietary information, the Company requires employees, consultants and certain collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with the Company. These agreements generally provide that all confidential information developed or made known to the individual by the Company during the course of the individual's relationship with the Company will be kept confidential and not disclosed to third parties except in specific circumstances. The agreements also generally provide that all inventions conceived by the individual in the course of rendering services to the Company shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets, confidential information or inventions in the event of unauthorized use or disclosure of such information or that adequate remedies would exist in the event of such unauthorized use or disclosure. The loss or exposure of trade secrets possessed by the Company could adversely affect its business. Like many high technology companies, the Company may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by the Company. Although the Company requires its employees to maintain the confidentiality of all confidential information of previous employers, there can be no assurance that the Company or these individuals will not be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. COMPETITION Competition among pharmaceutical and biopharmaceutical companies to identify drug targets and drug candidates for development is intense and is expected to increase. In the pharmaceutical industry, the Company competes with the research and development departments of pharmaceutical and biopharmaceutical companies and other commercial enterprises, as well as numerous academic and research institutions and governmental agencies. In addition, the pharmaceutical and biopharmaceutical industries are subject to rapid and substantial technological change. Pharmaceutical and biopharmaceutical companies and others are conducting research in various areas which overlap with the Company's technology platform, either on their own or in collaboration with others. There can be no assurance that pharmaceutical and biopharmaceutical companies which compete with the Company in specific areas will not merge or enter into collaborations or joint ventures or other alliances with one or more other such companies or academic and research institutions and become substantial competitors or that the Company's collaborators will not initiate or expand their own internal target and drug discovery and development efforts. At the present time, the Company has not conducted any clinical trials and has no commercial manufacturing capability, sales or marketing force. Many of the Company's competitors and potential competitors have substantially greater capital resources, research and development resources, manufacturing, sales and marketing experience and production facilities than does the Company. Additionally, many of these competitors have significantly greater experience than does the Company in undertaking target and drug discovery, preclinical product development and testing and clinical trials of potential pharmaceutical products and obtaining FDA and other regulatory approvals. Smaller companies also may prove to be significant competitors, particularly through proprietary research discoveries and collaborative arrangements with large pharmaceutical and established biopharmaceutical companies. Many of these competitors have significant products that have been approved or are in development and operate large, well funded research and development programs. Academic institutions, governmental agencies and other public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for the discovery, development and commercialization of new pharmaceutical products. In addition, these companies and institutions compete with the Company in recruiting and retaining highly qualified scientific and management personnel. There can be no assurance that the Company's competitors will not discover lead compounds, develop more effective, safer, more affordable or more easily administered potential products or achieve patent protection or commercialize potential products sooner than the Company. 49 51 Failure to compete effectively could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION The Company's and its collaborators' research, preclinical testing and clinical trials of their respective potential products, if any, and the manufacturing and marketing of their potential products, will be subject to extensive and rigorous regulation by numerous government authorities in the United States and in other countries where the Company and its collaborators intend to test, manufacture and market their potential products. Prior to marketing any product developed by the Company, the Company or its collaborators, as applicable, must undergo an extensive regulatory approval process. This regulatory process, which includes preclinical testing and clinical trials of each potential product to establish its safety and efficacy, will take many years and require the expenditure of substantial resources, and also may include post-marketing surveillance. Data obtained from preclinical testing and clinical trials are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, delays or rejection may be encountered based upon changes in FDA policy for drug approval during the period of product development and FDA regulatory review of each submitted new drug application ("NDA") or product license application ("PLA"). Similar delays or rejection also may be encountered in foreign countries. There can be no assurance that regulatory approval will be obtained for any potential products developed by the Company or its collaborators. Moreover, regulatory approval may entail limitations on the indicated uses of a drug. Further, even if regulatory approval is obtained, a marketed drug and its manufacturer are subject to continuing review, and discovery of previously unknown problems with a drug or manufacturer can result in the withdrawal of a drug from the market or a significant decrease in market demand, which would have an adverse effect on the Company's business, financial condition and results of operations. Violations of regulatory requirements at any stage, including preclinical testing and clinical trials, the approval process or post-approval, may result in various adverse consequences including a delay by the FDA or other applicable regulatory authority in approving or its refusal to approve a potential product, withdrawal of an approved drug from the market and the imposition of criminal penalties against the manufacturer and NDA or PLA holder. Neither the Company nor its collaborators has submitted any IND applications for any potential product of the Company, and none has been approved for commercialization in the United States or internationally. No assurance can be given that the Company or its collaborators will be able to obtain FDA or other applicable regulatory authority approval for any potential products. Failure to obtain requisite regulatory approvals or failure to obtain approvals of the scope requested will delay or preclude the Company or its collaborators from marketing the Company's or its collaborators' products or limit the commercial use of the potential products and would have material adverse effect on the Company's business, financial condition and results of operations. MANUFACTURING To date, the Company has not manufactured any products for preclinical, clinical or commercial purposes and does not have any manufacturing facilities. The Company intends to utilize third-party contract manufacturers or its corporate collaborators for the production of material for use in preclinical and clinical trials and for the manufacture of future products for commercialization. In the event that the Company is unable to secure such outside manufacturing capabilities, it will not be able to conduct preclinical product development, clinical trials or commercialize its potential products as planned. Even if the Company were able to establish its own internal manufacturing capability, doing so would require the expenditure of significant resources which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company or any outside manufacturers can produce potential products of suitable quality in sufficient quantity in a cost-effective manner, if at all. The manufacture of the Company's potential products for preclinical and clinical trials and commercial purposes is subject to current Good Manufacturing Practices ("cGMP") regulations promulgated by the FDA and other applicable 50 52 domestic and foreign regulations. No assurance can be given that in the future the Company or any outside manufacturers can maintain full compliance with cGMP regulations or other applicable regulations. EMPLOYEES As of April 30, 1998 the Company had 82 full-time employees, including 39 with Ph.D. degrees. Of the Company's workforce, 66 employees are engaged in discovery research and 16 are engaged in business development, finance and administration. The Company has assembled a group of experienced scientists and managers skilled in each phase of target and drug discovery, including cell line development, functional genomics, molecular biology, assay development, automated high throughput screening and medicinal chemistry. The Company also retains outside consultants. None of the Company's employees are covered by collective bargaining arrangements, and management considers its relationships with its employees to be good. FACILITIES Signal currently leases 23,000 square feet of laboratory and office space at 5555 Oberlin Drive, San Diego, California. The Company's lease for such facility expires on January 31, 2001, with an option to renew the lease for two additional periods of one year each. Signal also leases 11,000 square feet of laboratory and office space at 5626 Oberlin Drive, San Diego, California. The Company's lease for such facility expires on December 31, 2003. The Company believes that its existing facilities are adequate to meet its business requirements for the near-term and that additional space will be available on commercially reasonable terms, if required. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings at this time. SCIENTIFIC ADVISORY BOARD The Company's Scientific Advisory Board consists of its five scientific founders, as well as other individuals with expertise in the fields of immunology, cytokine biology, virology and synthetic chemistry. The Scientific Advisory Board generally advises the Company concerning long-term scientific planning, research and development, and also evaluates the Company's research programs, recommends personnel to the Company and advises the Company on specific scientific and technical issues. The Scientific Advisory Board meets at least two times per year, and certain individual scientific advisors consult with and meet informally with the Company on a more frequent basis. Certain scientific advisors own shares of Common Stock of the Company, and the Company has entered into consulting agreements with all of its scientific advisors. None of the scientific advisors is employed by the Company, and any or all of such advisors may have commitments to or consulting or advisory contracts with their employers or other entities that may conflict or compete with their obligations to Signal. Accordingly, such persons are expected to devote only a small portion of their time to Signal. The members of Signal's Scientific Advisory Board are: SCIENTIFIC FOUNDERS Fred H. Gage, Ph.D., is a Professor in the Laboratory of Genetics of the Salk Institute for Biological Studies. He is an internationally respected innovator in the fields of neurological diseases and transplantation. Dr. Gage has won the IPSEN Prize, the Ameritec Prize, the Metropolitan Award, the Chancellor's Associate Award and the Allied Signal Award. Stephen F. Heinemann, Ph.D., is a Professor and Director of the Molecular Neurobiology Laboratory at The Salk Institute and an external member of the Max Planck Institute. He is considered one of the foremost experts in the field of receptor neurobiology and is a member of the National Academy of Sciences. 51 53 Tony Hunter, Ph.D., is a Professor at The Salk Institute, an American Cancer Society Research Professor. Dr. Hunter is a world-renowned expert in the field of gene regulating kinases and established their roles in the regulation of cellular growth and tumor development. Dr. Hunter was elected a fellow of the Royal Society of London and has received several awards for his research, including a 1994 Gairdner Foundation International Award. Michael Karin, Ph.D., is a Professor in the Department of Pharmacology, University of California, San Diego. He is an internationally recognized expert in the field of transcriptional regulation and has made fundamental contributions to the understanding of a variety of gene regulating pathways, including JNK, FRK and NF-k B. Inder Verma, Ph.D., is Chairman of Signal's Scientific Advisory Board. Dr. Verma is an American Cancer Society Professor of Molecular Biology and Co-Director of the Laboratory of Genetics at The Salk Institute, and is a member of the National Academy of Sciences. Dr. Verma is internationally recognized for his work in the field of NF-k B gene regulation. OTHER SCIENTIFIC ADVISORY BOARD MEMBERS Elliot J. Androphy, M.D., is the Associate Chairman of the Department of Dermatology at the New England Medical Center and Tufts University School of Medicine, as well as a practicing physician. He is considered to be a world expert in the field of HPV, where he has made seminal contributions. Melanie Cobb, Ph.D., is a Professor in the Department of Pharmacology at the University of Texas Southwestern Medical Center in Dallas. Dr. Cobb is internationally renowned for her research on MAP kinase gene regulating pathways. Roger J. Davis, Ph.D., is a Professor in Molecular Medicine and the Department of Biochemistry & Molecular Biology at the University of Massachusetts Medical Center, and an Associate Investigator at the Howard Hughes Medical Institute. Dr. Davis is regarded as one of the leading researchers worldwide in the field of signal transduction. Dr. Davis is a principal or co-discoverer of several important gene regulating kinases, including molecular mechanisms of the JNK and p38 signaling pathways. Neal A. DeLuca, Ph.D., is an Associate Professor in the Department of Molecular Genetics and Biochemistry at the University of Pittsburgh School of Medicine. Dr. DeLuca is an internationally recognized researcher in the field of herpes virology. Charles Dinarello, M.D., is a Professor of Medicine at the University of Colorado School of Medicine in Denver. Dr. Dinarello is an internationally respected expert in the field of cytokines and their role in immunological and infectious diseases. Anjana Rao, Ph.D., is an Associate Professor of Pathology at the Harvard Medical School. Dr. Rao has conducted seminal research on signal transduction mechanisms of the human immune system, including the NF-ATp and NF-k B transcription factors. Dr. Rao is a recipient of the Leukemia Society of America Scholar Award. K. Barry Sharpless, Ph.D., is the William M. Keck Professor of Chemistry in the Department of Chemistry at The Scripps Research Institute. He is an internationally renowned synthetic chemist relating to his work in asymmetric chemical synthesis and has received numerous honors for his work including the King Faisal International Prize for Science. Dr. Sharpless is a fellow of the American Academy of Arts and Sciences and the National Academy of Sciences, and is a Guggenheim Fellow. 52 54 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth certain information regarding the Company's executive officers, directors and key employees as of May 15, 1998:
NAME AGE POSITION ---- --- -------- Alan J. Lewis, Ph.D. ..................... 52 President, Chief Executive Officer and Director Carl F. Bobkoski.......................... 45 Executive Vice President David W. Anderson, Ph.D. ................. 46 Senior Vice President, Drug Development Bradley B. Gordon......................... 44 Vice President Finance, Chief Financial Officer and Corporate Secretary Merl F. Hoekstra.......................... 38 Vice President, Target Discovery Douglas E. Richards....................... 35 Vice President, Corporate Development Miguel S. Barbosa, Ph.D. ................. 40 Senior Director of Experimental Therapeutics and Virology Anthony M. Manning, Ph.D. ................ 36 Director of Inflammation and Immunology Shripad S. Bhagwat, Ph.D. ................ 42 Director of Medicinal Chemistry Mark J. Suto, Ph.D. ...................... 42 Director of Technology Management John P. Walker............................ 49 Chairman of the Board Brook H. Byers(1)......................... 52 Director Luke B. Evnin, Ph.D.(1)................... 34 Director Harry F. Hixson, Ph.D.(2)................. 59 Director Patrick F. Latterell(1)(2)................ 39 Director Arnold Oronsky, Ph.D.(2).................. 57 Director
- ------------------------------ (1) Member of the Audit Committee (2) Member of the Compensation Committee Alan J. Lewis, Ph.D. has served the Company as Chief Executive Officer and director since 1996 and as President of the Company since 1994. Prior to joining the Company, Dr. Lewis worked for 15 years at the Wyeth-Ayerst Research division of American Home Products Corporation ("Wyeth-Ayerst"), a pharmaceutical company, where he served as Vice President of Research from 1990 to 1994. At Wyeth-Ayerst, Dr. Lewis was responsible for research efforts in CNS, cardiovascular, inflammatory, allergy and bone metabolism diseases. Dr. Lewis currently serves as a director of Allergan Specialty Therapeutics, Inc., a pharmaceutical company. He holds a Ph.D. in Pharmacology from the University of Wales in Cardiff and completed his post-doctoral training at Yale University. Carl F. Bobkoski has served the Company as Executive Vice President since 1995. Before joining Signal, from 1990 to 1995, Mr. Bobkoski was Executive Vice President and a director at Gensia, Inc. ("Gensia"), a biopharmaceutical company, where he was responsible for directing all commercialization activities for proprietary products, overseeing the operations of Gensia Laboratories, Ltd., a wholly-owned subsidiary of Gensia, and supervising product development, finance, management information systems and corporate development. Mr. Bobkoski received an M.B.A. from The University of Chicago. David W. Anderson, Ph.D. has served as Senior Vice President, Drug Development since May 1998 and served as Vice President, Drug Discovery and Preclinical Development of the Company from 1994 to May 1998. Prior to joining Signal, Dr. Anderson spent six years at Johnson & Johnson, a medical product and pharmaceutical company, most recently as Director, Drug Discovery at the R.W. Johnson Pharmaceutical Research Institute. He holds a Ph.D. in Medical Microbiology and Immunology from 53 55 the University of Missouri-Columbia and completed his post-doctoral training at The University of Colorado Health Science Center. Bradley B. Gordon has served the Company as Vice President Finance, Chief Financial Officer and Corporate Secretary since 1994. For the seven years prior to joining Signal, Mr. Gordon served in various management positions with Viagene, Inc., a biopharmaceutical company acquired by Chiron Corp. in 1995, including Corporate Vice President, Vice President Corporate Development and Vice President, Finance. Mr. Gordon received an M.B.A. from the University of Southern California. Merl F. Hoekstra, Ph.D. has served the Company as Vice President, Target Discovery since May 1998. From 1992 to 1998, Dr. Hoekstra was at ICOS Corporation, most recently serving as Senior Director, Science, where he headed target and drug discovery research directed toward novel signal transduction and cell cycle pathways in the fields of inflammation and oncology. From 1989 through 1992, he was an Associate Professor in Molecular Biology and Virology at The Salk Institute where he directed a laboratory conducting signal transduction and human genome research. Dr. Hoekstra received his Ph.D. in Molecular Biology and Immunology from Loyola University of Chicago, and conducted post-doctoral research in Molecular Biology at The Research Institute of Scripps Clinic under fellowships from the National Cancer Institute of Canada and as a Lucille P. Markey Scholar in Biomedical Sciences. Douglas E. Richards has served the Company as Vice President, Corporate Development since May 1998. Before joining Signal, from 1995 to 1998, Mr. Richards served most recently as Director of Biotechnology Licensing at Bristol-Myers Squibb, Inc., a public pharmaceutical company. Between 1992 and 1995, Mr. Richards served as Manager of Technology Licensing at Gensia, where he was responsible for partnering and technology licensing activities. Mr. Richards received an M.B.A. from The University of Chicago and an M.S. in Molecular Biology from the University of Wisconsin. Miguel S. Barbosa, Ph.D. has served the Company as Senior Director of Experimental Therapeutics and Virology since 1994. Prior to joining the Company, from 1990 to 1994, Dr. Barbosa was an Assistant Professor of Microbiology at the University of Texas Southwestern Medical Center, where he elucidated the interaction between HPV oncoproteins and cellular tumor suppressor proteins that results in human cervical cancer. Dr. Barbosa obtained his Ph.D. in the department of Microbiology and Immunology at the University of California, Los Angeles School of Medicine. Anthony M. Manning, Ph.D. has served the Company as Director of Inflammation and Immunology since 1996. Prior to joining Signal, from 1992 to 1996, Dr. Manning was Senior Research Scientist and NF-k B Drug Discovery Program Team Leader at Pharmacia & Upjohn, Inc., a pharmaceutical company. Dr. Manning received his Ph.D. in Biochemistry from the University of Otago, New Zealand and pursued post-graduate studies in the Department of Pediatrics, University of Otago and in the Institute for Molecular Genetics, Baylor College of Medicine, where he was also an Assistant Professor in the Department of Pediatrics. Shripad S. Bhagwat, Ph.D. has served as Director of Medicinal Chemistry at Signal since May 1998. Between 1994 and 1998, Dr. Bhagwat was Senior Group Leader, Neuroscience Research at Abbott Laboratories, a pharmaceutical company, with responsibility for managing the medicinal chemistry activities for two lead optimization programs, including one drug candidate currently in clinical development. From 1985 through 1994, Dr. Bhagwat was a staff scientist with Ciba-Geigy Corp., a pharmaceutical company, where he managed several medicinal chemistry programs in the fields of cardiology and virology. Dr. Bhagwat received his Ph.D. in Organic Chemistry from the State University of New York at Stony Brook and conducted post-doctoral research at Columbia University. Mark J. Suto, Ph.D. has served the Company as Director of Technology Management since January 1998. During the period from 1994 through 1997, Dr. Suto was Director of Medicinal Chemistry at the Company. Prior to joining Signal, from 1993 to 1994, Dr. Suto was Senior Director of Medicinal Chemistry at Trega Biosciences, Inc. (formerly Houghten Pharmaceuticals, Inc.) ("Trega"), a biopharmaceutical company. Prior to joining Trega, from 1982 to 1993, Dr. Suto was a Senior 54 56 Research Associate at Parke-Davis Pharmaceutical Research Division, Warner-Lambert Company. Dr. Suto received his Ph.D. in Medicinal Chemistry from the State University of New York at Buffalo. John P. Walker has served as Chairman of the Board of the Company since 1996. Mr. Walker is currently Chairman, Chief Executive Officer and a director of AxyS Pharmaceuticals, Inc., a public biopharmaceutical company ("AxyS"). From 1993 to 1997, he was President and Chief Executive Officer of Arris Pharmaceutical Corporation ("Arris"), a predecessor corporation to AxyS. From 1991 to 1993, he was a venture capitalist at Alpha Venture Partners. In addition, Mr. Walker was the Chairman and Chief Executive Officer of Vitaphore Corporation, a biomaterials company which was sold to Union Carbide Corporation in 1990, and for a period of 15 years was an executive with American Hospital Supply Corporation. Mr. Walker also serves on the board of directors of Microcide Corporation and Geron Corporation. He conducted graduate business studies at Northwestern University Institute for Management. Brook H. Byers has served as a director of the Company since 1993. Mr. Byers is a general partner of Kleiner Perkins Caufield & Byers, a private venture capital firm, which he joined in 1977. He has been the founding president and chairman of four life sciences companies: Hybritech Incorporated, IDEC Pharmaceuticals Corporation, Ligand Pharmaceuticals, Inc. and InSite Vision, Inc. Mr. Byers currently serves as a director of AxyS. He also serves as a director of a number of privately held technology companies and sits on the University of California, San Francisco Foundation Board of Directors. Mr. Byers received his M.B.A. from Stanford Graduate School of Business. Luke B. Evnin, Ph.D. has served as a director of the Company since 1993. Since March 1998, he has been a Managing Director at MPM Asset Management LLC, which manages BB BioVentures, L.P., a healthcare venture capital fund. From 1990 to 1997, Dr. Evnin was involved in healthcare investing activities at Accel Partners, a venture capital firm, and he remains a General Partner of Accel IV L.P. and Accel V L.P. He currently serves on the Board of Directors of Epix Medical, Inc. and several private companies, including Sonic Innovations. Dr. Evnin received his Ph.D. in Biochemistry from the University of California-San Francisco. Harry F. Hixson, Ph.D. has served as a director of the Company since 1993. Dr. Hixson was employed by Amgen Inc. from 1985 to 1991, where he last served as President and Chief Operations Officer. From 1991 to present, Dr. Hixson has been a private investor specializing in biotechnology start-up companies. From 1991 until its merger with Somatix Therapy Corporation in 1992, Dr. Hixson served as President and Chief Executive Officer of GeneSys Therapeutics, Inc., a biotechnology company. Dr. Hixson presently is a director of Neurocrine Biosciences, Inc. Dr. Hixson holds a Ph.D. in Physical Biochemistry from Purdue University and an M.B.A. from The University of Chicago. Patrick F. Latterell has served the Company as a director since 1993, as Chairman of the Board from 1993 to 1996, and as Chief Executive Officer from 1994 to 1996. Mr. Latterell is a General Partner of Venrock Associates, a venture capital investment group, which he joined in 1989. Mr. Latterell currently is a director of Vical, Inc. and several private biomedical companies. Mr. Latterell holds an M.B.A. from Stanford Graduate School of Business. Arnold Oronsky, Ph.D. has served as a director of the Company since 1994. Since 1994, Dr. Oronsky has been a general partner at InterWest Partners, a private venture capital firm. From 1995 to 1996, Dr. Oronsky served as President and Chief Executive Officer of Coulter Pharmaceutical, Inc., a biopharmaceutical company. From 1984 to 1994, Dr. Oronsky served as Vice President for Discovery Research at Lederle Laboratories, a pharmaceutical division of American Cyanamid, Inc., where he was responsible for the research of new drugs. Since 1988, Dr. Oronsky has served as a senior lecturer in the Department of Medicine at Johns Hopkins Medical School. Dr. Oronsky received his Ph.D. in Physiology and Biochemistry from Columbia University College of Physicians and Surgeons. Under the terms of the Restated Certificate, the Company's Board of Directors is divided into three classes, serving staggered terms of three years, and any vacancies that occur during the year may be filled by the Company's Board of Directors for the remainder of the full term. Dr. Lewis and 55 57 Mr. Walker serve as Class I directors, whose term will expire at the first annual meeting of stockholders following the closing of this offering. Dr. Evnin and Dr. Oronsky serve as Class II directors, whose term will expire at the second annual meeting of stockholders following the closing of this offering. Mr. Byers, Dr. Hixson and Mr. Latterell serve as Class III directors, whose term will expire at the third annual meeting of stockholders following the closing of this offering. Officers serve at the discretion of the Board of Directors. There are no family relationships between any directors or executive officers of the Company. COMMITTEES OF THE BOARD OF DIRECTORS The Compensation Committee consists of Mr. Latterell, Dr. Oronsky and Dr. Hixson. The Compensation Committee makes recommendations regarding the Company's 1998 Equity Incentive Plan, Non-Employee Directors' Stock Option Plan and Employee Stock Purchase Plan, as well as prior stock option plans, and makes decisions concerning salaries and incentive compensation for employees and consultants of the Company. The Audit Committee consists of Dr. Evnin, Mr. Latterell and Mr. Byers. The Audit Committee makes recommendations to the Board of Directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by the Company's independent auditors and reviews and evaluates the Company's audit and control functions. DIRECTOR COMPENSATION The Company's directors currently do not receive any cash compensation for services on the Board of Directors or any committee thereof, but directors may be reimbursed for certain expenses in connection with attendance at Board and committee meetings. Notwithstanding the foregoing, John P. Walker, the Chairman of the Board of Directors, currently receives $1,000 compensation for each meeting of the Board of Directors that he attends pursuant to a consulting agreement dated April 1, 1996. In 1997, each non-employee director also received options to purchase 12,500 shares of Common Stock of the Company. All directors are eligible to participate in the Company's 1998 Equity Incentive Plan. Non-employee directors receive automatic grants of options under the Company's Non-Employee Directors' Stock Option Plan as described below. See "Management--Equity Incentive Plan" and "--Non-Employee Directors' Stock Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. See "Certain Transactions" for a description of transactions between the Company and entities affiliated with members of the Compensation Committee. 56 58 EXECUTIVE COMPENSATION The following table sets forth summary information concerning compensation awarded to, earned by, or accrued for services rendered to, the Company in all capacities during the fiscal year ended December 31, 1997 by (i) the Company's Chief Executive Officer and (ii) the Company's three other most highly compensated executive officers whose salary and bonus for each year were in excess of $100,000 (together, the "Named Officers"). SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM COMPENSATION(1) COMPENSATION AWARDS -------------------- SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS (#) --------------------------- --------- -------- --------------------- Alan J. Lewis, Ph.D., President, Chief Executive Officer and Director.......................... $266,815 $36,544 18,750 Carl F. Bobkoski, Executive Vice President...... 192,346 27,179 -- David W. Anderson, Ph.D., Senior Vice President, Drug Development.............................. 198,129 27,368 25,000 Bradley B. Gordon, Vice President Finance, Chief Financial Officer and Corporate Secretary..... 145,564 20,536 20,000
- ------------------------------ (1) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), the compensation described in this table does not include medical, group life insurance or other benefits which are available generally to all salaried employees of the Company and certain perquisites and other personal benefits received which do not exceed the lesser of $50,000 or 10% of any officer's salary and bonus disclosed in this table. EMPLOYMENT AGREEMENTS The Company entered into an employment letter agreement with Alan J. Lewis, dated December 8, 1993, providing for an annual salary of $225,000, a signing bonus of $50,000, additional bonuses and options subject to certain performance milestones, assistance with home financing, and an opportunity to acquire 112,500 shares of Common Stock of the Company pursuant to the Company's stock option plan. The term of the employment letter agreement was for one year, renewable annually. See "Certain Transactions." The Company entered into an employment letter agreement with David W. Anderson, dated March 4, 1994, providing for an annual salary of $165,000, subject to adjustment from time to time, a signing bonus of $25,000, and an opportunity to acquire 50,000 shares of Common Stock of the Company pursuant to the Company's stock option plan. The employment letter agreement indicates that Dr. Anderson's employment is terminable at will by either party. The Company entered into an employment letter agreement with Bradley B. Gordon, dated August 18, 1994, providing for an annual salary of $130,000, subject to adjustment from time to time, plus bonuses subject to certain unspecified performance milestones, certain severance arrangements, and an opportunity to acquire 37,500 shares of Common Stock of the Company pursuant to the Company's stock option plan. The employment letter agreement indicates that Mr. Gordon's employment is terminable at will by either party. The Company entered into an employment letter agreement with Carl F. Bobkoski, dated June 13, 1995, providing for an annual salary of $175,000, subject to adjustment from time to time, plus bonuses and options subject to certain performance and corporate-partnering milestones, certain severance arrangements, and an opportunity to acquire 42,500 shares of Common Stock of the Company pursuant to the Company's stock option plan. The employment letter agreement indicates that Mr. Bobkoski's employment is terminable at will by either party. The Company entered into an employment letter agreement with Merl F. Hoekstra, dated May 13, 1998, providing for an annual salary of $150,000, subject to adjustment from time to time, a signing bonus of $15,000, certain moving expenses, certain severance arrangements, and an opportunity to 57 59 acquire 50,000 shares of Common Stock of the Company pursuant to the Company's stock option plan. The employment letter agreement indicates that Dr. Hoekstra's employment is terminable at will by either party. 1998 EQUITY INCENTIVE PLAN The Company adopted its 1993 Stock Option Plan, 1993 Founders' Stock Option Plan and 1997 Stock Option Plan (collectively, the "Prior Plans") and amended, restated and retitled them in February 1998 as the 1998 Equity Incentive Plan (as amended, restated and retitled, the "1998 Plan"). Outstanding options will continue to be governed by the original terms of those grants. An aggregate of 2,016,667 shares of the Company's Common Stock have been reserved for issuance pursuant to the exercise of stock awards granted to employees, directors and consultants under the 1998 Plan. The 1998 Plan will terminate in April 2008, unless sooner terminated by the Board. The 1998 Plan permits the granting of options intended to qualify as incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to employees (including officers and employee directors), and options that do not so qualify ("Nonstatutory Stock Options," and, together with Incentive Stock Options, the "Options") to employees (including officers and employee directors), directors and consultants (including non-employee directors). In addition, the 1998 Plan permits the granting of stock appreciation rights ("SARs") appurtenant to or independently of Options, as well as stock bonuses and rights to purchase restricted stock (Options, SARs, stock bonuses and rights to purchase restricted stock are hereinafter referred to as "Stock Awards"). No person is eligible to be granted Options and SARs covering more than 750,000 shares of the Company's Common Stock in any calendar year. The 1998 Plan is administered by the Board or a committee appointed by the Board. Subject to the limitations set forth in the 1998 Plan, the Board has the authority to select the persons to whom grants are to be made, to designate the number of shares to be covered by each Stock Award, to determine whether an Option is to be an Incentive Stock Option or a Nonstatutory Stock Option, to establish vesting schedules, to specify the Option exercise price and the type of consideration to be paid to the Company upon exercise and, subject to certain restrictions, to specify other terms of Stock Awards. The maximum term of Options granted under the 1998 Plan is 10 years. The aggregate fair market value, determined at the time of grant, of the shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an optionee during any calendar year (under all such plans of the Company and its affiliates) may not exceed $100,000, or the Options or portion thereof which exceed such limit (according to the order in which they are granted) shall be treated as Nonstatutory Stock Options. Options granted under the 1998 Plan generally are non-transferable and expire three months after the termination of an optionee's service to the Company. In general, if an optionee is permanently disabled or dies during his or her service to the Company, such person's Options may be exercised up to 12 months following such disability and following such death. The exercise price of Options granted under the 1998 Plan is determined by the Board of Directors in accordance with the guidelines set forth in the 1998 Plan. The exercise price of an Incentive Stock Option cannot be less than 100% of the fair market value of the Common Stock on the date of the grant. The exercise price of a Nonstatutory Stock Option cannot be less than 85% of the fair market value of the Common Stock on the date of grant. Options granted under the 1998 Plan vest at the rate specified in the option agreement. The exercise price of Incentive Stock Options granted to any person who at the time of grant owns stock representing more than 10% of the total combined voting power of all classes of the Company's capital stock must be at least 110% of the fair market value of such stock on the date of grant and the term of such Incentive Stock Options cannot exceed five years. Any stock bonuses or restricted stock purchase awards granted under the 1998 Plan shall be in such form and will contain such terms and conditions as the Board deems appropriate. The purchase price under any restricted stock purchase agreement will not be less than 85% of the fair market value 58 60 of the Company's Common Stock on the date of grant. Stock bonuses and restricted stock purchase agreements awarded under the 1998 Plan are generally non-transferable. Pursuant to the 1998 Plan, shares subject to Stock Awards that have expired or otherwise terminated without having been exercised in full again become available for grant, but shares subject to exercised stock appreciation rights will not again become available for grant. The Board of Directors has the authority to reprice outstanding Options and SARs and to offer optionees and holders of SARs the opportunity to replace outstanding options and SARs with new options or SARs for the same or a different number of shares. Upon certain changes in control of the Company, all outstanding Stock Awards under the 1998 Plan must either be assumed or substituted by the surviving entity. In the event the surviving entity does not assume or substitute such Stock Awards, such Stock Awards will be terminated to the extent not exercised prior to such change in control. As of March 31, 1998, the Company had issued 435,570 shares of Common Stock pursuant to the exercise of Options granted under the 1998 Plan, and had granted additional Options to purchase an aggregate of 662,676 shares of Common Stock. As of March 31, 1998, 918,421 shares of Common Stock remained available for future grants under the 1998 Plan. The following tables set forth information for 1997 concerning individual grants of stock options to Named Officers, the exercise of stock options by Named Officers and aggregate stock options held by the Named Officers at year-end: OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM(2) OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------ NAME GRANTED(1) 1997 PER SHARE DATE 5% 10% ---- ---------- ------------ -------------- ---------- ------- ------- Alan J. Lewis........ 18,750 10.8% $ 1.12 6/3/07 $34,207 $54,469 Carl F. Bobkoski..... -- -- -- -- -- -- David W. Anderson.... 8,750 5.0 0.56 2/19/07 7,982 12,709 16,250 9.4 1.12 6/3/07 29,645 47,206 Bradley B. Gordon.... 20,000 11.5 1.12 4/17/07 36,487 58,100
- ------------------------------ (1) Twenty-five percent of such options vest on the first anniversary of the grant date and the remaining options vest thereafter in 36 equal installments. The Board of Directors of the Company has the right to accelerate the vesting of such options. The term of the options is 10 years. (2) The potential realizable value is calculated based on the term of the option and is calculated by assuming that the fair market value of Common Stock on the date of the grant as determined by the Board appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and the Common Stock received therefore is sold on the last day of the term of the option for the appreciated price. The 5% and 10% rates of appreciation are derived from the rules of the Securities and Exchange Commission. The actual value realized may be greater than or less than the potential realizable values set forth in the table. AGGREGATED 1997 OPTION EXERCISES AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT YEAR END AT YEAR END($)(1) ACQUIRED ON VALUE ------------------------------ --------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- -------------- ------------- ----------- ------------- Alan J. Lewis......... -- -- 106,250 -- $1,213,000 -- Carl F. Bobkoski...... 73,750(3) $ 0 -- -- -- -- David W. Anderson..... -- -- 25,000 -- 276,900 -- Bradley B. Gordon..... -- -- 57,500 -- 646,600 --
59 61 - ------------------------------ (1) Based on an assumed initial public offering price of $12.00 per share minus the per share exercise price multiplied by the number of shares. (2) All stock options granted by the Company are immediately exercisable for shares of restricted common stock, subject to a right of repurchase by the Company pursuant to a vesting schedule. At year-end, Alan J. Lewis held 70,000 exercisable options remaining subject to a vesting schedule; David W. Anderson held 25,000 exercisable options remaining subject to a vesting schedule; and Bradley B. Gordon held 32,500 exercisable options remaining subject to a vesting schedule. (3) Includes 36,876 shares of Common Stock subject to a right of repurchase by the Company pursuant to a vesting schedule. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN In February 1998, the Company adopted its Non-Employee Directors' Stock Option Plan (the "Directors' Plan") to provide for the automatic grant of options to purchase shares of Common Stock to non-employee directors of the Company. The Directors' Plan is administered by the Board, unless the Board delegates administration to a committee of at least two disinterested directors. The maximum number of shares of Common Stock that may be issued pursuant to options granted under the Directors' Plan is 200,000. Pursuant to the terms of the Directors' Plan: (i) each person who, after the effective date of this offering, for the first time becomes a Non-Employee Director automatically will be granted, upon the date of his or her initial appointment or election to be a Non-Employee Director, a one-time option to purchase 20,000 shares of Common Stock; and (ii) on the date of each annual meeting of the stockholders of the Company after the effective date of this offering (other than any such annual meeting held in 1998), each person who is elected at such annual meeting to serve as a Non-Employee Director (who was also a Non-Employee Director prior to such annual meeting) automatically will be granted an option to purchase 5,000 shares of Common Stock. No options granted under the Directors' Plan may be exercised after the expiration of ten years from the date it was granted. Options granted under the Directors' Plan vest monthly over a three-year period. The exercise price of options under the Directors' Plan will equal 100% of the fair market value of the Common Stock on the date of grant. Options granted under the Directors' Plan are generally non-transferable. Unless otherwise terminated by the Board of Directors, the Directors' Plan automatically terminates on the tenth anniversary of the date of this offering. As of the date hereof, no options to purchase shares of Common Stock have been granted under the Directors' Plan. Options granted under the Directors' Plan vest in full upon certain changes in ownership or control of the Company, unless assumed or replaced with similar options by the entity gaining such ownership or control of the Company. EMPLOYEE STOCK PURCHASE PLAN In February 1998, the Company adopted the Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 200,000 shares of Common Stock. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may authorize participation by eligible employees, including officers, in periodic offerings following the commencement of the Purchase Plan. The initial offering under the Purchase Plan will commence on the effective date of this offering and terminate on July 31, 2000. Unless otherwise determined by the Board, employees are eligible to participate in the Purchase Plan only if they are employed by the Company or a subsidiary of the Company designated by the Board for at least 20 hours per week and are customarily employed by the Company or a subsidiary of the Company designated by the Board for at least five months per calendar year. Employees who participate in an offering may have up to 15% of their earnings withheld pursuant to the Purchase Plan. The amount withheld is then used to purchase shares of the Common Stock on specified dates determined by the Board. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock at the commencement date of 60 62 each offering period or the relevant purchase date. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. In the event of a merger, reorganization, consolidation or liquidation involving the Company, the Board has discretion to provide that each right to purchase Common Stock will be assumed or an equivalent right substituted by the successor corporation, or the Board may shorten the offering period and provide for all sums collected by payroll deductions to be applied to purchase stock immediately prior to such merger or other transaction. The Board has the authority to amend or terminate the Purchase Plan, provided, however, that no such action may adversely affect any outstanding rights to purchase Common Stock. 401(K) PLAN Effective September 15, 1994, the Company adopted the Signal Pharmaceuticals, Inc. Employees Retirement Investment Plan & Trust which was amended and restated on January 1, 1998 (the "401(k) Plan"), covering the Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,000 in 1998) and have the amount of such reduction contributed to the 401(k) Plan. In addition, eligible employees may make roll-over contributions to the 401(k) Plan from a tax-qualified retirement plan. The 401(k) Plan allows for the Company to make discretionary matching and additional profit sharing contributions, each as determined by a committee of the Board of Directors. No discretionary or profit sharing contributions were made by the Company in 1997 and the Company has no intention of making such contributions in the near future. Company contributions, if any, become 20% vested after two years of service, with an additional 20% becoming vested for each year of service thereafter. The 401(k) Plan is intended to qualify under Section 401 of the Code, so that contributions by employees and the Company to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. The trustees under the 401(k) Plan, at the direction of each participant, invest the 401(k) Plan employee salary deferrals in selected investment options. LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION The Company's Bylaws provide that the Company shall indemnify its directors and executive officers and may indemnify its other officers, employees and other agents to the fullest extent permitted by Delaware law, except with respect to certain proceedings initiated by such persons. The Company is also empowered under its Bylaws to enter into indemnification contracts with its directors and executive officers and to purchase insurance on behalf of any person it is required or permitted to indemnify. Pursuant to this provision, the Company has entered into indemnification agreements with each of its directors and executive officers. In addition, the Company's Restated Certificate provides that a director of the Company will not be personally liable to the Company or its stockholders for monetary damages for any 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 which 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 derives an improper personal benefit. The Restated Certificate also provides that if the Delaware General Corporation Law is amended after the approval by the Company's stockholders of the Restated Certificate to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of the Company's directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. The provision does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. 61 63 CERTAIN TRANSACTIONS The following is a description of transactions since January 1, 1995, to which the Company has been a party, in which the amount involved in the transaction exceeds $60,000 and in which any director, executive officer or holder of more than five percent of the capital stock of the Company had or will have a direct or indirect material interest, other than compensation arrangements that are otherwise required to be described under "Management." In December 1997, the Company sold in a private placement 680,628 shares of Series F Preferred Stock to Ares-Serono, a five percent holder of capital stock of the Company, in exchange for an aggregate purchase price of $8,200,001, pursuant to a Series F Preferred Stock Purchase Agreement dated November 25, 1997 (the "Series F Agreement"). Upon the closing of this offering, each share of Series F Preferred Stock will automatically convert into one share of Common Stock. See Note 5 of Notes to Financial Statements for a description of the Series F Preferred Stock. In addition, on November 25, 1997, the Company entered into a Research Development and License Agreement with Ares-Serono focused on the identification of compounds that modulate NF-k B gene regulating pathways. Ares-Serono has paid Signal a license fee and is obligated to provide Signal with annual research and development support, make payments to Signal based on the achievement of certain research and development milestones, and to pay Signal royalties on any future product sales arising from the collaboration. See "Business--Research and Development Partners." In September 1997, the Company sold in a private placement 1,613,865 shares of Series E Preferred Stock in exchange for an aggregate purchase price of $11,999,997, pursuant to a Series E Preferred Stock Purchase Agreement dated September 9, 1997 (the "Series E Agreement"). Upon the closing of this offering, each share of Series E Preferred Stock will automatically convert into one share of Common Stock. See Note 5 of Notes to Financial Statements for a description of the Series E Preferred Stock. The following directors and beneficial owners of more than five percent of the Company's Common Stock (assuming the conversion of all shares of Preferred Stock into Common Stock) acquired beneficial ownership of Series E Preferred Stock pursuant to the Series E Agreement:
NO. OF DIRECTORS/5% STOCKHOLDERS SHARES ------------------------- ------- Patrick F. Latterell/Venrock Associates..................... 25,273 Luke B. Evnin/Accel Partners................................ 25,273 Brook H. Byers/Kleiner Perkins Caufield & Byers............. 25,273 Arnold Oronsky/InterWest Partners........................... 19,826 Oxford Bioscience Partners.................................. 13,217 U.S. Venture Partners....................................... 13,217 Ares-Serono S.A............................................. 246,575 Lombard Odier Immunology Fund............................... 392,670
The Company has entered into certain other agreements in connection with the Series E and Series F Agreements. Pursuant to one such agreement, certain stockholders acquired registration rights. See "Description of Capital Stock--Registration Rights." Further, the Company and its stockholders agreed to certain restrictions on the issuance and transfer of shares of the Company's capital stock, and to certain voting rights relating to the election of directors, all of which restrictions and voting rights are not applicable to and shall terminate upon the closing of this offering. In June 1994, the Company loaned $250,000 to Alan J. Lewis, the Company's President and Chief Executive Officer and a director of the Company, to assist with the purchase of a residence in connection with Dr. Lewis' relocation to San Diego, California. Pursuant to the terms of a Promissory Note dated June 14, 1994, the principal amount of the loan plus accrued interest shall be amortized over a period of five years following June 14, 1999, with monthly payments commencing in July 1999. The principal amount of the loan will be interest-free for five years from the date of the Promissory Note, and thereafter will accrue interest at the per annum rate of 7.52%, compounded annually. 62 64 Interest will also begin to accrue at the same rate in the event that Dr. Lewis' employment is terminated for any reason. The parties also entered into a Security Agreement on the same date whereby Dr. Lewis pledged all present and future shares of Common Stock of the Company held by him (plus all cash and stock dividends attributable to such shares) as security for the loan. In May 1998, the Company loaned $62,000 to Alan J. Lewis in connection with the exercise of options to purchase 106,250 shares of Common Stock of the Company. Pursuant to the terms of a Promissory Note delivered to the Company by Dr. Lewis, dated May 8, 1998, the principal amount of the loan plus accrued interest at a per annum rate equal to 5.69%, compounded annually, shall be due and payable five years from the date of the loan. Pursuant to a Stock Pledge Agreement entered into on the same date, Dr. Lewis, pledged all present and future shares of Common Stock of the Company held by him (plus all cash and stock dividends attributable to such shares) as security for the loan. The Company has entered into employment letter agreements with Alan J. Lewis, its President and Chief Executive Officer, Carl F. Bobkoski, its Executive Vice President, David W. Anderson, its Senior Vice President, Drug Development, Bradley B. Gordon, its Vice President Finance, Chief Financial Officer and Corporate Secretary and Merl F. Hoekstra, its Vice President, Target Discovery. See "Management--Employment Agreements." The Company has granted options to certain of its directors and executive officers. The Company has also entered into an indemnification agreement with each of its directors and executive officers. See "Management--Limitations on Directors' and Executive Officers' Liability and Indemnification." 63 65 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of May 31, 1998, and as adjusted to reflect the sale of the shares of Common Stock offered hereby, by (i) each holder of more than five percent of the Company's Common Stock, (ii) each of the Company's executive officers, (iii) each of the Company's directors, and (iv) all current directors and executive officers as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(1) SHARES ------------------- 5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER AND NAMED EXECUTIVE OFFICERS OWNED(1) OFFERING OFFERING ---------------------------- ------------ -------- -------- Ares-Serono S.A.......................................... 927,203 13.4% 9.7% 15bis Chemin des Mines 1202 Geneva, Switzerland Luke B. Evnin, Ph.D.(2).................................. 745,653 10.8 7.8 Accel Partners 428 University Avenue Palo Alto, California 94301 Patrick F. Latterell(3).................................. 743,031 10.8 7.8 Venrock Associates 755 Page Mill Road, Suite A230 Palo Alto, California 94304 Brook H. Byers(4)........................................ 720,663 10.4 7.5 Kleiner Perkins Caufield & Byers 2750 Sand Hill Road Menlo Park, California 94025 Arnold Oronsky, Ph.D.(5)................................. 568,040 8.2 5.9 InterWest Partners 3000 Sand Hill Road Building 3, Suite 255 Menlo Park, California 94025 Lombard Odier & Cie...................................... 392,670 5.7 4.1 11, rue de la Corraterie 1204 Geneva, Switzerland Oxford Bioscience Partners(6)............................ 370,358 5.4 3.9 650 Town Center Drive, Suite 180 Costa Mesa, California 92626 U.S. Venture Partners(7)................................. 370,358 5.4 3.9 2180 Sand Hill Road, Suite 300 Menlo Park, California 94025 Alan J. Lewis, Ph.D.(8).................................. 187,500 2.7 2.0 Harry F. Hixson, Ph.D.(9)................................ 99,880 1.4 1.0 Carl F. Bobkoski(10)..................................... 98,750 1.4 1.0 David W. Anderson, Ph.D.(11)............................. 85,000 1.2 * Bradley B. Gordon(12).................................... 70,000 1.0 * Merl F. Hoekstra, Ph.D.(13).............................. 50,000 * * John P. Walker(14)....................................... 37,500 * * All directors and executive officers as a group (10 persons)(15)........................................... 3,406,017 47.4 34.7
- ------------------------------ * Represents beneficial ownership of less than one percent. 64 66 (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Percentage of beneficial ownership is based on 6,897,140 shares of Common Stock outstanding as of May 31, 1998 (after giving effect to the conversion of all outstanding shares of Preferred Stock into 6,050,949 Common Stock) and 9,563,806 shares of Common Stock outstanding after completion of this offering. (2) Includes 613,658 shares held by Accel IV L.P., 27,124 shares held by Accel Investors '93 L.P., 13,195 shares held by Accel Keiretsu L.P., 58,652 shares held by Accel Japan L.P., 16,127 shares held by Ellmore C. Patterson Partners and 4,397 shares held by Prosper Partners, affiliated entities for which Dr. Evnin is a General Partner or officer of some. Dr. Evnin disclaims beneficial ownership of all such shares, except to the extent of his pecuniary or pro rata interest in such shares. Also includes 12,500 shares subject to options exercisable within 60 days of May 31, 1998. (3) Includes 499,600 shares held by Venrock Associates and 234,056 shares held by Venrock Associates II, L.P., entities for which Mr. Latterell is a general partner. Mr. Latterell disclaims beneficial ownership of all such shares, except to the extent of his pecuniary or pro rata interest in such shares. (4) Includes 708,163 shares held by Kleiner Perkins Caufield & Byers VI, an entity for which Mr. Byers is a partner. Mr. Byers disclaims beneficial ownership of all such shares, except to the extent of his pecuniary or pro rata interest in such shares. Also includes 12,500 shares subject to options exercisable within 60 days of May 31, 1998. (5) Includes 552,068 shares held by InterWest Partners V and 3,472 shares held by InterWest Investors V, which are affiliated entities. Dr. Oronsky is a general partner of InterWest Partners V. Dr. Oronsky disclaims beneficial ownership of all such shares, except to the extent of his pecuniary or pro rata interest in such shares. Also includes 12,500 shares subject to options exercisable within 60 days of May 31, 1998. (6) Includes 231,942 shares held by Oxford Bioscience Partners L.P., 74,071 shares held by Oxford Bioscience Partners (Adjunct) L.P. and 64,345 shares held by Oxford Bioscience Partners (Bermuda) Limited Partnership. (7) Includes 320,361 shares held by U.S. Venture Partners IV, L.P., 38,887 shares held by Second Ventures II, L.P. and 11,110 shares held by USVP Entrepreneur Partners II, L.P. (8) Includes 18,750 shares subject to options exercisable within 60 days of May 31, 1998. (9) Includes 79,880 shares held by the Harry F. Hixson, Jr. Separate Property Trust Dated December 15, 1995, of which Dr. Hixson is the sole trustee. Also includes 12,500 shares subject to options exercisable within 60 days of May 31, 1998. (10) Includes 25,000 shares subject to options exercisable within 60 days of May 31, 1998. (11) Includes 35,000 shares subject to options exercisable within 60 days of May 31, 1998. (12) Includes 70,000 shares subject to options exercisable within 60 days of May 31, 1998. (13) Includes 50,000 shares subject to options exercisable within 60 days of May 31, 1998. (14) Includes 37,500 shares held by the Walker Living Trust Dated March 3, 1995, of which Mr. Walker is the sole trustee. (15) Includes 248,750 shares subject to options exercisable within 60 days of May 31, 1998. 65 67 DESCRIPTION OF CAPITAL STOCK Effective upon the closing of this offering, the authorized capital stock of the Company will consist of 25,000,000 shares of Common Stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.001 par value per share. COMMON STOCK As of March 31, 1998, there were 6,767,263 shares of Common Stock outstanding, after giving effect to the conversion of all outstanding shares of Preferred Stock into 6,050,949 shares of Common Stock. The holders of Common Stock are entitled to one vote per share on all matters to be voted on by 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 of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of Preferred Stock will be converted into 6,050,949 shares of Common Stock. See Note 5 of Notes to Financial Statements for a description of the currently outstanding Preferred Stock. Following the conversion, the Company's Certificate of Incorporation will be amended and restated to delete all references to such shares of Preferred Stock. Under the Restated Certificate, the Board has the authority, without further action by stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix or alter the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon any wholly unissued series of preferred stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. The issuance of preferred stock could adversely affect the voting power of holders of Common Stock and reduce the likelihood that such holders will receive dividend payments and payments upon liquidation. Such issuance could have the effect of decreasing the market price of the Common Stock. The issuance of preferred stock could have the effect of delaying, deterring or preventing a change in control of the Company. The Company has no present plans to issue any shares of preferred stock. WARRANTS As of March 31, 1998, there were warrants outstanding to purchase an aggregate of 62,500 shares of Series C-1 Preferred Stock at an exercise price of $8.40 per share, which will convert into warrants to purchase Common Stock upon the closing of this offering. REGISTRATION RIGHTS After this offering, the holders of 6,050,949 shares of Common Stock will be entitled to certain rights with respect to the registration of such shares under the Securities Act, pursuant to that certain Amended and Restated Investor Rights Agreement dated September 9, 1997, as amended on November 25, 1997 (the "Investors' Rights Agreement"). Under the terms of the Investors' Rights Agreement, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled, subject to certain limitations, to include shares therein. Commencing with the date that is 180 days after this offering, the holders may also require the 66 68 Company to file a registration statement under the Securities Act with respect to their shares, and the Company is required to use its best efforts to effect to such registration. Furthermore, the holders may require the Company to register their shares on a registration statement on Form S-3 when such form becomes available to the Company. Such registration rights terminate on the seventh anniversary of the effective date of this offering. The holder of a warrant to purchase 62,500 shares of Series C-1 Preferred Stock of the Company, granted November 23, 1996, will be entitled, upon exercise of such warrant, to notice whenever the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights. The holder of such warrant is entitled to include in any such registration the shares of Common Stock into which the Series C-1 Preferred Stock underlying the warrant may be converted. Such registration rights terminate on the seventh anniversary of the effective date of this offering. After this offering, a holder of 11,093 shares of Common Stock purchased pursuant to two certain Restricted Stock Purchase Agreements dated October 26, 1993 and February 18, 1998, respectively, will be entitled, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, to notice of such registration and, subject to certain limitations, to include such shares therein. In addition, such holder may obtain an additional 23,750 shares of Common Stock pursuant to the attainment of certain regulatory milestones whereby such additional shares would be entitled to the same registration rights as the 11,093 shares currently held. After this offering, a holder of 7,500 shares of Common Stock purchased pursuant to two certain Restricted Stock Purchase Agreements dated October 31, 1996 and December 7, 1997, respectively, will be entitled, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, to notice of such registration and, subject to certain limitations, to include such shares therein. In addition, such holder may obtain an additional 5,625 shares of Common Stock pursuant to the attainment of certain regulatory milestones whereby such additional shares would be entitled to the same registration rights as the 7,500 shares currently held. Generally, the Company is required to bear all registration and selling expenses incurred in connection with any of the registrations described above. The registration rights are also subject to certain conditions and limitations, among them the right of the underwriters of a public offering to limit the number of shares included in the registration statement filed in connection therewith. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS The Company is governed by the provisions of Section 203 of the Delaware General Corporation Law ("Section 203"). In general, Section 203 prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales or other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's outstanding voting stock. This provision could delay, discourage or prohibit transactions not approved in advance by the Board of Directors, such as takeover attempts that might result in a premium over the market price of the Common Stock. The Company's Restated Certificate provides that the Board of Directors will be divided into three classes of directors, with each class serving a staggered three-year term. The classification system of electing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the composition of the Board of Directors, as the classification of the Board of Directors generally increases the difficulty of replacing a majority of directors. The Company's Restated Certificate provides that any action required or 67 69 permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing. In addition, the Company's Bylaws provide that special meetings of the stockholders of the Company may be called only by the Chairman of the Board of Directors, the Chief Executive Officer of the Company, by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors, or by the holders of 10% of the outstanding voting stock of the Company. The Company's Restated Certificate also specifies that the authorized number of directors may be changed only by resolution of the Board of Directors and does not include a provision for cumulative voting for directors. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors. These and other provisions contained in the Restated Certificate and the Company's Bylaws could delay or discourage certain types of transactions involving an actual or potential change in control of the Company or its management (including transactions in which stockholders might otherwise receive a premium for their shares over then current prices) and may limit the ability of stockholders to remove current management of the Company or approve transactions that stockholders may deem to be in their best interests and, therefore, could adversely affect the price of the Company's Common Stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is ChaseMellon Shareholder Services, L.L.C. 68 70 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. Furthermore, since only a limited number of shares will be available for sale shortly after the offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of Common Stock in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this offering, the Company will have 9,433,929 shares of Common Stock outstanding, assuming no exercise of currently outstanding options or warrants. Of these shares, the 2,500,000 shares sold in this offering (plus any additional shares sold upon exercise of the Underwriters' over-allotment option) will be freely transferable without restriction under the Securities Act, unless they are held by "affiliates" of the Company as that term is used under the Securities Act and the rules and regulations promulgated thereunder. The remaining 6,933,929 shares of Common Stock held by existing stockholders are Restricted Shares. Restricted Shares may be sold in the public market only if registered or of they qualify for an exemption from registration under Rules 144 or 701 promulgated under the Securities Act, which rules are summarized below. As a result of Lock-up Agreements and the provisions of Rules 144 and 701, additional shares will be available for sale in the public market as follows: (i) no Restricted Shares will be eligible for immediate sale on the effective date of this offering; (ii) 6,677,325 Restricted Shares (plus approximately 623,687 shares of Common Stock issuable upon exercise of vested stock options) will be eligible for sale upon expiration of the Lock-up Agreements 180 days after the date of this Prospectus; and (iii) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods and could be sold earlier if the holders exercise any available registration rights. The holders of 6,058,449 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 beginning 180 days from the effective date of this offering. 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 a registration statement on Form S-8 registering shares of Common Stock subject to outstanding stock options or reserved for issuance under the Company's stock option plans. Such registration statement is expected to be filed and to become effective as soon as practicable after the effective date of this offering. Shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to Affiliates, be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described above. In general, under Rule 144 as in effect on the date of this Prospectus, beginning 90 days after the effective date of this offering, an Affiliate of the Company, or a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares (as defined under Rule 144) for at least one year is entitled to sell within any three-month period a number of shares that does not exceed greater of (i) one percent of the then outstanding shares of the Company's Common Stock or (ii) the average weekly trading volume of the Company's Common Stock in The Nasdaq National Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to the manner of sale, notice, and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who was not an Affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned Restricted Shares for at least two years is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. 69 71 An employee, officer or director of or consultant to the Company who purchased or was awarded shares or options to purchase shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 under the Securities Act, which permits Affiliates and non-Affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the effective date of this offering. In addition, non-Affiliates may sell Rule 701 shares without complying with the public information, volume and notice provisions of Rule 144. 70 72 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, through their representatives, Hambrecht & Quist LLC, BancAmerica Robertson Stephens and Lehman Brothers Inc. (the "Representatives") have severally agreed to purchase from the Company the following respective numbers of shares of Common Stock:
NUMBER NAME OF SHARES ---- --------- Hambrecht & Quist LLC....................................... BancAmerica Robertson Stephens.............................. Lehman Brothers Inc......................................... --------- Total............................................. 2,500,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company, its counsel and independent auditors. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly 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 not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Representatives have advised the Company that the Underwriters do not intend to confirm discretionary sales in excess of 5% of the shares of Common Stock offered hereby. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. Certain persons participating in this offering may overallot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling 71 73 concession from a syndicate member in connection with the offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. Stockholders of the Company, including the executive officers and directors, who hold in the aggregate 6,933,929 shares of Common Stock after the offering, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them during the 180-day period following the date of this Prospectus. The Company has agreed that it will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during the 180-day period following the date of this Prospectus, except that the Company may issue shares to DuPont Merck in accordance with its stock purchase agreement and under agreements that may be entered into with collaborators in the future. In addition, the Company may issue shares upon the exercise of options granted prior to the date hereof and may grant additional options and issue stock under its 1998 Equity Incentive Plan, and Employee Stock Purchase Plan (whereby the Company will cause any person to whom such options are granted or shares are issued to enter into an agreement restricting the transfer of any securities of the Company held by such person during the 180-day period following the date of this Prospectus without the prior written consent of Hambrecht & Quist LLC). See "Shares Eligible for Future Sale." Prior to the offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors to be considered in determining the initial public offering price are the prevailing market and economic conditions, revenue and earnings of the Company, market valuations of other companies engaged in activities similar to the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this Prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Cooley Godward LLP, San Diego, California. Certain legal matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. EXPERTS The financial statements of Signal Pharmaceuticals, Inc. as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, appearing in this Prospectus and 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. 72 74 ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus, which is a part of the Registration Statement, omits certain information, exhibits, schedules and undertakings set forth in the Registration Statement. For further information pertaining to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents or provisions of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any part of the Registration Statement may be obtained from such offices upon the payment of the fees prescribed by the Commission. In addition, registration statements and certain other filings made with the Commission through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's web site on the Internet at http://www.sec.gov. The Registration Statement, including all exhibits thereto and amendments thereof, has been filed with the Commission through EDGAR. 73 75 INDEX TO FINANCIAL STATEMENTS
PAGE ---- SIGNAL PHARMACEUTICALS, INC. Report of Ernst & Young LLP, Independent Auditors........... F-2 Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited)...................................... F-3 Statements of Operations for each of the three years in the period ended December 31, 1997 and the three months ended March 31, 1997 (unaudited) and 1998 (unaudited)........... F-4 Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997 and the three months ended March 31, 1998 (unaudited)................... F-5 Statements of Cash Flows for each of the three years in the period ended December 31, 1997 and the three months ended March 31, 1997 (unaudited) and 1998 (unaudited)........... F-6 Notes to Financial Statements............................... F-7
F-1 76 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Signal Pharmaceuticals, Inc. We have audited the accompanying balance sheets of Signal Pharmaceuticals, Inc. as of December 31, 1996 and 1997, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 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 Signal Pharmaceuticals, Inc. at December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. San Diego, California January 16, 1998, except for Note 7, as to which the date is May 5, 1998 - -------------------------------------------------------------------------------- THE FOREGOING REPORT IS IN THE FORM THAT WILL BE SIGNED UPON THE COMPLETION OF THE CHANGES IN CAPITALIZATION DESCRIBED IN NOTE 7 TO THE FINANCIAL STATEMENTS. ERNST & YOUNG LLP San Diego, California May 5, 1998 F-2 77 SIGNAL PHARMACEUTICALS, INC. BALANCE SHEETS
PRO FORMA STOCKHOLDERS' DECEMBER 31, EQUITY AT --------------------------- MARCH 31, MARCH 31, 1996 1997 1998 1998 ------------ ------------ ------------ ------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents....................... $ 5,459,696 $ 8,736,469 $ 12,916,238 Short-term investments.......................... -- 12,129,506 7,754,955 Grant revenue receivable........................ 308,062 90,449 99,931 Other current assets............................ 218,750 189,366 502,383 ------------ ------------ ------------ Total current assets.............................. 5,986,508 21,145,790 21,273,507 ------------ ------------ ------------ Property and equipment, net....................... 2,280,168 2,252,568 2,776,621 Deposits and other assets......................... 530,476 189,438 455,114 Note receivable from officer...................... 250,000 250,000 250,000 ------------ ------------ ------------ $ 9,047,152 $ 23,837,796 $ 24,755,242 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................ $ 426,718 $ 268,714 $ 538,702 Accrued liabilities............................. 312,599 1,207,719 591,355 Current portion of promissory note.............. 583,380 1,000,080 1,000,080 Current portion of obligations under capital 395,780 205,911 209,151 leases and equipment notes payable............ Current portion of deferred revenue under 1,662,497 3,083,956 4,298,743 collaborative agreements...................... ------------ ------------ ------------ Total current liabilities......................... 3,380,974 5,766,380 6,638,031 ------------ ------------ ------------ Promissory note, net of current portion........... 2,255,549 1,302,612 1,064,377 Obligations under capital leases and equipment 490,849 245,669 279,324 notes payable, net of current portion........... Deferred revenue under collaborative agreements, 1,339,579 1,281,254 1,016,675 net of current portion.......................... Deferred rent..................................... 67,851 78,167 107,821 Commitments Stockholders' equity: Convertible Preferred Stock, $.001 par value; 3,698 6,051 6,051 $ -- 6,113,485 shares authorized; 3,698,306, 6,050,949 and 6,050,949 shares issued and outstanding at December 31, 1996, 1997 and March 31, 1998, respectively; liquidation preference -- $40,909,587 at December 31, 1997 and March 31, 1998 (5,000,000 shares authorized, no shares issued and outstanding pro forma).................................... Common Stock, $.001 par value; 8,750,000 shares 522 664 716 6,767 authorized; 522,424, 664,602 and 716,314 shares issued and outstanding at December 31, 1996, 1997 and March 31, 1998, respectively, (25,000,000 shares authorized, 6,767,263 shares issued and outstanding pro forma)...... Additional paid-in capital...................... 20,513,608 40,365,615 41,433,814 41,433,814 Deferred compensation........................... -- (511,510) (1,387,318) (1,387,318) Accumulated other comprehensive income.......... -- 48,341 6,015 6,015 Accumulated deficit............................. (19,005,478) (24,745,447) (24,410,264) (24,410,264) ------------ ------------ ------------ ------------ Total stockholders' equity........................ 1,512,350 15,163,714 15,649,014 $ 15,649,014 ------------ ------------ ------------ ============ $ 9,047,152 $ 23,837,796 $ 24,755,242 ============ ============ ============
See accompanying notes. F-3 78 SIGNAL PHARMACEUTICALS, INC. STATEMENTS OF OPERATIONS
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, ---------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ----------- ------------ ----------- ----------- ----------- (UNAUDITED) Revenue under collaborative agreements: Related party.................................... $ -- $ -- $ 250,000 $ -- $ 750,000 Unrelated parties................................ -- 3,585,414 7,065,356 1,476,565 3,793,696 Grant income....................................... 299,152 347,198 264,257 72,261 99,932 ----------- ----------- ----------- ----------- ---------- 299,152 3,932,612 7,579,613 1,548,826 4,643,628 Expenses: Research and development......................... 5,172,992 7,724,178 10,337,318 2,458,817 3,287,649 General and administrative....................... 1,937,226 2,470,910 2,791,084 671,325 1,203,118 ----------- ----------- ----------- ----------- ---------- 7,110,218 10,195,088 13,128,402 3,130,142 4,490,767 ----------- ----------- ----------- ----------- ---------- Income (loss) from operations...................... (6,811,066) (6,262,476) (5,548,789) (1,581,316) 152,861 Interest income.................................... 452,609 187,488 325,529 59,859 282,863 Interest expense................................... (123,730) (134,019) (516,709) (152,274) (100,541) ----------- ----------- ----------- ----------- ---------- Net income (loss).................................. $(6,482,187) $(6,209,007) $(5,739,969) $(1,673,731) $ 335,183 =========== =========== =========== =========== ========== Pro forma net income (loss) per share, basic and diluted.......................................... $ (1.20) $ 0.05 =========== ========== Number of shares used in computing pro forma net income (loss) per share: Basic.......................................... 4,775,952 6,628,046 =========== ========== Diluted........................................ 4,775,952 6,875,100 =========== ==========
See accompanying notes. F-4 79 SIGNAL PHARMACEUTICALS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
CONVERTIBLE ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER ------------------ ---------------- PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) DEFICIT --------- ------ ------- ------ ----------- ------------ ------------- ------------ Balance at December 31, 1994........................ 3,573,306 $3,573 497,357 $497 $18,375,335 $ -- $ -- $(6,314,284) Issuance of Common Stock, net of repurchases...... -- -- 3,875 4 315 -- -- -- Offering costs related to issuance of Series C Preferred Stock......... -- -- -- -- (9,547) -- -- -- Net loss.................. -- -- -- -- -- -- -- (6,482,187) --------- ------ ------- ---- ----------- ----------- -------- ------------ Balance at December 31, 1995........................ 3,573,306 3,573 501,232 501 18,366,103 -- -- (12,796,471) Issuance of Series D Preferred Stock......... 125,000 125 -- -- 1,974,875 -- -- -- Issuance of warrants...... -- -- -- -- 165,000 -- -- -- Issuance of Common Stock, net of repurchases...... -- -- 21,192 21 7,630 -- -- -- Net loss.................. -- -- -- -- -- -- -- (6,209,007) --------- ------ ------- ---- ----------- ----------- -------- ------------ Balance at December 31, 1996........................ 3,698,306 3,698 522,424 522 20,513,608 -- -- (19,005,478) Issuance of Series D Preferred Stock......... 58,150 58 -- -- (58) -- -- -- Issuance of Series E Preferred Stock......... 1,613,865 1,614 -- -- 10,975,517 -- -- -- Issuance of Series F Preferred Stock......... 680,628 681 -- -- 8,161,399 -- -- -- Issuance of Common Stock, net of repurchases...... -- -- 141,774 142 99,294 -- -- -- Unrealized gain on available for sale securities.............. -- -- -- -- -- -- 48,341 -- Deferred compensation..... -- -- -- -- 615,855 (615,855) -- -- Amortization of deferred compensation............ -- -- -- -- -- 104,345 -- -- Net loss.................. -- -- -- -- -- -- -- (5,739,969) --------- ------ ------- ---- ----------- ----------- -------- ------------ Balance at December 31, 1997........................ 6,050,949 6,051 664,198 664 40,365,615 (511,510) 48,341 (24,745,447) Issuance of Common Stock, net of repurchases (unaudited)............. -- -- 52,116 52 49,029 -- -- -- Unrealized loss on available for sale securities (unaudited)............. -- -- -- -- -- -- (42,326) -- Deferred compensation (unaudited)............. -- -- -- -- 1,019,170 (1,019,170) -- -- Amortization of deferred compensation (unaudited)............. -- -- -- -- -- 143,362 -- -- Net income (unaudited).... -- -- -- -- -- -- -- 335,183 --------- ------ ------- ---- ----------- ----------- -------- ------------ Balance at March 31, 1998 (unaudited)................. 6,050,949 $6,051 716,314 $716 $41,433,814 $(1,387,318) $ 6,015 $(24,410,264) ========= ====== ======= ==== =========== =========== ======== ============ TOTAL STOCKHOLDERS' EQUITY ------------- Balance at December 31, 1994........................ $12,065,121 Issuance of Common Stock, net of repurchases...... 319 Offering costs related to issuance of Series C Preferred Stock......... (9,547) Net loss.................. (6,482,187) ----------- Balance at December 31, 1995........................ 5,573,706 Issuance of Series D Preferred Stock......... 1,975,000 Issuance of warrants...... 165,000 Issuance of Common Stock, net of repurchases...... 7,651 Net loss.................. (6,209,007) ----------- Balance at December 31, 1996........................ 1,512,350 Issuance of Series D Preferred Stock......... -- Issuance of Series E Preferred Stock......... 10,977,131 Issuance of Series F Preferred Stock......... 8,162,080 Issuance of Common Stock, net of repurchases...... 99,436 Unrealized gain on available for sale securities.............. 48,341 Deferred compensation..... -- Amortization of deferred compensation............ 104,345 Net loss.................. (5,739,969) ----------- Balance at December 31, 1997........................ 15,163,714 Issuance of Common Stock, net of repurchases (unaudited)............. 49,081 Unrealized loss on available for sale securities (unaudited)............. (42,326) Deferred compensation (unaudited)............. -- Amortization of deferred compensation (unaudited)............. 143,362 Net income (unaudited).... 335,183 ----------- Balance at March 31, 1998 (unaudited)................. $15,649,014 ===========
See accompanying notes. F-5 80 SIGNAL PHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................... $(6,482,187) $(6,209,007) $ (5,739,969) $(1,673,731) $ 335,183 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization............... 518,014 633,797 879,327 205,314 258,551 Amortization of warrants.................... -- 3,929 47,142 11,785 11,785 Amortization of deferred compensation....... -- -- 104,345 -- 143,362 Common stock issued for technology and services.................................. -- -- 14,600 -- 8,400 Deferred revenue under collaborative agreements................................ -- 3,002,076 1,363,134 (893,746) 950,208 Deferred rent............................... -- -- 10,316 (8,398) 29,654 Changes in operating assets and liabilities: Other current assets.................... (158,072) (342,271) 246,997 150,967 (322,499) Accounts payable........................ (546,392) 337,027 (158,004) 44,061 269,988 Accrued liabilities and other........... 14,824 188,550 895,120 139,629 (616,364) ----------- ----------- ------------ ----------- ----------- Net cash provided by (used for) operating activities.................................... (6,653,813) (2,385,899) (2,336,992) (2,024,119) 1,068,268 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments............. (1,560,728) -- (12,081,165) -- -- Sales or maturities of short-term investments... -- 1,560,728 -- -- 4,332,225 Purchase of property and equipment.............. (1,009,941) (874,175) (630,220) (155,059) (695,502) (Increase) decrease in deposits and other assets........................................ 279,930 (349,074) 341,038 3,240 (265,676) ----------- ----------- ------------ ----------- ----------- Net cash provided by (used for) investing activities.................................... (2,290,739) 337,479 (12,370,347) (151,819) 3,371,047 CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on obligations under capital leases, equipment notes payable and promissory note.......................................... (426,737) (503,506) (1,239,935) (144,562) (300,227) Proceeds from issuance of promissory note....... -- 3,000,000 -- -- -- Proceeds from issuance of equipment notes payable....................................... 646,810 379,064 -- -- -- Issuance of Preferred Stock, net................ (9,547) 1,975,000 19,139,211 -- -- Issuance of Common Stock, net................... 319 7,651 84,836 42,889 40,681 ----------- ----------- ------------ ----------- ----------- Net cash provided by (used for) financing activities.................................... 210,845 4,858,209 17,984,112 (101,673) (259,546) ----------- ----------- ------------ ----------- ----------- Increase (decrease) in cash and cash equivalents................................... (8,733,707) 2,809,789 3,276,773 (2,277,611) 4,179,769 Cash and cash equivalents at beginning of period........................................ 11,383,614 2,649,907 5,459,696 5,459,696 8,736,469 ----------- ----------- ------------ ----------- ----------- Cash and cash equivalents at end of period...... $ 2,649,907 $ 5,459,696 $ 8,736,469 $ 3,182,085 $12,916,238 =========== =========== ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid................................... $ 123,730 $ 128,337 $ 469,565 $ 152,274 $ 100,541 =========== =========== ============ =========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations entered into for equipment..................................... $ -- $ -- $ 221,507 $ 221,507 $ 87,102 =========== =========== ============ =========== =========== Warrant issued in conjunction with promissory note.......................................... $ -- $ 165,000 $ -- $ -- $ -- =========== =========== ============ =========== =========== Unrealized gain (loss) on investments........... $ -- $ -- $ 48,341 $ -- $ (42,326) =========== =========== ============ =========== ===========
See accompanying notes. F-6 81 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS ACTIVITY Signal Pharmaceuticals, Inc. ("Signal" or the "Company") was incorporated in California in July 1992. The Company is an integrated target and drug discovery company focused on identifying new classes of small molecule drugs that regulate genes and the production of disease-causing proteins. The Company applies advanced cellular, molecular and genomic technologies to map gene regulating pathways in cells and to identify proprietary molecular targets that activate or deactivate genes and result in disease. Signal is advancing the application of genomics beyond identifying and elucidating the functions of genes to designing novel classes of disease-modifying drugs that selectively regulate the activation of disease-causing genes. 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 related disclosures at the date of the financial statements, and the amounts of revenues and expenses reported during the period. Actual results could differ from those estimates. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers instruments purchased with an original maturity of three months or less, principally a money market account and U.S. government and corporate debt securities, to be cash equivalents. All investment securities are classified as available-for-sale, and are carried at fair value. Unrealized gains and losses, if any, are reported in a separate component of stockholders' equity. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization, along with realized gains and losses, is included in interest income. The cost of securities sold is based on the specific identification method. FINANCIAL INSTRUMENTS The fair values of the financial instruments approximate their carrying value except as otherwise disclosed in the financial statements. CONCENTRATION OF CREDIT RISK Cash, cash equivalents and short-term investments are financial instruments which potentially subject the Company to concentration of credit risk. The Company invests its excess cash primarily in U.S. government securities and marketable debt securities of financial institutions and corporations with strong credit ratings. The Company also has established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are reviewed periodically and may be modified to take advantage of trends in yields and interest rates. Due to Company policy, the Company has historically held the financial instruments to maturity and has not experienced any significant losses. However, the Company has the ability to sell these investments before maturity. F-7 82 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method. Leasehold improvements are stated at cost and amortized on a straight-line basis over the shorter of the estimated useful life of the assets or the lease term. IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards ("SFAS") 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, 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 121 also addresses the accounting for long-lived assets that are expected to be disposed of. To date, the Company has not identified any indicators of impairment nor recorded any impairment losses. DEFERRED RENT Rent expense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense incurred in excess of rent paid is accrued and recorded as deferred rent in the accompanying balance sheets. UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY In May 1998, the Board of Directors authorized management of the Company to file a registration statement with the SEC permitting the Company to sell shares of its common stock to the public. If the initial public offering is closed under the terms presently anticipated, the 6,050,949 shares of preferred stock outstanding at March 31, 1998 will automatically convert into 6,050,949 shares of common stock. Such conversion is reflected as "Unaudited Pro Forma Stockholders' Equity" at March 31, 1998 in the accompanying balance sheet. REVENUE RECOGNITION Contract revenue is recognized ratably over the period during which the research is conducted, which approximates the actual cost and performance of the research services. Grant revenue is recognized as services are performed and therefore equals the related research and development expense. Up-front license fees received under these agreements are recorded as deferred revenue and recognized ratably over the initial term of the contract. Revenues from the achievement of research and development milestones will be recognized when and if the milestones are achieved. Continuation of certain contracts and grants are dependent upon the Company achieving specific contractual milestones; however, none of the payments received are refundable under current contracts and grants. Ares-Serono is a related party based on its ownership interest in the Company, and revenues received from Ares-Serono therefore are classified as related party revenue. The Company does not F-8 83 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) have the right or the obligation to repurchase any of the rights provided to, or to refund any research payments received from, Ares-Serono under its collaboration, nor does it intend to do so. The Company's revenue is concentrated among a small number of customers, as follows:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------ ------------------ 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- (UNAUDITED) DuPont Merck........................... -- -- -- -- * Ares-Serono............................ -- -- * -- 16% Roche Bioscience....................... -- 11% 21% 22% * Organon................................ -- 19% 34% 35% 15% Nippon Kayaku.......................... -- -- -- -- * Tanabe................................. -- 62% 39% 38% 40%
- --------------- * Amount earned represents less than 10% of revenues for the period. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. STOCK-BASED COMPENSATION As permitted by SFAS 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations ("APB 25") in accounting for its employee stock options. Under APB 25, when the exercise price of the Company's employee stock options equals the fair value of the underlying stock on the date of grant, no compensation expense is recognized. NET INCOME (LOSS) PER SHARE Historical basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the periods presented. Common equivalent shares resulting from Convertible Preferred Stock, options to purchase Common Stock and warrants to purchase Convertible Preferred Stock are excluded from the computation. Historical diluted net income per share has been computed as described above and also gives effect to the common equivalent shares resulting from Convertible Preferred Stock, options to purchase Common Stock, and warrants to purchase Convertible Preferred and Common Stock. Historical net income (loss) per share information is as follows: F-9 84 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------ --------------------- 1995 1996 1997 1997 1998 -------- -------- -------- -------- ---------- Basic and diluted net loss per share............................... $ (18.25) $ (14.57) $ (11.29) $ (3.53) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share.......... 355,273 426,213 508,485 473,857 ======== ======== ======== ======== Basic net income per share............ $ 0.58 ========== Diluted net income per share.......... $ 0.05 ========== Shares used in computing basic net income per share.................... 577,097 ========== Shares used in computing diluted net income per share.................... 6,875,100 ==========
Pro Forma Net Income (Loss) Per Share Pro forma basic net income (loss) per share has been computed as described above for historical basic net income (loss) per share and also gives effect to the conversion of the 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. Pro forma diluted net income per share has been computed as described above for historical diluted net income per share. NEW ACCOUNTING STANDARDS Effective January 1, 1998, the Company adopted SFAS 130, Reporting Comprehensive Income and SFAS 131, Disclosures about Segments of an Enterprise and Related Information. The Company believes it operates in one business segment, and therefore the adoption of SFAS 131 had no effect on the Company's financial statements. YEAR 2000 (UNAUDITED) The Company currently has computer software and hardware which it believes to be year 2000 compliant. The Company is working with its vendors and customers to ensure their year 2000 compliance. Any necessary changes would be done in the normal course of business during 1998 and 1999 at minimal incremental cost. Therefore, the Company does not expect the year 2000 issue to have a significant impact on its operations. F-10 85 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 2. BALANCE SHEET INFORMATION INVESTMENTS The following is a summary of the Company's cash, cash equivalents and short-term investments:
DECEMBER 31, 1996 DECEMBER 31, 1997 ------------------------------------ -------------------------------------- GROSS GROSS UNREALIZED UNREALIZED GAINS ESTIMATED GAINS ESTIMATED COST (LOSSES) FAIR VALUE COST (LOSSES) FAIR VALUE ---------- ---------- ---------- ----------- ---------- ----------- Cash...................... $3,446,901 $-- $3,446,901 $ 5,512,634 $ -- $5,512,634 Corporate debt securities.............. 2,012,795 -- 2,012,795 15,305,000 48,341 15,353,341 ---------- -- ---------- ----------- ------- ----------- $5,459,696 $-- $5,459,696 $20,817,634 $48,341 $20,865,975 ========== == ========== =========== ======= =========== MARCH 31, 1998 --------------------------------------- GROSS UNREALIZED GAINS ESTIMATED COST (LOSSES) FAIR VALUE ----------- ----------- ----------- (UNAUDITED) Cash...................... $13,165,178 $ -- $13,165,178 Corporate debt securities.............. 7,500,000 6,015 7,506,015 ----------- ------ ----------- $20,665,178 $6,015 $20,671,193 =========== ====== ===========
There were no gross realized gains or losses on sales of available-for-sale securities for the years ended December 31, 1996 or 1997 or the three months ended March 31, 1998. The gross unrealized gains of $48,341 and $6,015 at December 31, 1997 and March 31, 1998, respectively, are reflected as separate components of stockholders' equity. The cost and estimated fair values of cash, cash equivalents and short-term investments at December 31, 1996 and 1997 and March 31, 1998, by contractual maturity, are shown below:
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998 ----------------------- ------------------------- ------------------------- ESTIMATED ESTIMATED ESTIMATED COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE ---------- ---------- ----------- ----------- ----------- ----------- (UNAUDITED) Due in one year or less....... $5,459,696 $5,459,696 $19,817,634 $19,824,100 $19,665,178 $19,668,068 Due in one year through two years....................... -- -- 1,000,000 1,041,875 1,000,000 1,003,125 ---------- ---------- ----------- ----------- ----------- ----------- $5,459,696 $5,459,696 $20,817,634 $20,865,975 $20,665,178 $20,671,193 ========== ========== =========== =========== =========== ===========
PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, ----------------------- MARCH 31, 1996 1997 1998 ---------- ---------- ---------- (UNAUDITED) Machinery and equipment............................ $2,334,021 $2,665,205 $2,826,308 Office furniture and equipment..................... 763,379 1,043,110 1,119,973 Leasehold improvements............................. 639,692 880,504 1,425,142 ---------- ---------- ---------- 3,737,092 4,588,819 5,371,423 Less accumulated depreciation and amortization..... (1,456,924) (2,336,251) (2,594,802) ---------- ---------- ---------- $2,280,168 $2,252,568 $2,776,621 ========== ========== ==========
F-11 86 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 2. BALANCE SHEET INFORMATION (CONTINUED) DEPOSITS AND OTHER ASSETS Deposits and other assets consist of the following:
DECEMBER 31, ------------------- MARCH 31, 1996 1997 1998 -------- -------- --------- (UNAUDITED) Restricted cash....................................... $495,000 $150,000 $150,000 Other deposits........................................ 29,450 37,243 303,650 Organization costs, net............................... 6,026 2,195 1,464 -------- -------- -------- $530,476 $189,438 $455,114 ======== ======== ========
3. COMMITMENTS LEASES The Company leases its office and research facilities under two operating lease agreements. The minimum annual rents are subject to specified annual rental increases. The Company also reimburses the lessor for taxes, insurance and operating costs associated with the leases. Under the terms of the leases, the Company has an outstanding letter of credit for $150,000 in favor of the lessor, fully collateralized by cash. In January 1998, the Company entered into a six-year operating lease for additional office space. The minimum annual rents are subject to specified increases and are included in the future minimum lease payments. In addition, the Company leases certain machinery, equipment and office furniture under capital leases with three-year terms with options to extend the lease term to five years. In January 1998, the Company entered into a $2.0 million equipment lease line to finance capital equipment and improvements. LONG-TERM DEBT In November 1996, the Company issued a secured promissory note for $3,000,000. The proceeds of the note payable were used for general corporate purposes and working capital. The note payable accrues interest at a rate of 14%, is due May 22, 2000, and is secured by certain assets of the Company. The principal payments due on the promissory note are $1.0 million, $1.0 million and $416,460 for 1998, 1999 and 2000, respectively. In conjunction with the issuance of the promissory note, the Company issued the creditor a warrant to purchase 62,500 shares of Series C-1 Preferred Stock at a price of $8.40 per share. The warrant expires at the earliest of ten years from the date of grant or five years from the date of an initial public offering. The warrant is valued at $165,000, which has been recorded as a discount on the related debt. The value of the warrant is being amortized as interest expense over the period of the debt. F-12 87 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 3. COMMITMENTS (CONTINUED) In April 1995, the Company entered into a note payable to equip its expanded research facility. The remaining balance on the note at December 31, 1996 was $377,270. The note was repaid in full in August 1997. Annual future minimum lease and equipment note payments as of December 31, 1997, including the office lease signed in January 1998, are as follows:
OBLIGATIONS UNDER CAPITAL LEASES AND EQUIPMENT OPERATING NOTES YEAR ENDED DECEMBER 31, LEASES PAYABLE ----------------------- ---------- ------------- 1998...................................................... $ 760,530 $228,525 1999...................................................... 793,867 221,239 2000...................................................... 792,337 34,521 2001...................................................... 283,526 -- 2002...................................................... 280,910 -- Thereafter................................................ 287,443 -- ---------- -------- Total minimum lease and equipment note payments........... $3,198,613 484,285 ========== Less amount representing interest......................... 32,705 -------- Present value of remaining minimum capital lease and equipment note payments................................. 451,580 Less amount due in one year............................... 205,911 -------- Long-term portion of obligations under capital leases and equipment notes payable................................. $245,669 ========
Rent expense for equipment and facility leases was $293,719, $406,453, $784,337, $124,377 and $267,860 for the years ended December 31, 1995, 1996, 1997 and the three months ended March 31, 1997 (unaudited) and 1998 (unaudited), respectively. Cost and accumulated depreciation of equipment under capital leases and equipment notes payable were as follows:
ACCUMULATED COST DEPRECIATION ---------- ------------ December 31, 1996.......................................... $1,978,010 $952,884 December 31, 1997.......................................... 671,482 240,087 March 31, 1998 (unaudited)................................. 759,392 285,586
F-13 88 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 4. SPONSORED RESEARCH AND LICENSE AGREEMENTS In connection with certain license agreements, the Company paid fees of $244,631, $602,007, $205,600, $40,000 and $38,000 for the years ended December 31, 1995, 1996, 1997 and the three months ended March 31, 1997 and 1998, respectively, which were charged to research and development, and has future commitments of up to $4.6 million which could be payable based on the achievement of certain milestones, as well as royalties upon commercial sales, if any, of certain products. Such milestone commitments may also involve the issuance of 15,000 shares of Common Stock. DUPONT MERCK In December 1997, Signal entered into a collaborative agreement with The DuPont Merck Pharmaceutical Company ("DuPont Merck"), under which DuPont Merck agreed to fund certain research at Signal for three years. The agreement may be extended for up to three additional years at DuPont Merck's option. The DuPont Merck collaboration is focused on identifying compounds for the treatment or prevention of HCV and HIV infections. Signal also has granted DuPont Merck an option, exercisable through August 1998, to expand the collaboration to include the identification of compounds directed toward an additional viral target. Pursuant to this collaboration, Signal and Dupont Merck will be responsible for developing target specific screening assays and will be jointly responsible for identifying lead compounds. DuPont Merck will be solely responsible for lead optimization and the worldwide development and commercialization of any drugs arising from the collaboration. DuPont Merck has paid Signal a $1.0 million license fee and has agreed to provide Signal with annual research and development support at a level approximating Signal's cost of these programs. DuPont Merck also is obligated to make payments to Signal and to purchase $1.0 million of its stock based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales arising from the collaboration. In addition, DuPont Merck has agreed to purchase $2.0 million of Common Stock of Signal in a private transaction to be completed concurrent with the closing of this offering at a price per share equal to the initial public offering price. ARES-SERONO In November 1997, Signal entered into a collaborative agreement with Ares Trading S.A. (Ares-Serono), an affiliate of Ares-Serono S.A., under which Ares-Serono agreed to fund certain research for an initial three-year period, which term will automatically be extended for additional three-year periods unless terminated at least six months prior to the end of the initial three-year term. Ares-Serono may terminate the agreement upon six months' notice any time after the end of the initial three-year term. The Ares-Serono collaboration is focused on identifying compounds that modulate NF-kB gene regulating pathways to which Ares-Serono has rights for all clinical indications in all countries of the world excluding Asia. Ares-Serono S.A. has purchased approximately $10.0 million of Signal's Series E and Series F Preferred Stock. Ares-Serono also has agreed to provide Signal with annual research and development support for Signal's cost of this program at a percentage level approximating Ares-Serono's relative share of worldwide marketing rights. In addition, Ares-Serono is obligated to make payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales arising from the collaboration. F-14 89 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 4. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED) ROCHE BIOSCIENCE In August 1996, Signal entered into a three-year collaborative agreement with the Roche Bioscience division ("Roche Bioscience") of Syntex (USA) Inc., a member of the Roche Group of Companies. Under the agreement, Signal is applying its proprietary cell line development technology toward the development of human PNS cell lines for use by Roche Bioscience in target and drug discovery. Pursuant to an exclusive, worldwide, royalty-free license granted by Signal, Roche Bioscience may utilize these PNS cells to discover and commercialize drugs for treating pain, incontinence and peripheral vascular disease. Under the agreement, Signal retains the right to use the PNS cell lines for its internal target and drug discovery programs in other therapeutic fields. Roche Bioscience has paid Signal a license fee of $500,000 and has agreed to pay annual research and development support at a level approximating Signal's cost of the PNS cell line program. To date, Signal has developed and transferred to Roche Bioscience clonal human PNS cell lines as specified in the collaborative agreement. Roche Bioscience may terminate the agreement beginning in August 1998 at its discretion upon 90 days' written notice. If the collaboration agreement is terminated for any reason, the licenses granted to Roche Bioscience by Signal shall survive for as long as Roche Bioscience continues to pay annual license maintenance fees to Signal. As long as Roche Bioscience pays these annual license maintenance fees, Signal may not enter into any other collaborations with respect to cloned immortalized PNS cell lines in the covered fields of pain, incontinence and peripheral vascular disease. ORGANON In July 1996, Signal entered into a collaborative agreement with N.V. Organon ("Organon"), a business unit of Akzo Nobel N.V., for the discovery of new genomic targets, under which Organon agreed to fund certain research at Signal for three years. Such agreement may be extended for up to two additional years by mutual consent of the parties. Pursuant to an amendment dated January 1998, Organon may terminate the research, effective in either January 1999 or July 1999, for failure to meet certain milestones by October 1998 or January 1999, respectively. Initially, Signal will utilize its cellular, molecular and genomic technologies to identify and validate novel genes in certain target tissues. Signal will then develop high throughput screening assays for use by Organon in identifying small molecule drugs to treat cardiovascular, neurological, gynecological and certain other diseases. Pursuant to this collaboration, Organon has received rights for, and will be solely responsible for, the worldwide development and commercialization of any drugs arising from the collaboration. To date, Organon has paid Signal an initial $1.0 million non-refundable license fee and annual research and development support payments at a level approximating Signal's cost of this program. In addition, Organon is obligated to make payments to Signal based on the achievement of certain research and development milestones, and Organon must pay Signal royalties on any future product sales arising from the collaboration. TANABE From March 1996 to March 1998, Signal and Tanabe were engaged in a collaborative program under which Tanabe funded certain research by Signal in target and drug discovery in the fields of F-15 90 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 4. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED) inflammatory disease and osteoporosis. In connection with the collaboration, Tanabe paid Signal an initial $1.0 million non-refundable license fee and reimbursed Signal for research and development costs. Tanabe also purchased 125,000 shares of Signal's Series D Preferred Stock at $16.00 per share. Pursuant to certain anti-dilution provisions of the Series D agreement, the Company issued an additional 58,150 shares of Series D Preferred Stock to Tanabe during 1997. In conjunction with the collaboration and stock purchase agreement entered into in 1996, the Company issued Tanabe a warrant for the purchase of $2,000,000 of Common Stock, which is only exercisable in connection with the filing of an initial public offering by the Company, at the public offering price per common share. In March 1998, Signal and Tanabe mutually agreed to conclude their collaboration and Tanabe licensed from Signal a lead compound that was discovered during the collaboration. This lead has been validated in animal models of arthritis, for the treatment of autoimmune, inflammatory and certain other diseases. Signal retained all other intellectual property rights, including rights to all other drug targets and drug leads, created before or during the collaboration. Tanabe paid an additional license fee to Signal for the exclusive worldwide license to the lead compound and is obligated to make payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales. 5. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK A summary of the Convertible Preferred Stock of the Company at December 31, 1997 and March 31, 1998 is as follows:
SHARES ISSUED AND OUTSTANDING -------------------------- PREFERENCE IN DECEMBER 31, MARCH 31, LIQUIDATION 1997 1998 ------------- ------------ ----------- (UNAUDITED) Series A....................................... $ 2,626,892 656,710 656,710 Series B....................................... 3,450,000 718,745 718,745 Series C....................................... 12,308,005 2,197,851 2,197,851 Series D....................................... 2,000,000 183,150 183,150 Series E....................................... 12,329,929 1,613,865 1,613,865 Series F....................................... 8,194,761 680,628 680,628 ----------- --------- --------- $40,909,587 6,050,949 6,050,949 =========== ========= =========
Each of the Series A, B, C, D, E and F Preferred Stock is convertible on a one-for-one basis, at the option of the holder, into shares of the Company's Common Stock, which have been reserved for issuance upon conversion of the Preferred Stock, subject to certain anti-dilution adjustments. The Preferred Stock will convert automatically upon the closing of an underwritten public offering of the Company's Common Stock with proceeds to the Company of at least $15.0 million and at a price not less than $5.00 per share after adjustment for any stock splits. The holders of the Series A, B, C, E and F Preferred Stock are entitled to elect four directors to the Board of Directors, and in all other matters F-16 91 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 5. STOCKHOLDERS' EQUITY (CONTINUED) the holder of each share of preferred stock is entitled to one vote for each share of Common Stock into which it would convert. Annual dividends of $0.32, $0.38, $0.45, $1.28, $0.61 and $0.96 per share of Series A, B, C, D, E and F Preferred Stock, respectively, are payable whenever funds are legally available and when and as declared by the Board of Directors. COMMON STOCK In connection with certain stock purchase agreements, the Company has the option to repurchase, at the original issue price, unvested shares in the event of termination of employment or engagement. Shares issued under these agreements generally vest over four to five years. At December 31, 1997 and March 31, 1998, 99,567 and 126,754 shares, respectively, were subject to repurchase by the Company. STOCK OPTION PLANS In June 1993, the Company adopted its 1993 Founders' Stock Option Plan (the "Founders' Plan"), under which 137,500 shares of Common Stock were reserved for issuance upon exercise of options granted by the Company. The Founders' Plan provides for the grant of incentive and nonstatutory options. The exercise price of incentive stock options must equal at least the fair value on the date of grant, and the exercise price of nonstatutory stock options may be no less than 85% of the fair value on the date of grant. The maximum term of options granted under the Founders' Plan is ten years. Options generally are immediately exercisable. Common Stock or options issued under the Founders' Plan generally vest over five years. Unvested shares issued pursuant to the exercise of options are subject to repurchase in the event of termination of employment or engagement. In November 1993, the Company adopted its 1993 Stock Option Plan, under which 112,500 shares of the Company's Common Stock were reserved for issuance upon exercise of options granted by the Company under provisions similar to the Founders' Plan. In 1995 and 1996, the Company authorized an additional 250,000 and 262,500 shares, respectively, of the Company's Common Stock be reserved for issuance upon exercise of options granted by the Company under the 1993 Stock Option Plan. In June 1997, the Company adopted its 1997 Stock Option Plan, under which 250,000 shares of Common Stock were reserved for issuance upon exercise of options granted by the Company. In February 1998, the Company authorized an additional 500,000 shares of the Company's Common Stock be reserved for issuance upon exercise of options granted by the Company under the 1997 Stock Option Plan. The options contain similar provisions to those options issued under the 1993 Founders' Stock Option Plan and the 1993 Stock Option Plan. The Company recorded $615,855 and $1,019,170 of deferred compensation for options granted during the year ended December 31, 1997 and the three months ended March 31, 1998, respectively, representing the difference between the option exercise price and the estimated fair value for financial statement presentation purposes. The Company is amortizing the deferred compensation over the vesting period of the options. The Company recorded $104,345 and $143,362 of compensation expense during the year ended December 31, 1997 and the three months ended March 31, 1998, respectively. F-17 92 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 5. STOCKHOLDERS' EQUITY (CONTINUED) A summary of the Company's stock option activity and related information follows:
YEAR ENDED DECEMBER 31, THREE ---------------------------------------------------------------- MONTHS ENDED 1995 1996 1997 MARCH 31, 1998 ------- ------- -------- ------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- --------- ------- --------- -------- --------- ------- --------- (UNAUDITED) Outstanding at beginning of period......................... 192,624 $0.44 286,874 $0.48 407,324 $0.51 542,115 $0.80 Granted...................... 102,625 $0.56 146,987 $0.56 299,162 $1.10 166,050 $1.12 Exercised.................... (3,875) $0.56 (16,924) $0.48 (138,519) $0.61 (44,618) $0.99 Cancelled.................... (4,500) $0.56 (9,613) $0.56 (25,852) $0.64 (871) $0.69 ------- ------- -------- ------- Outstanding at end of period..... 286,874 $0.48 407,324 $0.51 542,115 $0.80 662,676 $0.87 ------- ------- -------- ------- Vested options at end of period......................... 171,467 $0.40 283,172 $0.45 421,842 $0.45 454,525 $0.46 ------- ------- -------- -------
Exercise prices for options outstanding as of March 31, 1998 ranged from $0.08 to $1.12. The weighted average remaining contractual life of those options is 8.4 years. The weighted average fair value of the options granted in 1995, 1996 and 1997 are $0.16, $0.16 and $0.28, respectively. As of December 31, 1997, options for 79,433 common shares were available for future grant. As of March 31, 1998, options for 414,254 common shares were available for future grant. Adjusted pro forma information regarding net loss is required to be disclosed by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed in that Statement. The fair value of options was estimated at the date of grant using the minimum value pricing model with the following weighted average assumptions for 1995, 1996 and 1997: risk-free interest rate of 6.0%, dividend yield of 0%; and an expected life of five years. The minimum value pricing model is similar to the Black-Scholes option valuation model which was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable, except that it excludes the factor for volatility. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-18 93 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 5. STOCKHOLDERS' EQUITY (CONTINUED) For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the related options. The effects of applying SFAS 123 for adjusted pro forma disclosure purposes are not likely to be representative of the effects on adjusted pro forma net loss in future years because it does not take into consideration adjusted pro forma compensation expense related to grants made prior to 1995. The Company's adjusted pro forma information follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Adjusted pro forma net loss...................... $(6,483,838) $(6,214,581) $(5,757,845) Adjusted pro forma basic net loss per share...... $ (18.25) $ (14.58) $ (11.32)
6. INCOME TAXES Significant components of the Company's deferred tax assets as of December 31, 1996 and 1997 are shown below. A valuation allowance of $10,477,000, of which $2,278,000 is related to 1997, has been recognized as of December 31, 1997 to offset the deferred tax assets as realization of such assets is uncertain.
DECEMBER 31, -------------------------- 1996 1997 ----------- ----------- Deferred tax assets: Capitalized research expenses.......................... $ 825,000 $ 861,000 Net operating loss carryforwards....................... 6,576,000 8,422,000 Research and development credits....................... 825,000 1,163,000 Other, net............................................. 118,000 104,000 ----------- ----------- Total deferred tax assets................................... 8,344,000 10,550,000 Deferred tax liability: Depreciation........................................... (145,000) (73,000) ----------- ----------- Net deferred tax assets..................................... 8,199,000 10,477,000 Valuation allowance for deferred tax assets................. (8,199,000) (10,477,000) ----------- ----------- Net deferred taxes.......................................... $ -- $ -- =========== ===========
At December 31, 1997, the Company has federal and California net operating loss carryforwards of approximately $23,276,000 and $4,789,000, respectively. The difference between the federal and California tax loss carryforwards is attributable to the capitalization of research and development expenses for California tax purposes and the fifty percent limitation on California loss carryforwards. The federal and California tax loss carryforwards will begin expiring in 2007 and 1998, respectively, unless previously utilized. The Company also has federal and California research and development tax credit carryforwards of approximately $857,000 and $470,000, respectively, which will begin expiring in 2008 unless previously utilized. Pursuant to Sections 382 and 383 of the Internal Revenue Code, future utilization of these carryforwards may be limited in any one fiscal year pursuant to the Internal Revenue Code and similar F-19 94 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 6. INCOME TAXES (CONTINUED) state provisions; however, the annual limitation will not prevent the entire amount of the carryforwards from being used during the carryforward period. Therefore, the Company does not believe any such limitation will have a material effect upon the utilization of these carryforwards. 7. SUBSEQUENT EVENTS DEFERRED COMPENSATION The Company granted an additional 221,525 options and recorded $1,267,123 of additional deferred compensation in May 1998, representing the difference between the option exercise price and the estimated fair value of the Common Stock for financial statement presentation purposes at the date of such grant. CHANGES IN CAPITALIZATION On May 5, 1998, the Company's 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 and approved (subject to shareholder ratification) that, prior to the effective date of the Offering contemplated by this Prospectus, the Company will change the authorized shares of Preferred Stock from 6,113,482 to 5,000,000; authorized shares of Common Stock from 8,750,000 to 25,000,000 and reincorporate the Company in Delaware and effect a 4-for-1 reverse split of the Common Stock. The financial statements and accompanying notes have been retroactively restated to reflect the effect of the reverse split and reincorporation in Delaware. AMENDMENT AND CONCLUSION OF COLLABORATIVE AGREEMENT On March 31, 1998, Signal and Tanabe Seiyaku Co., Ltd. ("Tanabe") mutually agreed to conclude the research and development collaboration component of their Collaborative Development and Licensing Agreement and Tanabe subsequently licensed from Signal a lead compound discovered during the collaboration, and validated in animal models of arthritis, for the treatment of autoimmune, inflammatory and other diseases. Signal retained all other intellectual property rights, including rights to all other drug targets and drug leads, discovered before or during the collaboration. Tanabe paid an additional $2.0 million license fee to Signal for the exclusive worldwide license to the lead compound and is obligated to make further payments to Signal based on the achievement of certain research and development milestones and to pay Signal royalties on any future product sales. NEW COLLABORATIVE RESEARCH AGREEMENT In February 1998, Signal entered into a collaborative agreement with Nippon Kayaku Co., Ltd. ("Nippon Kayaku") under which Nippon Kayaku agreed to fund certain research at Signal, totaling $4.0 million, for two years. Under the agreement, Signal and Nippon Kayaku will develop and commercialize products based on or derived from a compound supplied by Nippon Kayaku for the treatment and prevention of diseases and disorders of the CNS and PNS. Signal will perform combinatorial chemistry and use its proprietary human neuronal cell lines to further optimize the compound and characterize its mechanism of action prior to the start of clinical studies. Nippon Kayaku has agreed to provide Signal with annual research and development support at a level F-20 95 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (Information subsequent to December 31, 1997, except for Note 7, and pertaining to March 31, 1998 and the three months ended March 31, 1997 and 1998 is unaudited) 7. SUBSEQUENT EVENTS (CONTINUED) approximating Signal's cost of the program. Each party also is obligated to pay the other royalties on future product sales arising from the collaboration. Pursuant to a commercialization agreement to be concluded by Signal and Nippon Kayaku following the initial research phase of the collaboration, Nippon Kayaku will be solely responsible for the development and commercialization of products in Japan for the treatment or prevention of diseases and disorders of the PNS and will receive co-commercialization rights in Japan with respect to products for the treatment and prevention of CNS diseases and disorders. Under such future commercialization agreement, development and commercialization rights for products outside Japan for the treatment or prevention of both PNS and CNS diseases and disorders will be agreed upon by the parties on a product-by-product basis, with Nippon Kayaku not guaranteed any minimum level of co-commercialization rights. Signal and Nippon Kayaku also have granted each other co-exclusive commercialization rights outside the field with respect to each analog compound arising from the collaboration which is developed and commercialized by one or both of the parties. F-21 96 [Graphic depicting logos or unstylized names of Signal's corporate collaborators, including Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon, and DuPont Merck. Below each logo are disease programs addressed by the collaboration. These logos or names surround the Signal logo centered on the page.] (inside back cover) 97 - ------------------------------------------------------------ - ------------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS 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 THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................... 3 Risk Factors............................. 6 Use of Proceeds.......................... 19 Dividend Policy.......................... 19 Capitalization........................... 20 Dilution................................. 21 Selected Financial Data.................. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 23 Business................................. 28 Management............................... 53 Certain Transactions..................... 62 Principal Stockholders................... 64 Description of Capital Stock............. 66 Shares Eligible for Future Sale.......... 69 Underwriting............................. 71 Legal Matters............................ 72 Experts.................................. 72 Additional Information................... 73 Index to Consolidated Financial Statements............................. F-1
------------------ UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------ - ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ 2,500,000 SHARES LOGO COMMON STOCK ------------------------ PROSPECTUS ------------------------ HAMBRECHT & QUIST BANCAMERICA ROBERTSON STEPHENS LEHMAN BROTHERS , 1998 - ------------------------------------------------------------ - ------------------------------------------------------------ 98 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses payable by the Registrant in connection with the sale of the Common Stock being registered. All the amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq listing fee. SEC Registration fee........................................ $ 11,026 NASD filing fee............................................. 4,238 Nasdaq Stock Market Listing Application fee................. 74,625 Blue sky qualification fees and expenses.................... 5,000 Printing and engraving expenses............................. 125,000 Legal fees and expenses..................................... 250,000 Accounting fees and expenses................................ 100,000 Transfer agent and registrar fees........................... 15,000 Miscellaneous............................................... 15,111 -------- Total.................................................. $600,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under Section 145 of the Delaware General Corporation Law, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act. The Registrant's Second Amended and Restated Certificate of Incorporation and Bylaws include provisions to (i) eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its directors and executive officers to the fullest extent permitted by Section 145 of the Delaware Law, including circumstances in which indemnification is otherwise discretionary. Pursuant to Section 145 of the Delaware Law, a corporation generally has the power to indemnify its present and former directors, officers, employees and agents against expenses incurred by them in connection with any suit to which they are or are threatened to be made, a party by reason of their serving in such positions so long as they acted in good faith and in a manner they reasonably believed to be in or not opposed to, the best interests of the corporation and with respect to any criminal action, they had no reasonable cause to believe their conduct was unlawful. The Registrant believes that these provisions are necessary to attract and retain qualified persons as directors and officers. These provisions do not eliminate the directors' duty of care, and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware Law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of the Registrant or its stockholders, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director's duty to the Registrant or its stockholders when the director was aware or should have been aware of a risk of serious injury to the Registrant or its stockholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its stockholders, for improper transactions between the director and the Registrant and for improper distributions to stockholders and loans to directors and officers. The provision also does not affect a director's responsibilities under any other law, such as the federal securities law or state or federal environmental laws. II-1 99 The Registrant has entered into indemnity agreements with each of its directors and executive officers that require the Registrant to indemnify such persons against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with any action, suit or proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director, an officer or an employee of the Registrant or any of its affiliated enterprises, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Registrant and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. At present, there is no pending litigation or proceeding involving a Director, officer or key employee of the Registrant as to which indemnification is being sought nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any officer or Director. The Registrant has an insurance policy covering the officers and Directors of the Registrant with respect to certain liabilities, including liabilities arising under the Securities Act or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since January 1, 1995, the Registrant has sold and issued the following unregistered securities: 1. On July 1, 1995, the Company issued 3,750 shares of Common Stock, valued at $0.56 per share, to the New England Medical Center in connection with the execution of a license agreement. 2. On March 31, 1996, the Company issued a warrant to purchase $2.0 million worth of Common Stock to Tanabe Seiyaku Co., Ltd., exercisable only in connection with the initial public offering of the Company's Common Stock on Form S-1 at the same per share price of such offering. 3. On March 31, 1996, the Company sold 125,000 shares of Series D Preferred Stock at a price of $1.00 per share to Tanabe Seiyaku Co., Ltd. On September 12, 1997, the Company issued an additional 58,150 shares of Series D Preferred Stock to Tanabe Seiyaku Co., Ltd. for no additional consideration as part of a purchase price adjustment with respect to its prior sale of Series D Preferred Stock. 4. On October 19, 1996, the Company issued 2,500 shares of Common Stock, valued at $0.56 per share, to the University of Massachusetts. 5. On November 22, 1996, the Company issued a warrant to purchase 62,500 shares of Series C-1 Preferred Stock to MMC/GATX Partnership No. 1 ("MMC/GATX") at an exercise price of $8.40 per share. If such warrant is exercised, the resulting shares of Series C-1 Preferred Stock would, upon the closing of this offering, automatically convert into 62,500 shares of Common Stock. 6. On December 2, 1996, the Company issued to MMC/GATX a Secured Promissory Note in the principal amount of $3.0 million in connection with a loan to the Company of the same amount. Such promissory note bears interest at a rate of 13.6% annually. 7. On December 31, 1996, the Company issued 1,250 shares of Common Stock, valued at $0.56 per share to The Regents of the University of California. 8. On September 9, 11 and 12, 1997, the Company sold an aggregate of 1,613,865 shares of Series E Preferred Stock at a price of $7.64 per share to the following purchasers: Accel Investors '93 L.P., (935 shares), Accel IV L.P. (21,153 shares), Accel Japan L.P. (2,022) shares), Accel Keiretsu L.P. (455 shares), Ares-Serono S.A. (246,575 shares), Bayview Investors Ltd. II-2 100 (15,204 shares), Biocentive (130,890 shares), Ellmore C. Patterson Partners (556 shares), Finsbury Worldwide Pharmaceutical Trust, plc (130,890 shares), Hambrecht & Quist LLC (10,798 shares), Harry F. Hixson, Jr. Separate Property Trust, Dated December 15, 1995 (5,505 shares), InterWest Investors V (124 shares), InterWest Partners V (19,702 shares), Kleiner Perkins Caufield & Byers VI (25,273 shares), Lehman Brothers (21,596 shares), Lombard Odier & Cie (392,670 shares), Neuroscience Partners Limited Partnership (130,890 shares), New York Life Insurance Company (196,335 shares), Oxford Bioscience Partners (Adjunct) L.P. (2,643 shares), Oxford Bioscience Partners (Bermuda) L.P. (2,296 shares), Oxford Bioscience Partners, L.P. (8,277 shares), Pharma/wHealth (130,890 shares), Prosper Partners (151 shares), Robertson, Stephens & Company LLC (10,798 shares), Second Ventures II, L.P. (1,387 shares), The Health Care and Biotechnology Venture Fund (65,445 shares), U.S. Venture Partners IV, L.P. (11,433 shares), USVP Entrepreneur Partners II, L.P. (396 shares), Venrock Associates (10,867 shares), Venrock Associates II, L.P. (14,405 shares), and Vertical Fund Associates, L.P. (3,304 shares). 9. On December 1, 1997, the Company sold 680,628 shares of Series F Preferred Stock at a price of $12.04 per share to Ares-Serono, S.A. 10. On December 8, 1997, the Company issued 5,000 shares of Common Stock, valued at $1.12 per share, to the University of Massachusetts. 11. On December 31, 1997, the Company issued 625 shares of Common Stock, valued at $14.40 per share, to Dr. David J. Baylink pursuant to a consulting agreement. 12. On January 14, 1998, the Company issued 1,250 shares of Common Stock, valued at $1.12 per share, to The Regents of the University of California. 13. On March 8, 1998, the Company issued 6,248 shares of Common Stock in the aggregate, valued at $1.12 per share, to five scientists affiliated with The Regents of the University of California. 14. As of March 31, 1998, the Company has granted options to purchase an aggregate of 1,103,444 shares of its Common Stock to directors, employees and consultants pursuant to its Prior Plans, and the Company has issued an aggregate of 435,570 shares of its Common Stock upon the exercise of stock options under its Prior Plans. The exercise price for such options range from $0.08 to $1.12 per share. The offers, sales and issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, and/or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through employment or other relationships, to information about the Company. II-3 101 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 1.1+ Form of Underwriting Agreement. 3.1+ Articles of Incorporation effective prior to reincorporation of the Company in Delaware. 3.2+ Bylaws effective prior to reincorporation of the Company in Delaware. 3.3+ Certificate of Incorporation of the Company's Delaware subsidiary. 3.4+ Form of Amended and Restated Certificate of Incorporation, to be filed and become effective prior to the effectiveness of this Registration Statement. 3.5+ Form of Second Amended and Restated Certificate of Incorporation, to be filed and become effective upon completion of the offering. 3.6+ Form of Bylaws to become effective prior to the effectiveness of this Registration Statement. 4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6. 4.2++ Form of Common Stock Certificate. 5.1++ Opinion of Cooley Godward LLP. 10.1+ Second Amended and Restated Voting Agreement, dated September 8, 1994, entered into between the Registrant and certain of its stockholders. 10.2+ Form of Indemnity Agreement entered into between the Registrant and its directors and officers. 10.3+ Registrant's 1998 Equity Incentive Plan. 10.4+ Form of Incentive and Nonstatutory Stock Option Agreements under the 1998 Equity Incentive Plan. 10.5+ Registrant's Employee Stock Purchase Plan and related offering document. 10.6+ Registrant's Non-Employee Directors' Stock Option Plan. 10.7+ Form of Nonstatutory Stock Option under Registrant's Non-Employee Directors' Stock Option Plan. 10.8+ Registrant's Employees Retirement Investment Plan and Trust, effective as of January 1, 1998. 10.9+ Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P., dated September 6, 1994. 10.10+ Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P., Second Ventures II, L.P. and USVP Entrepreneur Partners II, L.P., dated September 8, 1994. 10.11+ Management Rights Letter delivered by the Registrant to Oxford Bioscience Partners L.P., Oxford Bioscience Partners (Bermuda) Limited Partnership and Oxford Bioscience Partners (Adjunct) L.P., dated September 8, 1994. 10.12+ Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P. dated September 5, 1997. 10.13+ Amended and Restated Investors' Rights Agreement, dated September 9, 1997, entered into between the Registrant and certain of its stockholders. 10.14+ Amendment to the Amended and Restated Investors' Rights Agreement dated November 25, 1997, entered into between the Registrant and certain of its stockholders.
II-4 102
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 10.15+ Loan and Security Agreement, dated November 22, 1996, entered into between the Registrant and MMC/GATX Partnership No. 1. 10.16+ Warrant to Purchase 250,000 shares of Series C-1 Preferred Stock, issued by the Registrant to MMC/GATX Partnership No. 1. 10.17+ Secured Promissory Note, dated December 2, 1996, issued by the Registrant to MMC/ GATX Partnership No. 1. 10.18+ Series E Preferred Stock Purchase Agreement, dated September 9, 1997, between the Registrant and certain of its stockholders. 10.19+ Series F Preferred Stock Purchase Agreement, dated November 25, 1997, between the Registrant and Ares-Serono S.A. 10.20+ Promissory Note, dated June 14, 1994, as amended, issued to the Registrant by Alan J. Lewis. 10.21+ Security Agreement, dated June 14, 1994, entered into between the Registrant to Alan J. Lewis. 10.22+ Employment letter agreement, dated December 8, 1993, between the Registrant and Alan J. Lewis. 10.23+ Employment letter agreement, dated March 4, 1994, between the Registrant and David W. Anderson. 10.24+ Employment letter agreement, dated August 18, 1994, between the Registrant and Bradley B. Gordon. 10.25+ Employment letter agreement, dated June 13, 1995, between the Registrant and Carl F. Bobkoski. 10.26+ Consulting Agreement, dated April 1, 1996, between the Registrant and John P. Walker. 10.27+ Lease, dated April 30, 1993, as amended, between the Registrant and Sorrento Valley Business Park. 10.28+ Master Lease Agreement, dated July 8, 1993, between the Registrant and E.I. Dupont de Nemours & Co. 10.29+ Master Equipment Lease, dated September 1, 1993, between the Registrant and Phoenix Leasing Incorporated. 10.30+ Master Lease Agreement, dated January 1, 1998, between the Registrant and Transamerica Business Credit Corporation. 10.31+ Lease, dated January 1, 1998, between the Registrant and Sorrento Valley Business Park. 10.32* Exclusive License Agreement, dated October 26, 1993, between the Registrant and The Regents of the University of California. 10.33* First Amendment to Exclusive License Agreement, dated June 22, 1997, between the Registrant and The Regents of the University of California. 10.34* Second Amendment to Exclusive License Agreement, dated February 2, 1998, between the Registrant and The Regents of the University of California. 10.35+* Restricted Stock Purchase Agreement, dated October 26, 1993, between the Registrant and the Regents of the University of California. 10.36* License Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California. 10.37+* Restricted Stock Purchase Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California.
II-5 103
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------- ----------------------- 10.38* Collaborative Development and Licensing Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.39+* Amendment to Collaborative Development and Licensing Agreement, dated March 31, 1998, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.40+ Stock Purchase Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.41* Agreement dated July 30, 1996, between the Registrant and N.V. Organon. 10.42* First Amendment to Agreement, dated January 30, 1998, between the Registrant and N.V. Organon. 10.43+* Research Collaboration Agreement, dated August 26, 1996, and as amended on September 5, 1997, between the Registrant and Roche Bioscience. 10.44+* Exclusive License Agreement, dated October 1996, between the Registrant and the University of Massachusetts. 10.45+* Restricted Stock Purchase Agreement, dated October 31, 1996, between the Registrant and the University of Massachusetts. 10.46* License Agreement, dated October 28, 1997, between the Registrant and the University of Massachusetts. 10.47+* Restricted Stock Purchase Agreement, dated December 7, 1997, between the Registrant and the University of Massachusetts. 10.48* Research, Development and License Agreement, dated November 25, 1997, between the Registrant and Ares Trading S.A. 10.49* Collaborative Research and License Agreement, dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company. 10.50+* Stock Purchase Agreement dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company. 10.51* Collaboration Agreement, dated February 9, 1998, between the Registrant and Nippon Kayaku Co., Ltd. 10.52+ Promissory Note, dated May 8, 1998, issued to the Registrant by Alan J. Lewis. 10.53 Employment Letter Agreement, dated May 13, 1998, between the Registrant and Merl F. Hoekstra. 11.1+ Computation of Net Loss per Share. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2++ Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1+ Power of Attorney.
- ------------------------------ * Confidential Treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. + Previously filed. ++ To be filed by amendment. (B) SCHEDULES. All schedules are omitted because they are not required, are not applicable or the information is included in the consolidated Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant 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. II-6 104 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to provisions described in Item 14 of this Registration Statement, or otherwise, the Registrant has been advised that in the opinion of the 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 Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant 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 Registrant 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: (1) That, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement 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. (2) That, 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. (3) 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-7 105 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Amendment No. 2 to 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 5th day of August 1998. /s/ BRADLEY B. GORDON By: Bradley B. Gordon Vice President, Finance, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * President, Chief Executive Officer and August 5, 1998 - --------------------------------------------- Director (Principal Executive Officer) Alan J. Lewis, Ph.D. /s/ BRADLEY B. GORDON Vice President, Finance, Chief August 5, 1998 - --------------------------------------------- Financial Officer and Secretary Bradley B. Gordon (Principal Financial and Accounting Officer) * Chairman of the Board August 5, 1998 - --------------------------------------------- John P. Walker * Director August 5, 1998 - --------------------------------------------- Brook H. Byers * Director August 5, 1998 - --------------------------------------------- Luke B. Evnin, Ph.D. * Director August 5, 1998 - --------------------------------------------- Harry F. Hixson, Ph.D. * Director August 5, 1998 - --------------------------------------------- Patrick F. Latterell * Director August 5, 1998 - --------------------------------------------- Arnold Oronsky, Ph.D.
*By: /s/ BRADLEY B. GORDON --------------------------- (Bradley B. Gordon) (Attorney-in-fact) II-8 106 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1+ Form of Underwriting Agreement. 3.1+ Articles of Incorporation effective prior to reincorporation of the Company in Delaware. 3.2+ Bylaws effective prior to reincorporation of the Company in Delaware. 3.3+ Certificate of Incorporation of the Company's Delaware subsidiary. 3.4+ Form of Amended and Restated Certificate of Incorporation, to be filed and become effective prior to the effectiveness of this Registration Statement. 3.5+ Form of Second Amended and Restated Certificate of Incorporation, to be filed and become effective upon completion of the offering. 3.6+ Form of Bylaws to become effective prior to the effectiveness of this Registration Statement. 4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6. 4.2++ Form of Common Stock Certificate. 5.1++ Opinion of Cooley Godward LLP. 10.1+ Second Amended and Restated Voting Agreement, dated September 8, 1994, entered into between the Registrant and certain of its stockholders. 10.2+ Form of Indemnity Agreement entered into between the Registrant and its directors and officers. 10.3+ Registrant's 1998 Equity Incentive Plan. 10.4+ Form of Incentive and Nonstatutory Stock Option Agreements under the 1998 Equity Incentive Plan. 10.5+ Registrant's Employee Stock Purchase Plan and related offering document. 10.6+ Registrant's Non-Employee Directors' Stock Option Plan. 10.7+ Form of Nonstatutory Stock Option under Registrant's Non-Employee Directors' Stock Option Plan. 10.8+ Registrant's Employees Retirement Investment Plan and Trust, effective as of January 1, 1998. 10.9+ Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P., dated September 6, 1994. 10.10+ Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P., Second Ventures II, L.P. and USVP Entrepreneur Partners II, L.P., dated September 8, 1994. 10.11+ Management Rights Letter delivered by the Registrant to Oxford Bioscience Partners L.P., Oxford Bioscience Partners (Bermuda) Limited Partnership and Oxford Bioscience Partners (Adjunct) L.P., dated September 8, 1994. 10.12+ Management Rights Letter delivered by the Registrant to U.S. Venture Partners IV, L.P. dated September 5, 1997. 10.13+ Amended and Restated Investors' Rights Agreement, dated September 9, 1997, entered into between the Registrant and certain of its stockholders. 10.14+ Amendment to the Amended and Restated Investors' Rights Agreement dated November 25, 1997, entered into between the Registrant and certain of its stockholders.
107
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.15+ Loan and Security Agreement, dated November 22, 1996, entered into between the Registrant and MMC/GATX Partnership No. 1. 10.16+ Warrant to Purchase 250,000 shares of Series C-1 Preferred Stock, issued by the Registrant to MMC/GATX Partnership No. 1. 10.17+ Secured Promissory Note, dated December 2, 1996, issued by the Registrant to MMC/ GATX Partnership No. 1. 10.18+ Series E Preferred Stock Purchase Agreement, dated September 9, 1997, between the Registrant and certain of its stockholders. 10.19+ Series F Preferred Stock Purchase Agreement, dated November 25, 1997, between the Registrant and Ares-Serono S.A. 10.20+ Promissory Note, dated June 14, 1994, as amended, issued to the Registrant by Alan J. Lewis. 10.21+ Security Agreement, dated June 14, 1994, entered into between the Registrant to Alan J. Lewis. 10.22+ Employment letter agreement, dated December 8, 1993, between the Registrant and Alan J. Lewis. 10.23+ Employment letter agreement, dated March 4, 1994, between the Registrant and David W. Anderson. 10.24+ Employment letter agreement, dated August 18, 1994, between the Registrant and Bradley B. Gordon. 10.25+ Employment letter agreement, dated June 13, 1995, between the Registrant and Carl F. Bobkoski. 10.26+ Consulting Agreement, dated April 1, 1996, between the Registrant and John P. Walker. 10.27+ Lease, dated April 30, 1993, as amended, between the Registrant and Sorrento Valley Business Park. 10.28+ Master Lease Agreement, dated July 8, 1993, between the Registrant and E.I. Dupont de Nemours & Co. 10.29+ Master Equipment Lease, dated September 1, 1993, between the Registrant and Phoenix Leasing Incorporated. 10.30+ Master Lease Agreement, dated January 1, 1998, between the Registrant and Transamerica Business Credit Corporation. 10.31+ Lease, dated January 1, 1998, between the Registrant and Sorrento Valley Business Park. 10.32* Exclusive License Agreement, dated October 26, 1993, between the Registrant and The Regents of the University of California. 10.33* First Amendment to Exclusive License Agreement, dated June 22, 1997, between the Registrant and The Regents of the University of California. 10.34* Second Amendment to Exclusive License Agreement, dated February 2, 1998, between the Registrant and The Regents of the University of California. 10.35+* Restricted Stock Purchase Agreement, dated October 26, 1993, between the Registrant and the Regents of the University of California. 10.36* License Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California.
108
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.37+* Restricted Stock Purchase Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California. 10.38* Collaborative Development and Licensing Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.39+* Amendment to Collaborative Development and Licensing Agreement, dated March 31, 1998, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.40+ Stock Purchase Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd. 10.41* Agreement dated July 30, 1996, between the Registrant and N.V. Organon. 10.42* First Amendment to Agreement, dated January 30, 1998, between the Registrant and N.V. Organon. 10.43+* Research Collaboration Agreement, dated August 26, 1996, and as amended on September 5, 1997, between the Registrant and Roche Bioscience. 10.44+* Exclusive License Agreement, dated October 1996, between the Registrant and the University of Massachusetts. 10.45+* Restricted Stock Purchase Agreement, dated October 31, 1996, between the Registrant and the University of Massachusetts. 10.46* License Agreement, dated October 28, 1997, between the Registrant and the University of Massachusetts. 10.47+* Restricted Stock Purchase Agreement, dated December 7, 1997, between the Registrant and the University of Massachusetts. 10.48* Research, Development and License Agreement, dated November 25, 1997, between the Registrant and Ares Trading S.A. 10.49* Collaborative Research and License Agreement, dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company. 10.50+* Stock Purchase Agreement dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company. 10.51* Collaboration Agreement, dated February 9, 1998, between the Registrant and Nippon Kayaku Co., Ltd. 10.52+ Promissory Note, dated May 8, 1998, issued to the Registrant by Alan J. Lewis. 10.53 Employment Letter Agreement, dated May 13, 1998, between the Registrant and Merl F. Hoekstra. 11.1+ Computation of Net Loss per Share. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2++ Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1+ Power of Attorney.
- ------------------------------ * Confidential Treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. + Previously filed. ++ To be filed by amendment. EX-10.32 2 EXHIBIT 10.32 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.32 EXCLUSIVE LICENSE AGREEMENT between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA and SIGNAL PHARMACEUTICALS, INC. for [***] UC Case No. [92-116] [***] UC Case Nc. [93-173] and [***] UC Case No. [93-179] ***Confidential Treatment Requested 2 TABLE OF CONTENTS
Article No. Title Page RECITALS.............................................................1 1. DEFINITIONS..........................................................3 2. EXCLUSIVE GRANT......................................................5 3. SUBLICENSES..........................................................6 4. LICENSE-ISSUE FEE....................................................7 5. EARNED ROYALTIES AND MILESTONE PAYMENTS..............................7 6. DUE DILIGENCE.......................................................12 7. PROGRESS AND ROYALTY REPORTS........................................15 8. BOOKS AND RECORDS...................................................16 9. LIFE OF THE AGREEMENT...............................................17 10. TERMINATION BY THE REGENTS..........................................17 11. TERMINATION BY LICENSEE.............................................18 12. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION.......................................19 13. USE OF NAMES AND TRADEMARKS.........................................19 14. LIMITED WARRANTY....................................................19 15. PATENT PROSECUTION AND MAINTENANCE..................................21 16. PATENT MARKING......................................................23 17. PATENT INFRINGEMENT.................................................24 18. INDEMNIFICATION.....................................................26 19. NOTICES.............................................................27 20. ASSIGNABILITY.......................................................28 21. LATE PAYMENTS.......................................................28 22. WAIVER..............................................................28 23. FAILURE TO PERFORM..................................................29 24. GOVERNING LAWS......................................................29 25. PREFERENCE FOR UNITED STATES INDUSTRY...............................29 26. FOREIGN GOVERNMENT APPROVAL OR REGISTRATION................................................29 27. EXPORT CONTROL LAWS.................................................30 28. SECRECY.............................................................30 29. MISCELLANEOUS.......................................................32
3 UC Case Nos. 92-116, 93-173 and 93-179 EXCLUSIVE LICENSE AGREEMENT for [***] THIS LICENSE AGREEMENT (the "Agreement") is made and is effective this 26TH day of October , 1993 by and between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a California corporation having its statewide administrative offices at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550, hereinafter referred to as "The Regents", and Signal Pharmaceuticals, Inc., a California corporation having a principal place of business at 11545 Sorrento Valley Road, Suite 315, San Diego, California 92121, hereinafter referred to as the "Licensee". RECITALS WHEREAS, certain inventions, generally characterized as methods for the [***] and testing drugs therewith (UC Case No. 92-116), [***] (UC Case No. 93-173), and [***] U.C. Agreement Control Number 93-04-0786 ***Confidential Treatment Requested 4 [***] (UC Case No. 93-179), hereinafter collectively referred to as the "Inventions", were made in the course of research at the University of California, San Diego by [***] (UC Case No. 92-116), [***] (UC Case No. 93-173), and [***] (UC Case No. 93-179) and are covered by Regents' Patent Rights as defined below; WHEREAS, the Licensee entered into Secrecy Agreements (U.C. Control Nos. 92-20-0437) with The Regents effective September 7, 1992, for the purpose of evaluating the Inventions; WHEREAS, the development of the Inventions was sponsored at least in part by the following organizations, and as a consequence this license in certain respects is subject to overriding obligations to third party sponsoring organizations: (a) [***] (UC 92-116); (b) [***] (UC 93-173); (c) [***] (UC 93-179). WHEREAS, the Licensee is a "small business firm" as defined in 15 U.S.C. 632; WHEREAS, The Regents is desirous that the Inventions be developed and utilized to the fullest extent so that the benefits can be enjoyed by the general public; WHEREAS, the Licensee is desirous of obtaining certain rights from The Regents for the commercial development, use, and sale of the Inventions, and The Regents is willing to grant such rights; 2 ***Confidential Treatment Requested 5 WHEREAS, both parties recognize and agree that royalties due hereunder will be paid on both pending patent applications and issued patents; and WHEREAS, both parties recognize and agree that royalties due hereunder will be paid on products developed through the use of Regents' Technology Rights and the Licensee is willing to pay such royalties in exchange for the early access to The Regents' technology granted by this license, regardless of whether or not some or all of The Regents' technology may have been published or may become published; WHEREAS, The Regents previously entered into Letters of Intent dated [***] (U.C. Control No. [***]), and [***] (U.C. Control No. [***]), with the Licensee for UC Case No. 92-116 and UC Case No. 92-130, which has been combined into UC Case No. 92-116, and for UC Case No. 93-173 and UC Case No. 93-179; - - 00 0 00 - - the parties agree as follows: 1. DEFINITIONS 1.1 "Regents' Patent Rights" means patent rights assigned to The Regents to any subject matter claimed in or covered by any of the following: Pending U.S. Patent Application Serial No. [***], entitled [***], by [***], filed [***]; pending U.S. Patent Application Serial No. [***] filed on [***], under the title [***], by [***]; and pending U.S. Patent Application Serial No.[***] 3 ***Confidential Treatment Requested 6 filed on [***], under the title "[***]", by [***]; and continuing applications thereof including divisions and substitutions but including continuation-in-part applications which contain claims supported in the original application; any patents issuing on said application or continuing applications including reissues; and any corresponding foreign applications or patents. 1.2 "Licensed Product" means any material either that is covered by Regents' Patent Rights, that is identified or produced by the Licensed Method, or that the use or sale of which would constitute, but for the license granted to the Licensee pursuant to this Agreement, an infringement of any pending or issued claim within Regents' Patent Rights. 1.3 "Licensed Method" means any method that is covered by Regents' Patent Rights or Regents' Technology Rights, the use of which would constitute, but for the license granted to the Licensee pursuant to this Agreement, an infringement of any claim within Regents' Patent Rights or a misuse of Regents' Technology Rights. 1.4 "Net Sales" means the total of the gross invoice prices of Licensed Products sold by the Licensee, an Affiliate, or a sublicensee, less the sum of the following actual and customary deductions where applicable: cash, trade, or quantity discounts; sales, use, tariff, import/export duties or other excise taxes imposed upon particular sales; transportation charges and allowances or credits to customers because of rejections, breakage or returns. 1.5 "Affiliate" means any corporation or other business entity in which the Licensee owns or controls, directly or indirectly, at least fifty percent (50%) of the outstanding stock or other voting nights entitled to elect directors; provided, however, that in 4 ***Confidential Treatment Requested 7 any country where the local law shall not permit foreign equity participation of at least 50%, then an "Affiliate" shall include any company in which the Licensee shall own or control, directly or indirectly, the maximum percentage of such outstanding stock or voting rights permitted by local law. 1.6 "Regents' Technology Rights" means The Regents' interest in know how and embodiments of know how relating to Regents' Patents Rights, whether or not covered by Regents' Patent Rights, for example, unpublished patent applications, notebooks, data, protocols, cell lines and other Biological Materials (as defined below) which pertain to and/or are necessary for the exercise of the rights granted herein. Regents' Technology Rights includes such know how as may be transferred from time to time to personnel of the Licensee during on site visits to the laboratories of the inventors named herein. 1.7 "[***]" means Regents' Patent Rights and Regents' Technology Rights relating to UC 93-173 and UC 93-179 as identified herein. 1.8 "[***] Technologies" means Regents' Patent Rights and Regents' Technology Rights relating to UC 92-116 as identified herein. 2. EXCLUSIVE GRANT 2.1 Subject to the limitations set forth in this Agreement, The Regents hereby grants to the Licensee a world-wide license under Regents' Patent Rights and Regents' Technology Rights to make, have made, use, and sell Licensed Products and to practice Licensed Methods. 5 ***Confidential Treatment Requested 8 2.2 Except as otherwise provided herein, the License granted in section 2.1 shall be exclusive for the life of the Agreement and shall be for all fields of use, except that the Licensee's license under Regents' Technology Rights shall be Limited to such uses as are necessary for identifying, making, using, or selling Licensed Products. 2.3 The license granted hereunder shall be subject to all the applicable provisions of any License to the United States Government executed by The Regents. The license granted hereunder shall be subject to the overriding obligations to the U.S. Government set forth in 35 U.S.C. 200-212 and applicable governmental implementing regulations. 2.4 The Regents expressly reserves the right to use the Inventions and associated technology for educational and research purposes. 3. SUBLICENSES 3.1 The Regents also grants to the Licensee the right to issue sublicenses to third parties to make, have made, use, and sell Licensed Products and to practice Licensed Method, provided the Licensee has current exclusive rights thereto under this Agreement. To the extent applicable, such sublicenses shall include all of the rights of and obligations due to The Regents (and, if applicable, the United States Government) that are contained in this Agreement. 3.2 The Licensee shall provide The Regents with a copy of each sublicense issued hereunder; collect and Guarantee payment of all royalties due The Regents from sublicensees, and summarize and deliver all reports due The Regents from sublicensees. 6 9 3.3 Upon termination of this Agreement for any reason, The Regents, at its sole discretion, shall determine whether any or all sublicenses shall be canceled or assigned to The Regents. 4. LICENSE-ISSUE FEE 4.1 The Licensee agrees to pay to The Regents a LICENSE-ISSUE FEE of [***] plus issuance of [***] shares of common stock in accordance with the Shareholders Agreement which is appended hereto as Appendix A and made a part of this Agreement (the Shareholders Agreement) within seven days after the execution of this Agreement. The Licensee shall also, at the same time pay to The Regents extension fees in the amount of [***] in accordance with the Letter of Intent dated September 16, 1992 (U.C. Control No. 92-30-0436). 4.2 These fees are non-refundable and are not an advance against royalties. 5. EARNED ROYALTIES AND MILESTONE PAYMENTS 5.1 (a) The Licensee shall also pay to The Regents an EARNED ROYALTY of [***] of the Net Sales of Licensed Products, provided that the earned royalty shall be [***] of Net Sales of a Licensed Product if Net Sales of the Licensed Product are less than [***] per year in any given calendar year of sales. 7 ***Confidential Treatment Requested 10 5.1(b) Any earned royalty due under Paragraph 5.1(a) shall be reduced by [***] in the event that a Licensed Product is not covered by Regents' Patent Rights but is covered by or developed from Regents' Technology Rights. 5.2 Paragraphs 1.1, 1.2, and 1.3 define Regents' Patent Rights, Licensed Products and Licensed Methods so that royalties shall be payable on products and methods covered by both pending patent applications and issued patents, provided that no earned royalties shall be payable under Regents' Patent Rights on pending claims that are abandoned or that are pending for more than thirty (30) years from the effective date of this Agreement. In no event shall any royalty be due under Regents' Patent Rights or Regents' Technology Rights after the expiration of the last-to-expire patent licensed hereunder which covers the Licensee's activities. 5.2(a) Paragraphs 1.6, 1.2, and 1.3 define Regents' Technology Rights, Licensed Products and Licensed Methods so that royalties shall be payable on products and methods covered by Regents' Technology Rights but not Regents' Patent Rights, in accordance with Paragraph 5.1(a) and (b). No royalties shall be payable under Regents' Technology Rights in any country after ten (10) years from the date of first commercial sale in that country, or after a patent licensed hereunder that covers the Licensee's activities has expired in that country, as provided for in Paragraph 5.2 above. No royalties shall be payable under Regents' Technology Rights on products developed independently of Regents' Technology Rights. 5.3 Earned royalties shall accrue in each country for the duration of Regents' Patent Rights or Regents' Technology Rights in that country and shall be payable to The 8 ***Confidential Treatment Requested 11 Regents when Licensed Products are invoiced, or if not invoiced, when delivered to a third party. For earned royalties accruing on sales for cash (or the equivalent thereof) outside the United States, the Licensee may delay payment of earned royalties until it actually receives payment from its customer, provided that such delay does not exceed three (3) months from the date of invoice. 5.4 Royalties accruing to The Regents shall be paid to The Regents quarterly on or before the following dates of each calendar year: February 28 May 31 August 31 November 30 Each such payment will be for royalties which accrued within the Licensee's most recently completed calendar quarter. 5.5 The Licensee shall pay to The Regents MILESTONE PAYMENTS. Milestone payments for any particular milestone event shall be made within thirty (30) days of the date of the milestone event. Milestone payments shall be made as follows: (a) [***] (b) [***] 9 ***Confidential Treatment Requested 12 [***] (c) [***] (d) [***] 5.6 All monies due The Regents shall be payable in United States funds collectible at par in San Francisco, California. When Licensed Products are sold for monies other than United States dollars, the earned royalties will first be determined in the foreign currency of the country in which such Licensed Products were sold and then converted into equivalent United States funds. The exchange rate will be that rate quoted in the Wall Street Journal on the last business day of the reporting period. 5.7 Royalties earned with respect to sales occurring in any country outside the United States shall not be reduced by any taxes, fees, or other charges imposed by the Government of such country on the remittance of royalty income. The Licensee shall also be for all bank transfer charges. Notwithstanding this, all payments made by the response Licensee in fulfillment of The Regents' tax liability in any particular country shall be credited against Earned Royalties, royalties or fees due The Regents for that country. 10 ***Confidential Treatment Requested 13 5.7(a) The Licensee shall not be required to sell Licensed Product in a particular country if taxes and fees or other charges imposed by the government make such sales unprofitable to the Licensee. In such event, the Licensee shall notify The Regents of its intention not to sell in such country, and the Licensee shall be required to sublicense rights in such country to any qualified company recommended by The Regents. 5.8 If at any time legal restrictions prevent the prompt remittance of part or all royalties by the Licensee with respect to any country where a Licensed Product is sold, the Licensee shall have the right and option to make such payments by depositing the amount thereof in local currency to The Regents' account in a bank or other depository in such country. The Regents will use its best efforts to transfer the monies held in the account specified in Paragraph 5.8 to the United States. If after one year from the date of the first deposit into that account there are still legal restrictions that prevent The Regents from transferring the monies, The Regents shall transfer the impounded funds back to the Licensee, and the Licensee shall convert the amount owed to The Regents into United States funds and shall pay The Regents directly from its U.S. source of funds for the amount impounded. The Licensee shall then pay all future royalties due to The Regents from its U.S. source of funds so long as the legal restrictions of paragraph 5.8 still apply. 5.9 Notwithstanding anything to the contrary in Paragraph 5.3 hereof, in the event that any patent or any claim thereof included within the Regents' Patent Rights shall be rejected or held invalid in a final decision by a patent office from which no appeal or additional patent prosecution has or can be taken or by a court of competent jurisdiction and last resort and from which no appeal has or can be taken, all obligation to pay royalties 11 14 based on such patent or claim or any claim patentably indistinct therefrom shall cease as of the date of such final decision. The Licensee shall not, however, be relieved from paying any royalties that accrued before such decision or that are based on another patent or claim not involved in such decision, or that are based on The Regents' Technology Rights as provided for in this Agreement. 5.10 No royalties shall be collected or paid hereunder on Licensed Products sold to the account of the U.S. Government, any agency thereof, state or domestic municipal government as provided for in applicable Licenses to the Government relating to the Karin Technologies. 6. DUE DILIGENCE 6.1 The Licensee, upon execution of this Agreement, shall diligently proceed with the development, manufacture and sale of Licensed Products and shall earnestly and diligently endeavor to market the same within a reasonable time after execution of this Agreement and in quantities sufficient to meet the market demands therefor. 6.2 The Licensee shall be entitled to exercise prudent and reasonable business judgment in meeting its due diligence obligations hereunder. 6.3 The Licensee shall endeavor to obtain all necessary governmental approvals for the manufacture, use and sale of Licensed Products. 6.4 If the Licensee is unable to perform any of the following: [***] 12 ***Confidential Treatment Requested 15 ' [***] [***] [***] [***] [***] [***] (6.4h) reasonably fill the market demand for Licensed Products following commencement of marketing at any time during the exclusive period of this Agreement; then, subject to Paragraph 6.5, The Regents shall have the right and option either to terminate this Agreement or to reduce the Licensee's exclusive license to a nonexclusive license. This right, if exercised by The Regents, supersedes the rights granted in Article 2 (GRANT). 6.5 Subject to Paragraphs 6. 1 and 6.2, if the Licensee is unable to meet any of the dates set forth in Paragraph 6.4, with regard to either the [***] Technologies or the [***] Technologies, respectively, the parties shall in good faith re-establish a date or dates that are 13 ***Confidential Treatment Requested 16 reasonable under the then current circumstances. The Regents shall not exercise its rights to terminate this Agreement or convert it to a non-exclusive agreement unless a re-established date is not met. If a re-established date is more than six months from the original date, The Licensee shall begin making an annual license maintenance fee for the delayed product of [***] per year. The annual license maintenance fee shall begin to be payable in [***] for the [***] Technologies, or [***] for the [***] Technologies, on the anniversary date of the effective date hereof and shall continue until sales of the delayed product begin. The annual maintenance fee provided for in this Paragraph shall not exceed [***] per year per Technology (i.e. the [***] Technologies or the [***] Technologies, respectively). The re-established date shall not affect the date when any milestone payment would be due under Paragraph 5.5. 6.6 Either party to this Agreement may refer a dispute arising under this Agreement to arbitration. Such referral to arbitration shall be made by so notifying the other party in writing in accordance with the provisions of Article 19 hereto (NOTICES), stating the nature of the dispute to be resolved. Any such arbitration shall be controlled by the provisions of the Commercial Arbitration Rules of the American Arbitration Association then in effect, with the proviso that the arbitrators shall not be employees of the parties and shall establish an arbitration timetable resulting in a hearing, in San Francisco, California, within 120 days of the original request to arbitrate. The decision of the arbitrators shall be enforceable, but not appealable, in any court of competent jurisdiction. 14 ***Confidential Treatment Requested 17 7. PROGRESS AND ROYALTY REPORTS 7.1 Beginning February 28, 1994 and semi-annually thereafter, the Licensee shall submit to The Regents a progress report covering the Licensee's activities related to the development and testing of all Licensed Products and the obtaining of the governmental approvals necessary for marketing. These progress reports shall be made for each Licensed Product until the first commercial sale of that Licensed Product occurs in the United States. These progress reports shall be considered "Data" for all purposes of Article 28, hereof and shall be subject to the terms thereof. 7.2 The progress reports submitted under section 7.1 should include, but not be limited to, the following topics: - summary of work completed - key scientific discoveries - summary of work in progress - current schedule of anticipated events or milestones - market plans for introduction of Licensed Products, and - a summary of resources (dollar value) spent in the reporting period. 7.3 The Licensee shall have a continuing responsibility to keep The Regents informed of the large/small entity status (as defined by the United States Patent and Trademark Office) of itself and its sublicensees and Affiliates. 7.4 The Licensee also agrees to report to The Regents in its immediately subsequent progress and royalty report the date of first commercial sale of a Licensed Product in each country. 15 18 7.5 After the first commercial sale of a Licensed Product anywhere in the world, the Licensee will make quarterly royalty reports to The Regents on or before each February 28, May 31, August 31 and November 30 of each year. Each such royalty report will cover the Licensee's most recently completed calendar quarter and will show (a) the gross sales and Net Sales of Licensed Products sold by the Licensee during the most recently completed calendar quarter; (b) the number of each type of Licensed Product sold; (c) the royalties, in U.S. dollars, payable hereunder with respect to such sales; (d) the method used to calculate the royalty; and (e) the exchange rates used. 7.6 If no sales of Licensed Products has been made during any reporting period, a statement to this effect shall be required. 8. BOOKS AND RECORDS 8.1 The Licensee shall keep books and records accurately showing all Licensed Products manufactured, used, and/or sold under the terms of this Agreement. Such books and records shall be preserved for at least five (5) years from the date of the royalty payment to which they pertain and shall be open to inspection by representatives or agents of The Regents at reasonable times. 8.2 The fees and expenses of The Regents' representatives performing such an examination shall be borne by The Regents. However, if an error in royalties of more than five percent (5%) of the total royalties due for any year is discovered, then the fees and expenses of these representatives shall be borne by the Licensee. 16 19 9. LIFE OF THE AGREEMENT 9.1 Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of this Agreement, this Agreement shall be in force from the effective date recited on page one and shall remain in effect for the life of the last-to-expire patent licensed under this Agreement; or, if no patent in Regents' Patent Rights issues, for thirty (30) years from the effective date of this Agreement, or for ten (10) years from the date of first commercial sales in a given country, if such date is more than thirty (30) years from the effective date. 9.2 Any termination of this Agreement shall not affect the rights and obligations set forth in the following Articles: Article 8 Books and Records Article 12 Disposition of Licensed Products on Hand Upon Termination Article 13 Use of Names and Trademarks Article 18 Indemnification Article 23 Failure to Perform Article 28 Secrecy 10. TERMINATION BY THE REGENTS 10.1 If the Licensee should violate or fail to perform any term or covenant of this Agreement, then The Regents may give written notice of such default (Notice of Default) to the Licensee. If the Licensee should fail to repair such default within ninety (90) days of 17 20 the effective date of such notice, The Regents shall have the right to terminate this Agreement and the licenses herein by a second written notice (Notice of Termination) to the Licensee. If a Notice of Termination is sent to the Licensee, this Agreement shall automatically terminate on the effective date of such notice. Such termination shall not relieve the Licensee of its obligation to pay any royalty or License fees owing at the time of such termination and shall not impair any accrued right of The Regents. These notices shall be subject to Article 19 (Notices). 11. TERMINATION BY LICENSEE 11.1 The Licensee shall have the right at any time to terminate this Agreement in whole or as to any portion of Regents' Patent Rights or Regents' Technology Rights by giving notice in writing to The Regents. Such notice of termination shall be subject to Article 19 (Notices) and termination of this Agreement shall be effective ninety (90) days from the effective date of such notice. 11.2 Any termination pursuant to the above paragraph shall not relieve the Licensee of any obligation or liability accrued hereunder prior to such termination or rescind anything done by the Licensee or any payments made to The Regents hereunder prior to the time such termination becomes effective, and such termination shall not affect in any manner any rights of The Regents arising under this Agreement prior to such termination. 18 21 12. DISPOSITION OF LICENSED-PRODUCTS ON HAND UPON TERMINATION 12.1 Upon termination of this Agreement pursuant to Article 10 or Article 11, the Licensee shall have the privilege of disposing of all previously made or partially made Licensed Products, but no more, within a period of one hundred and twenty (120) days, provided, however, that the sale of such Licensed Products shall be subject to the terms of this Agreement including, but not limited to, the payment of royalties at the rate and at the time provided herein and the rendering of reports thereon. 13. USE OF NAMES AND TRADEMARKS 13.1 Nothing contained in this Agreement shall be construed as conferring any right to use in advertising, publicity, or other promotional activities any name, trade name, trademark, or other designation of either party hereto (including contraction, abbreviation or simulation of any of the foregoing). Unless required by law, the use by Licensee of the name, "The Regents of the University of California" or the name of any campus of the University of California is expressly prohibited. 14. LIMITED WARRANTY 14.1 The Regents warrants to the Licensee that it has the lawful right to grant this license. 14.2 This license and the associated Inventions are provided WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE 19 22 OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT THE LICENSED PRODUCTS OR LICENSED METHODS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT. 14.3 IN NO EVENT WILL THE REGENTS BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE INVENTIONS OR LICENSED PRODUCTS. 14.4 Nothing in this Agreement shall be construed as: (14.4a) a warranty or representation by The Regents as to the validity or scope of any Regents' Patent Rights; or (14.4b) a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents of third parties; or (14.4c) an obligation to bring or prosecute actions or suits against third parties for patent infringement except as provided in Article 17; or (14.4d) conferring by implication, estoppel or otherwise any license or rights under any patents of The Regents other than Regents' Patent Rights as defined herein, regardless 20 23 of whether such patents are dominant or subordinate to Regents' Patent Rights; or (14.4e) an obligation to furnish any know how not provided in Regents' Patent Rights, except as specifically provided for under Regents' Technology Rights. 15. PATENT PROSECUTION AND MAINTENANCE 15.1 Provided that the Licensee has paid patent expenses as provided for in Paragraph 15.5, The Regents shall diligently prosecute and maintain the United States and foreign patents comprising Regents' Patent Rights using counsel of its choice, and The Regents shall provide the Licensee with copies of all relevant documentation so that the Licensee may be informed and apprised of the continuing prosecution and the Licensee agrees to keep this documentation confidential. The Regents' counsel will take instructions only from The Regents. 15.2 The Regents shall use all reasonable efforts to amend any patent application to include claims reasonably requested by the Licensee to protect the products contemplated to be sold under this Agreement. 15.3 The Licensee shall apply for an extension of the term of any patent included within Regents' Patent Rights if appropriate under the Drug Price Competition and Patent Term Restoration Act of 1984 and/or European, Japanese and other foreign counterparts of this Law. The Licensee shall prepare all such documents, and The Regents 21 24 agrees to execute such documents and to take such additional action as the Licensee may reasonably request in connection therewith. 15.4 In the event either party receives notice pertaining to infringement or potential infringement of any issued patent included within Regents' Patent Rights pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984 (and/or European and Japanese counterparts of this Law), such party shall notify the other party within ten (10) days after receipt of such notice. 15.5 The costs of preparing, filing, prosecuting and maintaining all United States patent applications contemplated by this Agreement shall be borne by the Licensee. Costs billed to The Regents by The Regents' counsel shall be rebilled to Licensee and shall be due within 30 days of rebilling by The Regents. This includes patent prosecution costs for these Inventions incurred by The Regents prior to the execution of this Agreement. Such costs will be due upon execution of this Agreement and billing by The Regents. Such prior costs will be approximately Nine Thousand Six Hundred Dollars ($9,600.00). 15.6 The Licensee shall have the continuing responsibility to notify The Regents if the Licensee or any of its sublicensees is not a small entity under the provisions of 35 USC 41(h). 15.7 The Licensee shall have the right to request The Regents to obtain patent protection on the Inventions in foreign countries if available and if it so desires. The Licensee shall notify The Regents by January 6, 1993 of its decision to obtain foreign patents. This notice concerning foreign filing shall be in writing, must identify the countries desired, and reaffirm the Licensee's obligation to underwrite the costs thereof. The absence 22 25 of such a notice from the Licensee to The Regents shall be considered an election not to secure foreign rights. 15.8 The preparation, filing and prosecuting of all foreign patent applications filed at the Licensee's request, as well as the maintenance of all resulting patents, shall be at the sole expense of the Licensee. Such patents shall be held in the name of The Regents and shall be obtained using counsel of The Regents' choice. 15.9 The Licensee's obligation to underwrite and to pay patent prosecution costs shall continue for so long as this Agreement remains in effect, provided, however, that the Licensee may terminate its obligations with respect to any given patent application or patent upon three (3) months written notice to The Regents. The Regents will use its best efforts to curtail patent costs when such a notice is received from the Licensee. The Regents may continue prosecution and/or maintenance of such application(s) or patent(s) at its sole discretion and expense; provided, however, that the Licensee shall have no further right or licenses thereunder. 15.10 The Regents shall have the right to file, prosecute or maintain patent applications at its own expense in any country in which the Licensee has not elected to file, prosecute, or maintain patent rights in accordance with this Article 15, and such applications and resultant patents shall not be subject to this Agreement. 16. PATENT MARKING 16.1 The Licensee agrees to mark all Licensed Products made, used or sold under the terms of this Agreement, or their containers, in accordance with the applicable 23 26 patent marking laws. 17. PATENT INFRINGEMENT 17.1 In the event that the Licensee shall learn of the substantial infringement of any patent licensed under this Agreement, the Licensee shall call The Regents' attention thereto in writing and shall provide The Regents with reasonable evidence of such infringement. Both parties to this Agreement agree that during the period and in a jurisdiction where the Licensee has exclusive rights under this Agreement, neither will notify a third party of the infringement of any of Regents' Patent Rights without first obtaining consent of the other party, which consent shall not be unreasonably denied. Both parties shall use their best efforts in cooperation with each other to terminate such infringement without litigation. 17.2 The Licensee may request that The Regents take legal action against the infringement of Regents' Patent Rights. Such request shall be made in writing and shall include reasonable evidence of such infringement and damages to the Licensee. If the infringing activity has not been abated within ninety (90) days following the effective date of such request, The Regents shall have the right to: (17.2a) commence suit on its own account; or (17.2b) refuse to participate in such suit, and The Regents shall give notice of its election in writing to the Licensee by the end of the one-hundredth (100th) day after receiving notice of such request from the Licensee. The Licensee may thereafter bring suit for patent infringement if and only if The Regents elects 24 27 not to commence suit and if the infringement occurred during the period and in a jurisdiction where the Licensee had exclusive rights under this Agreement. However, in the event the Licensee elects to bring suit in accordance with this paragraph, The Regents may thereafter join such suit at its own expense. 17.3 Such legal action as is decided upon shall be at the expense of the party on account of whom suit is brought and all recoveries recovered thereby shall belong to such party, provided, however, that legal action brought jointly by The Regents and the Licensee and fully participated in by both shall be at the joint expense of the parties and all recoveries shall be shared jointly by them in proportion to the share of expense paid by each party. If the Licensee pays all legal expenses, it shall have the right to offset one half of its out-of-pocket legal expenses against any earned royalties payable under Paragraph 5. 1, provided that earned royalties payable under Paragraph 5.1 shall not be reduced in any given quarter by more than [***]; any unused credit may be carried forward until the Licensee has received full credit for its creditable legal expenses. 17.4 Each party agrees to cooperate with the other in litigation proceedings instituted hereunder but at the expense of the party on account of whom suit is brought. Such litigation shall be controlled by the party bringing the suit, except that The Regents may be represented by counsel of its choice pursuant to The Regents' determination in any suit brought by the Licensee, and The Licensee may be represented by counsel of its choice pursuant to The Licensee's determination in any suit brought by The Regents. 25 ***Confidential Treatment Requested 28 18. INDEMNIFICATION 18.1 The Licensee agrees to indemnify, hold harmless and defend The Regents, its officers, employees, and agents; the sponsors of the research that led to the Inventions; and the inventors of the patents and patent applications in Regents' Patent Rights and their employers against any and all claims, suits, losses, damage, costs, fees, and expenses resulting from or arising out of exercise of this license or any sublicense. This indemnification will include, but will not be limited to, any product liability. 18.2 The Licensee, at its sole cost and expense, shall insure its activities in connection with the work under this Agreement and obtain, keep in force and maintain insurance as follows, beginning with the date that materials to be used on or by the third parties are first manufactured: Comprehensive or Commercial Form General Liability Insurance (contractual liability included) with limits as follows: (a) Each Occurrence $1,000,000 (b) Products/Completed Operations Aggregate $5,000,000 (c) Personal and Advertising Injury $1,000,000 (d) General Aggregate (commercial form only) $5,000,000 It should be expressly understood, however, that the coverages and limits referred to under the above shall not in any way limit the liability of the Licensee. The Licensee shall furnish The Regents with certificates of insurance evidencing compliance with all requirements. Such certificates shall: 26 29 (a) Provide for thirty (30) day advance written notice to The Regents of any modification. (b) Indicate that The Regents has been endorsed as an additional insured under the coverages referred to under the above. (c) Include a provision that the coverages will be primary and will not participate with nor will be excess over any valid and collectable insurance or program of self-insurance carried or maintained by The Regents. 18.3 The Regents shall promptly notify the Licensee in writing of any claim or suit brought against The Regents in respect of which The Regents intends to invoke the provisions of this Article 18. The Licensee will keep The Regents informed on a current basis of its defense of any claims pursuant to this Article 18. 19. NOTICES 19.1 Any notice or payment required to be given to either party shall be deemed to have been properly given and to be effective (a) on the date of delivery if delivered in person or (b) five (5) days after mailing if mailed by first-class certified mail, postage paid, to the respective addresses given below, or to such other address as it shall designate by written notice given to the other party. In the case of the Licensee: Signal Pharmaceuticals, Inc. 11545 Sorrento Valley Road, Suite 315 San Diego, CA 92121 Attention: Chief Executive Officer 27 30 In the case of The Regents: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA 1320 Harbor Bay Parkway, Suite 150 Alameda, California 94502 Attention: Director; Office of Technology Transfer Referring to: UC Case Nos. 92-116, 93-173, and 93-179 20. ASSIGNABILITY 20.1 This Agreement is binding upon and shall inure to the benefit of The Regents, its successors and assigns, but shall be personal to the Licensee and assignable by the Licensee only with the written consent of The Regents, which consent shall not be unreasonably withheld. 21. LATE PAYMENTS 21.1 In the event royalty payments, rebillings or fees are not received by The Regents when due, the Licensee shall pay to The Regents interest charges at a rate of ten (10) percent per annum. Such interest shall be calculated from the date payment was due until actually received by The Regents. 22. WAIVER 22.1 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. 28 31 23. FAILURE TO PERFORM 23.1 In the event of a failure of performance due under the terms of this Agreement and if it becomes necessary for either party to undertake legal action against the other on account thereof, then the prevailing party shall be entitled to reasonable attorney's fees in addition to costs and necessary disbursements. 24. GOVERNING LAWS 24.1 THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, but the scope and validity of any patent or patent application shall be governed by the applicable laws of the country of such patent or patent application. 25. PREFERENCE FOR UNITED STATES INDUSTRY 25. 1 Because this Agreement grants the exclusive right to use or sell the Inventions in the United States, the Licensee agrees that any products embodying these Inventions or produced through the use thereof will be manufactured substantially in the United States. 26. FOREIGN GOVERNMENT APPROVAL OR REGISTRATION 26.1 If this Agreement or any associated transaction is required by the law of any nation to be either approved or registered with any governmental agency, the Licensee 29 32 shall assume all legal obligations to do so. 27. EXPORT-CONTROL LAWS 27.1 The Licensee shall observe all applicable United States and foreign laws with respect to the transfer of Licensed Products and related technical data to foreign countries, including, without limitation, the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations. 28. SECRECY 28.1 With regard to confidential information ("Data"), which can be oral or written or both, received from The Regents regarding these Inventions, or received from the Licensee regarding its business, the receiving party (hereinafter "Recipient") agrees: (1) not to use the Data except for the sole purpose of performing under the terms of this Agreement; (2) to safeguard Data against disclosure to others with the same degree of care as it exercises with its own data of a similar nature; (3) not to disclose Data to others (except to its employees, agents or consultants who are bound to the Licensee by a like obligation of confidentiality) without the express written permission of the disclosing party, except that the Recipient shall not be prevented from using or disclosing any of the Data: 30 33 (a) which the Recipient can demonstrate by written records was previously known to it; (b) which is now, or becomes in the future, public knowledge other than through acts or omissions of the Recipient; or (c) which is lawfully obtained by the Recipient from sources independent of the disclosing party; (4) that the secrecy obligations hereunder are subject to the California Public Records Act; and (5) that the secrecy obligations of the Recipient with respect to Data shall continue for a period ending five (5) years from the termination date of this Agreement. 28.2 With regard to biological material received from The Regents, including any cell lines, vectors, genetic material, derivatives, products progeny or material derived therefrom ("Biological Material"), the Licensee hereby agrees: (1) not to use Biological Material except for the sole purpose of performing under the terms of this Agreement; (2) not to transfer Biological Material to others (except to its employees, agents or consultants who are bound to the Licensee by like obligations conditioning and restricting access, use and continued use of Biological Material) without the express written permission of The Regents, except that the Licensee shall not be prevented from transferring Biological Material which: 31 34 (a) becomes publicly available other than through acts or omissions of the Licensee, or (b) is lawfully obtained by the Licensee from sources independent of The Regents; (3) to safeguard Biological Material against disclosure and transmission to others with the same degree of care as it exercises with its own biological materials of a similar nature; (4) to destroy all copies of Biological Material at the termination pursuant to Article 10 or Article 11 of this Agreement; and (5) that title to the Biological Material shall automatically transfer to the Licensee at the expiration of this Agreement. 29. MISCELLANEOUS 29.1 The headings of the several sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 29.2 This Agreement will not be binding upon the parties until it has been signed below on behalf of each party, in which event, it shall be effective as of the date recited on page one. 29.3 No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed on behalf of each party. 32 35 29.4 This Agreement embodies the entire understanding of the parties and shall supersede all previous communications, representations or understandings, either oral or written, between the parties relating to the subject matter hereof. The Secrecy Agreements dated September 7, 1992 (U.C. Control No. 92-20-0437), August 13, 1992 (U.C. Control No. 93-20-0575), August 13, 1993 (U.C. Control No. 93-20-0576), and the Letters of Intent dated September 16, 1992 (U.C. Control No. 92-30-0436), and June 11, 1993 (U.C. Control No. 93-30-0379), are hereby terminated. 29.5 In case any of the provisions contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, but this Agreement shall be construed as if such invalid or illegal or unenforceable provisions had never been contained herein. 29.6 This Agreement includes Appendix A which is attached hereto. Appendix A is a Shareholder's Agreement. As long as The Regents is a shareholder under the Shareholder's Agreement, or until the Common Stock of the Company (as defined in Appendix A) is publicly traded, the Licensee agrees that it shall give The Regents' designated representative notice of all of its Board of Directors meetings, as it gives to its own board members. The designated Regents' representative shall be permitted to attend at least one meeting of the Board of Directors per year (the date and time of which shall be determined by the Licensee in its sole discretion) and to comment and ask questions during the proceedings. The Regents' representative shall be selected after consultation with the 33 36 Licensee, and it is understood that the representative is not a Director and cannot vote on matters before the Board. IN WITNESS WHEREOF, both The Regents and the Licensee have executed this Agreement, in duplicate originals, by their respective officers hereunto duly authorized, on the day and year hereinafter written. SIGNAL PHARMACEUTICALS, INC. THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By: /s/ MARK D. CARMAN By: /s/ WILLIAM T. DAVIS ---------------------------- ---------------------------- (Signature) (Signature) Name: MARK D. CARMAN Name: William T. Davis --------------------------- (Please Print) Title: V.P. OPERATION'S Title: Associate Director; ---------------------------- Office of Technology Transfer CORPORATE DEV. Date: 10/14/93 Date: 10/26/93 -------------------------- -------------------------- APPROVAL AS TO LEGAL FORM: /s/ P. MARTIN SIMPSON 10/6/93 ------------------------------ ------------ P. Martin Simpson, Jr., Resident Date Counsel Office of Technology Transfer University of California 34 EX-10.33 3 EXHIBIT 10.33 1 EXHIBIT 10.33 UC Case Nos. 92-116, 93-173, and 93-179 FIRST AMENDMENT TO EXCLUSIVE LICENSE AGREEMENT FOR METHODS FOR [***] THIS FIRST AMENDMENT TO LICENSE AGREEMENT (the "First Amendment") is effective this 22nd day of June 1997 between The Regents of the University of California, a California corporation with administrative headquarters at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550 ("The Regents"), and Signal Pharmaceuticals, Inc., a California corporation with an address at 11545 Sorrento Valley Road, Suite 315, San Diego, California 92121 ("Licensee"). BACKGROUND A. The Regents and Licensee entered into an agreement effective October 26, 1993 (UC Control No. 93-04-0786) which is entitled [***] (the "License Agreement"); B. The Regents and Licensee wish to amend the License Agreement to include rights to The Regents' undivided interest in pending U.S. Patent Application No. [***]. Rights granted in this First Amendment are limited to The Regents' undivided interest because the patent application is the result of a collaboration between The Regents and The University of Massachusetts Medical Center (UMMC) and is jointly assigned to both institutions. C. UMMC has filed conflicting patent applications, which could lead to interferences with patent applications filed under UC Case No. 93-173 and increase Licensee's patent prosecution costs under this license. D. The Regents and Licensee also wish to amend the License Agreement to show negotiated and agreed upon changes to the terms on sublicensing, confidentiality, patent enforcement, place of manufacture for Licensed Products, and dispute resolution. U.C. AGREEMENT CONTROL NUMBER 93-04-0786I 1 ***Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406 2 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 E. The parties wish to clarify and bring current the patents and patent applications that are subject to this agreement, including the addition of certain continuation-in-part applications. F. As recited in Paragraph 6.5 of the License Agreement, if the Licensee is unable to meet any of the dates set forth in Paragraph 6.4 of the License Agreement, with regard to either the [***] Technologies or the [***] Technologies, the parties shall in good faith re-establish a date or dates that are reasonable under the then current circumstances. Since Signal has made significant progress in the development of both the [***] Technologies and the [***] Technologies, The Regents wishes to amend the License Agreement to extend the due diligence dates recited in Paragraph 6.4 by [***] as requested by Licensee. Licensee and The Regents agree: 1. Paragraph 1. 1 of Article 1 (Definitions) of the License Agreement is removed in its entirety and replaced with the following: 1.1 "Regents' Patent Rights" means The Regents' interest in subject matter claimed in or covered by any of the following: 1.1.(1) Pending U.S. Patent Application Serial No. [***] entitled "[***]", filed [***], [***] by [***] (UC Case 92-116-2), which is a continuation application to U.S. Patent Application [***] (UC Case No. 92-116-1); 1.1.(2) Pending U.S. Patent Application Serial [***] entitled "[***]", filed [***] by [***] (UC Case 92-116-3); 1.1.(3) U.S. Patent No. [***] entitled "[***] [***]", filed on [***] by [***] (UC Case No. 93-173-1); 1.1.(4) Pending U.S. Patent Application Serial No. [***] entitled "[***]", filed [***] by [***] (UC Case No. 93-173-2); 2 ***Confidential Treatment Requested 3 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 1. 1. (5) U. S. Patent No. [***] entitled "[***]", filed [***] by [***] (UC Case No. 93-173-3); 1. 1. (6) U. S. Patent No. [***] entitled "[***]", filed on [***] by [***] (UC Case No. 93-173-4); 1. 1. (7) Pending U.S. Patent Application Serial No. [***] entitled "[***]", filed [***] by [***] (UC Case No. 93-173-5); 1.1.(8) Pending U.S. Patent Application Serial No. [***], entitled "[***]", filed [***] by [***] (UC Case No. 93-179-1); 1.1.(9) Pending U.S. Patent Application Serial No. [***], entitled "[***]", filed [***] by [***] (UC Case No. 93-179-2); and continuing applications thereof including divisions and substitutions but excluding continuation-in-part applications, except to the extent that those continuation-in-part applications contain claims supported in the original application; any patents issuing on said application or continuing applications including reissues; and any corresponding foreign applications or patents. 2. Paragraph 3.3 of Article 3 (Sublicensing) of the License Agreement is removed in its entirety and replaced with the following: 3.3 Upon termination of this Agreement or reduction of its licenses to non-exclusive, for any reason, The Regents shall accept assignment of sublicenses, to the extent that it is not unreasonable for The Regents to do so as a public entity and provided that: (a) The Licensee was not in breach of this Agreement when entering into the sublicense; 3 ***Confidential Treatment Requested 4 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 (b) The sublicensee is not in breach of its sublicense agreement at the time of termination of this Agreement; and (c) The sublicensee acquires no rights from or obligations on the part of The Regents other than those that are specifically granted in this Agreement, and the sublicensee assumes all obligations to The Regents required of Licensee by this Agreement, including past due obligations existing at the time of assumption of the sublicense, as well as any additional payments required by the sublicense. 3. Paragraph 6.4 of Article 6 (Due Diligence) of the License Agreement is removed in its entirety and replaced with the following: [***] 6.4h reasonably fill the market demand for Licensed Products following commencement of marketing at any time during the exclusive period of this Agreement; 4 ***Confidential Treatment Requested 5 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 then, subject to Paragraph 6.5, The Regents shall have the right and option either to terminate this Agreement or to reduce the Licensee's exclusive license to a nonexclusive license. This right, if exercised by The Regents, supersedes the rights granted in Article 2 (Grant). 4. The fourth sentence of Paragraph 6.5 of the License Agreement which reads, "The annual license maintenance fee shall begin to be payable in [***] for the [***] Technologies, or [***] for the [***] Technologies, on the anniversary date of the effective date hereof and shall continue until sales of the delayed product begin," is removed and replaced with the following: "The annual license maintenance fee shall begin to be payable in [***] for the [***] Technologies, or [***] for the [***] Technologies, on the anniversary date of the effective date hereof and shall continue until sales of the delayed product begin. " 5. Paragraph 6.6 of Article 6 (Due Diligence) of the License Agreement is removed in its entirety and replaced with the following: 6.6 Either party to this Agreement shall refer a dispute arising under this Article to mediation prior to commencing litigation with the other party under this Agreement. The mediation shall be conducted in accordance with the rules of the Commercial Arbitration and Mediation Center for the Americas. 6. Article 25 (Preference for United States Industry) of the License Agreement is removed in its entirety and replaced with the following: 25.1 Because this Agreement grants the exclusive right to use or sell the Inventions in the United States, the Licensee agrees that any products sold in the U.S. embodying these Inventions or produced through the use thereof will be manufactured substantially in the United States. 5 ***Confidential Treatment Requested 6 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 7. Subparagraph 28.1(3) of Article 28 (Secrecy) of the License Agreement is removed in its entirety and replaced with the following: 28.1(3) not to disclose Data to others (except to its employees, agents, consultants, investors or collaborators who are bound to the Licensee by a like obligation of confidentiality) without the express written permission of the disclosing party, except that the Recipient shall not be prevented from using or disclosing any of the Data: (a) which the Recipient can demonstrate by written records was previously known to it; (b) which is now, or becomes in the future, public knowledge other than through acts or omissions of the Recipient; or (c) which is lawfully obtained by the Recipient from sources independent of the disclosing party. 8. Licensee and The Regents recognize that the license granted in the License Agreement to pending U.S. Patent Application No. [***] may be limited by the outcome of an interference, if one is declared, between The Regents and UMMC. The Licensee will, however, have a license under any rights remaining to The Regents following any interference proceeding. 6 ***Confidential Treatment Requested 7 First Amendment to Exclusive License Agreement U.C. Control No. 93-04-0786 9. Except as amended, modified and supplemented by the terms of this First Amendment, the License Agreement shall remain in full force and effect in accordance with its terms. The parties have executed this FIRST AMENDMENT TO THE LICENSE AGREEMENT by their respective and duly authorized officers, as evidenced by the signatures below. SIGNAL PHARMACEUTICALS, INC. THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By: /s/ CARL BOBKOSKI By: /s/ TERENCE A. FEUERBORN -------------------------------- --------------------------------- (Signature) (Signature) Name: /s/ CARL BOBKOSKI Name: ------------------------------ ------------------------------- (Please Print) Terence A. Feuerborn Title: E.V.P. Title: Executive Director Research Administration and Technology Transfer Date: 6/19/97 Date: 6/22/97 ------------------------------ ------------------------------- Approved as to legal form: /s/ SANDRA S. SCHULTZ 6/14/92 ----------------------- ------- Sandra S. Schultz, Attorney Date Office of Technology Transfer University of California 7 EX-10.34 4 EXHIBIT 10.34 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.34 [UNIVERSITY OF CALIFORNIA LETTERHEAD] February 2,1998 Carl F. Bobkoski Executive Vice President Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 RE: Second Amendment to Exclusive License Agreement for: Methods for Production of Neuroblasts and Testing Drugs... UC Case No. 92-116 etc.: UC Agreement Control No. 93-04-0786 Dear Carl: I write regarding a proposed designated sublicense agreement, which Signal Pharmaceuticals, Inc. "Signal") is negotiating for the [***] Technologies (as defined in the subject License Agreement) with a certain other party ("Designated Sublicensee"). Signal wishes to issue this sublicense with a royalty base that differs from the royalty base defined in the License Agreement and on other terms and conditions which vary from the License Agreement. Accordingly: The Regents agrees to waive certain provisions of the License Agreement solely for this designated sublicense in consideration of Signal agreeing that (capitalized terms should have the meaning set forth herein, if not specified herein, the meaning defined in the above referenced License Agreement): (a) The designated sublicense grant will be confined to a field allowing the Designated Sublicensee to use the [***] Technologies in connection with [***] ***Confidential Treatment Requested 2 Carl F. Bobkoski February 2, 1998 Page 2 (b) Signal will pay The Regents an earned royalty on Net Sales of Licensed Product sold by the Designated Sublicensee, its affiliates and sublicensees as set forth in Appendix A hereto; accordingly, solely for purposes of the designated sublicense agreement. Paragraphs 5.1 through 5.3 and 5.9 of the License Agreement are hereby superseded by the terms and conditions set forth in Appendix A. (c) Upon termination of the License Agreement or reduction of Signal's license under the License Agreement to non-exclusive, for any reason, The Regents shall accept assignment of this designated sublicense, as provided for in the First Amendment to Exclusive License Agreement for [***] effective June 22, 1997. Notwithstanding the foregoing, The Regents shall accept assignment of this sublicense even if Signal was in breach of the License Agreement when entering into the sublicense. (d) The designated sublicense agreement will require that Sublicensee (itself or through a designee) develop at least [***] as follows: - [***] - [***] - [***] - [***] Notwithstanding the foregoing, the designated sublicense agreement may provide for reasonable extensions of the foregoing diligence deadlines, if despite diligent efforts such deadline is or may not be met. However, in the event that The Regents accepts assignment of the sublicense, The Regents shall not be required to provide any extension of the diligence deadlines and any extension of the diligence deadlines shall be at the sole discretion of The Regents. Apart from the above-specified changes, the subject sublicense agreement will adhere to all the sublicensing provisions of the License Agreement. However, to the extent this letter and the License Agreement conflict solely with respect to the designated sublicense agreement this letter will control. ***Confidential Treatment Requested 3 Carl F. Bobkoski February 2, 1998 Page 3 If you agree to the terms of this letter, please sign both enclosed originals and return them to me. I will return a fully executed original to you for your records. Sincerely, /s/ PATRICIA ANDERSON COTTON, PH.D. ----------------------------------- Patricia Anderson Cotton, Ph.D. Licensing Officer ______________________________________________________________________________ SIGNAL PHARMACEUTICALS THE REGENTS OF THE UNIVERSITY INC.: OF CALIFORNIA: By: /s/ CARL F. BOBKOSKI By: /s/ TERENCE A. FEUERBORN ------------------------------- ------------------------------- (Signature) (Signature) Name: Carl F. Bobkoski Name: Terence A. Feuerborn Title: Executive Vice President Title: Executive Director Office of Research Administration and Technology Transfer Date: Feb. 13, 98 Date: 3-2-98 ----------------------------- ----------------------------- [ILLEGIBLE] /s/ P. Martin Simpson, Jr. 3-Jan 98 ----------------------- -------- P. Martin Simpson, Jr. Date Resident Counsel Office of Technology Transfer University of California 4 APPENDIX A TO SECOND AMENDMENT DATED FEBRUARY 2, 1998 Signal and The Regents agree that solely for purposes of the designated sublicense agreement: 1. The following terms defined in Paragraphs 1.2, 1.3, 1.4 and 1.5 of the License Agreement shall have the following meanings: 1.2 "Licensed Product" means any product, composition or material (i) the sale of which would, but for the licenses granted to the Designated Sublicensee, infringe a Valid Claim within The Regents' Patent Rights in the country for which such product, composition or material is sold or (ii) is manufactured or administered to a patient by a Licensed Method. 1.3 "Licensed Method" means any method (i) the practice of which would, but for the license granted to Designated Sublicensee, infringe a Valid Claim within Regents' Patent Rights or (ii) consisting of a method of [***] 1.4 "Net Sales" means the total amount invoiced to third parties on sales of Licensed Products by Designated Sublicensee, its affiliates or sublicensees, less the following reasonable and customary deductions to the extent applicable to such invoiced amounts: (i) all trade, cash and quantity credits, discounts, refunds or government rebates; (ii) amounts for claims, allowances or credits for returns, retroactive price reductions, or chargebacks; (iii) packaging, handling fees and prepaid freight, sales taxes, duties and other governmental charges (including value added tax); and (iv) provisions for uncollectible accounts determined in accordance with reasonable accounting practices, consistently applied to all products of the selling party; provided, however, that in the case of Patient-Specific Licensed Products, "Net Sales" shall equal [***] of the foregoing amounts (after the deductions described in (i) through (iv) above). For purposes of the foregoing, it is understood that Net Sales shall include only the amount invoiced for materials consisting of Licensed Products (less the foregoing deductions and adjustments) and shall not include charges related to services [***] performed in connection with the sale of such Licensed Products; accordingly, Net Sales shall not include, without limitation, charges for [***] or the like. For the removal of doubt, Net Sales shall not include sales by Sublicensee to its affiliates for resale, provided that if Sublicensee sells a Licensed Product to an affiliate for resale, Net Sales shall include the amounts invoiced by such affiliate to third parties on the resale of such Licensed Product. 1.5 "Affiliate" means any corporation or other business entity in which the Licensee or Designated Sublicensee owns or controls, directly or indirectly, at least fifty (50%) of the outstanding stock or other voting rights entitled to elect directors; provided however, that any country where the local law shall not permit foreign equity participation of at least 50%, then an ***Confidential Treatment Requested 5 "Affiliate" shall include any company in which the Licensee or Sublicensee owns or controls, directly or indirectly, the maximum percentage of such outstanding stock or voting rights permitted by local law. 2. The following definitions are added to Article I (Definitions) of the License Agreement: 1.9 [***] 2.0 "Valid Claim" shall mean a claim of an issued and unexpired patent or a claim of a pending patent application within Regents' Patent Rights which has not been held unpatentable, invalid or unenforceable by a court or other government agency of competent jurisdiction and has not been admitted to be invalid or unenforceable through reissue, re-examination, disclaimer or otherwise. Notwithstanding the foregoing, if a claim of a pending patent application within Regents' Patent Rights has not issued as a claim of an issued patent within Regent's Patent Rights, on or before [***] such pending claim shall not be a Valid Claim for purposes of the sublicense agreement unless and until such claim issues. 3. Paragraphs 5.1, 5.2, 5.3 and 5.9 of the License Agreement shall be removed and replaced with the following: 5.1(a) The Licensee shall pay The Regents an earned royalty of [***] of the Net Sales of Licensed Product sold by the Designated Sublicensee, its Affiliates or sublicensees; provided that the earned royalty shall be [***] of the Net Sales of Licensed Products, if such Net Sales by Licensee, its Affiliates and sublicensees (including without limitation, Designated Sublicensee, its Affiliates and sublicensees) are less than [***] per year in any given calendar year of sales. 5.1(b) The earned royalty due under Paragraph 5.1(a) above with respect to a Licensed Product which is not covered by any Valid Claim but is manufactured or administered to patients using a Licensed Method not covered by a Valid Claim shall be [***]. 5.2 Royalties shall continue under Paragraph(s) 5.1(a) and 5.1(b) above with respect to each Licensed Product, (i) on a country-by-country basis for so long as the sale of such Licensed Product would, but for the license granted to Designated Sublicensee, infringe a Valid Claim within the Regents' Patent rights in such country or (ii) with respect to a Licensed Product(s) not covered by any Valid Claim but that is manufactured or administered to patients using a Licensed Method not covered by a Valid Claim for ten (10) years from the date of first commercialization of the first such Licensed Product in any country. ***Confidential Treatment Requested 6 5.3 Earned royalties due on Net Sales of Licensed Products by Designated Sublicensee, its affiliates or sublicensees shall be deemed accrued in the quarter in which Licensee receives payment from the Sublicensee with respect to such Net Sales, but in no event later than the quarter following the quarter in which Net Sales are made by the Sublicensee, its affiliates or sublicensee. EX-10.36 5 EXHIBIT 10.36 1 ***Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.36 LICENSE AGREEMENT BETWEEN SIGNAL PHARMACEUTICALS, INC. AND THE REGENTS OF THE UNIVERSITY OF CALIFORNIA Case No. SD97-026 2 EXCLUSIVE LICENSE AGREEMENT This agreement ("Agreement") is made this 18th day of February, 1998 ("Effective Date") by and between Signal Pharmaceuticals, Inc., a California corporation having a principal place of business at 5555 Oberlin Drive, San Diego, California 92121 ("LICENSEE") and The Regents Of The University of California, a California corporation having its statewide administrative offices at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550 ("THE REGENTS"), represented by its San Diego campus having an address at University of California, San Diego, Technology Transfer Office, Mailcode 0910, 9500 Gilman Drive, La Jolla, California 92093-0910 ("UCSD") RECITALS Whereas, certain inventions, generally characterized as [***] ("Invention"), Case No. SD97-026, were made in the course of research at UCSD by [***] ("Inventors") and are covered by Regents' Patent Rights as defined below; Whereas, U.S. Patent Application, Serial No. [***] was filed in the United States Patent and Trademark Office by the Inventors on [***] and such application is included within Regents' Patent Rights; Whereas, the Inventors are employees of UCSD and as such are under an obligation to assign their rights to the Invention to THE REGENTS; Whereas, the development of the Invention was sponsored by Department of Health and Human Services and as a consequence this license is subject to overriding obligations to the Federal Government under 35 U.S.C. Sections 200-212 and applicable regulations; Whereas, LICENSEE and THE REGENTS executed a secrecy agreement, identified as U.C. Control No. 97-20-0108 and effective on April 17, 1997 ("Secrecy Agreement") under which LICENSEE evaluated the Invention; Whereas, LICENSEE and THE REGENTS executed a letter agreement, identified as U.C. Control No. 97-30-0130 and effective on June 10, 1997 ("Letter Agreement"), under which THE REGENTS and LICENSEE have negotiated the grant of license under Regents' Patent Rights; ***Confidential Treatment Requested 3 Page 2 of 25 Exclusive License Agreement Case No. SD97-026 Whereas, LICENSEE is a "small business concern" as defined in 37 CFR Section 121-12(a); Whereas, THE REGENTS is desirous that the Invention be developed and utilized to the fullest possible extent so that its benefits can be enjoyed by the general public; Whereas, LICENSEE is desirous of obtaining certain rights from THE REGENTS for commercial development, use, and sale of the Invention, and THE REGENTS is willing to grant such rights; Whereas, LICENSEE desires to issue common stock of LICENSEE to THE REGENTS under the agreement appended hereto in Appendix A ("Shareholder's Agreement") as partial consideration for such rights; and Whereas, both parties recognize and agree that royalties due hereunder shall be paid on both pending patent applications and issued patents. Now, Therefore, the parties agree: ARTICLE 1. DEFINITIONS. 1.1 "Affiliate" means any corporation or other business entity in which LICENSEE owns or controls, directly or indirectly, at least fifty percent (50%) of the outstanding stock or other voting rights entitled to elect directors, or in which LICENSEE is owned or controlled directly or indirectly by at least 50% of the outstanding stock or other voting rights entitled to elect directors; but in any country where the local law does not permit foreign equity participation of at least 50%, then an "Affiliate" includes any company in which LICENSEE owns or controls or is owned or controlled by, directly or indirectly, the maximum percentage of outstanding stock or voting rights permitted by local law. 1.2 "Licensed Method" means any method that is covered by Regents' Patent Rights, the use of which would constitute, but for the license granted to LICENSEE under this Agreement, an infringement of any pending or issued claim within Regents' Patent Rights. 1.3 "Licensed Product" means any material that is either 4 Exclusive License Agreement Page 3 of 25 Case No. SD97-026 covered by Regents' Patent Rights, that is identified or produced by the Licensed Method, or that the use of which would constitute, but for the license granted to LICENSEE under this Agreement, an infringement of any pending or issued claim within Regents' Patent Rights. 1.4 "Net Sales" means the total of the gross invoice prices of Licensed Products sold by LICENSEE, an Affiliate, or a sublicensee of LICENSEE, less the sum of the following actual and customary deductions where applicable: cash, trade, or quantity discounts, including chargebacks; sales, use, tariff, import/export duties or other excise taxes imposed on particular sales; transportation charges and allowances; credits to customers because of rejections or returns; or bad debts. For purposes of calculating Net Sales, transfers to an Affiliate or sublicensee for end use by the Affiliate or sublicensee shall be treated as sales at list price. 1.5 "Regents' Patent Rights" means any of the following: the U.S. patent application, serial number [***], entitled [***] disclosing and claiming the Invention, filed by Inventors and assigned to THE REGENTS; and continuing applications thereof including divisions, substitutions, and continuations-in-part (but only to extent the claims thereof are enabled by disclosure of the parent application); any patents issuing on said applications including reissues, reexaminations and extensions; and any corresponding foreign applications or patents. ARTICLE 2. GRANT. 2.1 Subject to the limitations set forth in this Agreement, THE REGENTS grants to LICENSEE a world-wide license under Regents' Patent Rights to make, have made, use, sell, have sold, offer for sale and import Licensed Products and to practice Licensed Methods. 2.2 Except as otherwise provided in this Agreement, the license granted in Paragraph 2.1 hereof shall be exclusive for the life of the Agreement. 2.3 The license granted in Paragraph 2.1 hereof is subject to all the applicable provisions of any license to the United ***Confidential Treatment Requested 5 Exclusive License Agreement Page 4 of 25 Case No. SD97-026 States Government executed by THE REGENTS and is subject to the overriding obligations to the U.S. Government under 35 U.S.C. Sections 200-212 and applicable governmental implementing regulations. 2.4 The license granted in Paragraph 2.1 hereof is for all fields of use. 2.5 THE REGENTS reserves the right to use the Invention and associated technology for educational and research purposes. ARTICLE 3. SUBLICENSES. 3.1 THE REGENTS also grants to LICENSEE the right to issue sublicenses to third parties to make, have made, use, sell, have sold, offer for sale and import Licensed Products and to practice Licensed Methods, as long as LICENSEE has current exclusive rights thereto under this Agreement. To the extent applicable, sublicenses shall include all of the rights of and obligations due to THE REGENTS (and, if applicable, the United States Government) that are contained in this Agreement. 3.2 LICENSEE shall promptly provide THE REGENTS with a copy of each sublicense issued; collect and guarantee payment of all payments due THE REGENTS from sublicensees; and summarize and deliver all reports due THE REGENTS from sublicensees. 3.3 In the event that the license granted in this Agreement is terminated, THE REGENTS shall assume any sublicenses granted by LICENSEE hereunder, and THE REGENTS shall be held only to the obligations of THE REGENTS under this Agreement. ARTICLE 4. LICENSE-ISSUE FEE. 4.1 Within seven days after the Effective Date, LICENSEE shall pay to THE REGENTS [***], and issue to THE REGENTS [***] shares of LICENSEE's common stock (collectively, the "License Issue Fee") in accordance with the Shareholder's Agreement and in the manner provided in paragraph 7.1 hereof. 4.2 The License-Issue Fee payable by LICENSEE as specified in paragraph 4.1 hereinabove is non-refundable, non-cancelable, ***Confidential Treatment Requested 6 Exclusive License Agreement Page 5 of 25 No. SD971-0426 and is not an advance against royalties. ARTICLE 5. MILESTONE PAYMENTS. 5.1 Within thirty (30) days following (i) [***] (ii) [***], whichever occurs first, LICENSEE shall pay to THE REGENTS [***] shares of LICENSEE's common stock in accordance with the Shareholder's Agreement and in the manner provided in paragraph 7.1 hereof. 5.2 Within thirty (30) days following the date LICENSEE [***], LICENSEE shall pay to THE REGENTS [***] and issue to THE REGENTS [***] shares of LICENSEE's common stock in accordance with the Shareholder's Agreement and in the manner provided in paragraph 7.1 hereof. 5.3 Within thirty (30) days following the date LICENSEE [***], LICENSEE shall pay to THE REGENTS [***] and issue to THE REGENTS [***] shares of LICENSEE's common stock in accordance with the Shareholder's Agreement and in the manner provided in paragraph 7.1 hereof. 5.4 The milestone payments specified in paragraphs 5.1, 5.2 and 5.3 hereinabove are non-refundable and are not an advance against earned royalties. ARTICLE 6. ROYALTIES. 6.1 Earned Royalties. LICENSEE shall also pay to THE REGENTS an earned royalty of one percent (1.0%) of the Net Sales, except that in any given calendar quarter in which the Net Sales ***Confidential Treatment Requested 7 Exclusive License Agreement Page 6 of 25 Case No. SD97-026 total less than [***] the earned royalty payable by LICENSEE to THE REGENTS shall be [***] of such Net Sales. ARTICLE 7. PAYMENT TERMS. 7.1 Stock Payments. The parties understand that THE REGENTS' Patent Policy (effective November 18, 1985) provides that the Inventors as a group are entitled to forty-two and one-half percent (42.5%) of net royalties and fees, whether in the form of cash or equity, received by THE REGENTS for licensing of the Invention to LICENSEE. The parties further understand that THE REGENTS' Policy on Accepting Equity When Licensing University Technology (effective February 16, 1996) provides that each of the Inventors may elect to: (i) directly receive his or her share of such equity, or (ii) have THE REGENTS accept his or her share of the equity. Accordingly, with respect to any payment in the form of equity due to THE REGENTS under this Agreement, THE REGENTS shall provide written notice to LICENSEE, within thirty (30) days after the execution of this Agreement by both parties, of the manner in which THE REGENTS would like any equity payments due under this Agreement distributed. 7.2 Cash Payments. All monies due THE REGENTS are payable in United States dollars, all checks for such monies shall be made payable to "The Regents of the University of California", referencing THE REGENTS' taxpayer identification number, 95-6006144, and such checks shall be delivered to THE REGENTS pursuant to Article 20 (NOTICES). When Licensed Products are sold for monies other than United States dollars, LICENSEE shall first determine the earned royalty in the currency of the country in which Licensed Products were sold and then convert the amount into equivalent United States funds, using the exchange rate quoted in the Wall Street Journal on the last business day of the applicable reporting period. 7.3 Royalties shall accrue in each country for the duration of Regents' Patent Rights in that country and are payable to THE REGENTS when Licensed Products are invoiced, or if not invoiced, when delivered to a third party. For earned royalties accruing on sale for cash (or the equivalent thereof) outside the United States, LICENSEE may delay payment of earned royalties until it actually receives payment from its customer, provided that such ***Confidential Treatment Requested 8 Exclusive License Agreement Page 7 of 25 Case No. SD97-026 delay does not exceed three (3) months from the date of invoice. 7.4 Paragraphs 1.3, 1.4 and 1.6 define Licensed Methods, Licensed Products and Regents' Patent Rights so that royalties shall be payable on products and methods covered by pending applications and issued patents, provided that no earned royalties shall be payable under Regents' Patent Rights on pending claims once the claims are no longer pending due to abandoning prosecution thereof or that are pending more than thirty (30) years from the Effective Date. In no event shall any royalty be due under Regents' Patent Rights after the expiration of the last-to-expire patent licensed hereunder which covers LICENSEE's activities. 7.5 LICENSEE shall pay earned royalties quarterly on or before February 28, May 31, August 31 and November 30 of each calendar year. Each such payment shall be for earned royalties accrued within LICENSEE's most recently completed calendar quarter. 7.6 Royalties earned on sales occurring in any country outside the United States may not be reduced by any taxes, fees, or other charges imposed by the government of such country on the payment of royalty income. LICENSEE is also responsible for all bank transfer charges. Notwithstanding this, all payments made by LICENSEE in fulfillment of THE REGENTS' tax liability in any particular country shall be credited against earned royalties or fees due THE REGENTS for that country. 7.7 If at any time legal restrictions prevent the prompt remittance of part or all royalties by LICENSEE with respect to any country where a Licensed Product is sold, LICENSEE shall have the right and option to make such payments by depositing the amount thereof in local currency to THE REGENTS' account, if any, in a bank or other depository in such country. THE REGENTS will use reasonable efforts to transfer the monies held in the account specified in this Paragraph 7.7 to the United States. If after one (1) year from the date of the first deposit into that account, there are still legal restrictions that prevent THE REGENTS from transferring the monies, THE REGENTS shall transfer the impounded funds back to LICENSEE, and LICENSEE shall convert the amount owed to THE REGENTS into United States funds and shall pay THE REGENTS directly from its U.S. source of funds for the amount impounded. LICENSEE shall then pay all future royalties ***Confidential Treatment Requested 9 Exclusive License Agreement Page 8 of 25 Case No. SD97-026 due to THE REGENTS with respect to Net Sales in such country from its U.S. source of funds so long as the legal restrictions described in this Paragraph 7.7 still apply. 7.8 In the event that any patent or patent claim within The Regents' Patent Rights is held invalid in a final decision by a patent office from which no appeal or additional patent prosecution has been or can been taken, or by a court of competent jurisdiction and last resort and from which no appeal has been or can be taken, all obligation to pay royalties based on that patent or claim or any claim patentably indistinct therefrom shall cease as of the date of such final decision. LICENSEE shall not, however, be relieved from paying any royalties that accrued before such final decision or that are based on another patent or claim not involved in such final decision. 7.9 No royalties may be collected or paid on Licensed Products sold to the account of the U.S. Government or any agency thereof as provided for in the license to the U.S. Government. 7.10 In the event royalty payments, rebillings or fees payable in cash are not received by THE REGENTS when due, LICENSEE shall pay to THE REGENTS interest charges at a rate of ten (10) percent per annum. Such interest shall be calculated from the date payment was due until actually received by THE REGENTS. ARTICLE 8. DUE DILIGENCE. 8.1 Upon execution of this Agreement, LICENSEE shall diligently proceed with the development, manufacture and sale of Licensed Products and shall earnestly and diligently endeavor to market the same within a reasonable time after execution of this Agreement. 8.2 LICENSEE shall endeavor to obtain all necessary governmental approvals for the manufacture, use and sale of Licensed Products. 8.3 LICENSEE shall: (a) [***] ***Confidential Treatment Requested 10 Exclusive License Agreement Page 9 of 25 Case No. SD97-026 (b) [***] (c) [***] (d) [***] (d) reasonably fill the market demand for Licensed Products following commencement of marketing at any time during the exclusive period of this Agreement. 8.4 In addition to the obligations set forth above, LICENSEE shall spend not less than [***] during [***] of this Agreement for the development of Licensed Products. LICENSEE may, at its sole option, fund the research of [***] and credit the amount of such funding actually paid to UCSD against its obligation under this paragraph. 8.5 Subject to paragraphs 8.1, 8.2 and 8.6 hereof, if LICENSEE believes that it will be unable to perform any of its obligations under paragraphs 8.3 or 8.4 hereinabove, LICENSEE shall deliver notice to THE REGENTS of its belief in its prospective inability to perform and reasons therefor, at least three (3) months before the date when such obligation or obligations to perform comes due. This notice shall be subject to Article 20 (NOTICES). Upon receipt of such notice, LICENSEE and THE REGENTS shall negotiate in good faith and for a period not to exceed three (3) months from the date of such notice ("Renegotiation Period") to re-establish a date or dates for performance of such obligation or obligations, which date or dates the parties consider reasonable under the then-current circumstances, and to establish what consideration, if any, THE REGENTS shall be entitled to in consideration for such re-established date or dates. If LICENSEE and THE REGENTS are unable to mutually agree within the Renegotiation Period to a reestablished date or dates for performance by LICENSEE and/or consideration for THE REGENTS, then THE REGENTS shall have the *** Confidential Treatment Requested 11 Exclusive License Agreement Page 10 of 25 Case No. SD97-026 right and option to either terminate this Agreement or reduce LICENSEE's exclusive license to a nonexclusive license. This right, if exercised by THE REGENTS, shall supersede the rights granted in Article 2 (GRANT). 8.6 Notwithstanding any other provision of this Article 8, LICENSEE shall be entitled to exercise its prudent and reasonable business judgment in the manner in which LICENSEE proceeds to meet its obligations under paragraphs 8.1, 8.2, 8.3 and 8.4 hereinabove. ARTICLE 9. PROGRESS AND ROYALTY REPORTS. 9.1 Progress Reports. (a) Beginning February 28, 1998 and semi-annually thereafter, LICENSEE shall submit to THE REGENTS a progress report covering LICENSEE's (and any Affiliate's or sublicensee's) activities related to the development and testing of all Licensed Products and the obtaining of the governmental approvals necessary for marketing. Progress reports shall be made for each Licensed Product until the first commercial sale of that Licensed Product occurs in the United States. These progress reports shall be considered "Confidential Information" for all purposes of Article 28 (SECRECY) hereof and shall be subject to the terms thereof. (b) Progress reports submitted under this paragraph should include, but are not limited to, the following topics: (1) summary of work completed; (2) summary of work in progress; (3) current schedule of anticipated events or milestones; (4)market plans for introduction of Licensed Products; and (5) a summary of resources (dollar value) spent in the reporting period. 12 Exclusive License Agreement Page 11 of 25 Case No. SD97-026 (c) LICENSEE shall report to THE REGENTS, in its immediately subsequent progress report, the date of first commercial sale of a Licensed Product in each country. 9.2 Royalty Reports. After the first commercial sale of a Licensed Product anywhere in the world, LICENSEE shall make quarterly royalty reports to THE REGENTS on or before each February 28, May 31, August 31 and November 30 of each year. Each royalty report shall cover LICENSEE's most recently completed calendar quarter and shall show: (a) the gross sales and Net Sales of Licensed Products sold during the most recently completed calendar quarter; (b) the number of each type of Licensed Product sold; (c) the royalties, in U.S. dollars, payable with respect to sales of Licensed Products; (d) the method used to calculate the royalty; and (e) the exchange rates used. If no sales of Licensed Products have been made during any reporting period, a statement to this effect is required. ARTICLE 10. BOOKS AND RECORDS. 10.1 LICENSEE shall keep accurate books and records showing all Licensed Products manufactured, used, and/or sold under the terms of this Agreement. Books and records must be preserved for at least five (5) years from the date of the royalty payment to which they pertain. 10.2 Books and records shall be open to inspection by representatives or agents of THE REGENTS at reasonable times. THE REGENTS shall bear the fees and expenses of examination; but if an error in royalties of more than ten percent (10%) of the total royalties due for any year is discovered in any examination, then LICENSEE shall bear the fees and expenses of that examination. 13 Exclusive License Agreement Page 12 of 25 Case No. SD97-026 ARTICLE 11. TERM OF THE AGREEMENT. 11.1 Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of this Agreement, this Agreement shall be in force from the Effective Date and shall remain in effect for the life of the last-to-expire issued patent licensed under this Agreement; or if no patent in the Regents' Patent Rights issues, until the date of abandonment of the last patent application in the Regents' Patent Rights. 11.2 Any termination of this Agreement shall not affect the rights and obligations set forth in the following Articles: (a) Article 10 (BOOKS AND RECORDS); (b) Article 13 (DISPOSITIONS OF LICENSED PRODUCT ON HAND UPON TERMINATION); (c) Article 14 (USE OF NAMES AND TRADEMARKS); (d) Article 19 (INDEMNIFICATION); (e) Article 23 (FAILURE TO PERFORM); (f) Article 28 (SECRECY); and (g) Article 29 (DISPUTE RESOLUTION). ARTICLE 12. TERMINATION. 12.1 Termination by The Regents. If LICENSEE fails to perform or violates any term of this Agreement, then THE REGENTS may give written notice of default ("Notice of Default") to LICENSEE. If LICENSEE fails to repair the default within ninety (90) days of the effective date of Notice of Default, THE REGENTS may terminate this Agreement and the licenses herein by a second written notice ("Notice of Termination") to LICENSEE. If a Notice of Termination is sent to LICENSEE, this Agreement shall automatically terminate on the effective date of that notice. Termination shall not relieve LICENSEE of its obligation to pay any fees owing at the time of termination and shall not impair any accrued right of THE REGENTS. These notices are subject to 14 Exclusive License Agreement Page 13 of 25 Case No. SD97-026 Article 20 (Notices). 12.2 Termination by Licensee. (a) LICENSEE has the right at any time to terminate this Agreement in whole or as to any portion of Regents' Patent Rights by giving notice in writing to THE REGENTS. Notice of termination shall be subject to Article 20 (NOTICES), and termination of this Agreement shall be effective ninety (90) days from the effective date of notice. (b) Any termination under the above paragraph does not relieve LICENSEE of any obligation or liability accrued under this Agreement prior to termination or rescind any payment made to THE REGENTS or anything done by LICENSEE prior to the time termination becomes effective. Termination does not affect in any manner any rights of THE REGENTS arising under this Agreement prior to termination. ARTICLE 13. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION. 13.1 Upon termination of this Agreement, LICENSEE is entitled to dispose of all previously made or partially made Licensed Products, but no more, within a period of one hundred and twenty (120) days provided that the sale of those Licensed Products is subject to the terms of this Agreement, including but not limited to the rendering of reports and payment of royalties required under this Agreement. ARTICLE 14. USE OF NAMES AND TRADEMARKS. 14.1 Nothing contained in this Agreement confers any right to use in advertising, publicity, or other promotional activities any name, trade name, trademark, or other designation of either party hereto (including contraction, abbreviation or simulation of any of the foregoing). Unless required by law, the use by LICENSEE of the name, "The Regents Of The University Of California" or the name of any campus of the University Of California is prohibited. 14.2 THE REGENTS may disclose to the Inventors the terms and 15 Exclusive License Agreement Page 14 of 25 Case No. SD97-026 conditions of this Agreement upon their request. If such disclosure is made, THE REGENTS shall require that the Inventors not disclose any such terms or conditions to others. 14.3 If a third party inquires whether a license to Regents' Patent Rights is available, THE REGENTS may disclose the existence of this Agreement and the extent of the grant in Article 2 to such third party, but shall not disclose the name of LICENSEE or any other term of this Agreement, except where THE REGENTS are required to disclose such information under either the California Public Records Act or other requirement of applicable law. ARTICLE 15. LIMITED WARRANTY. 15.1 THE REGENTS warrants to LICENSEE that it has the lawful right to grant this license. 15.2 This license and the associated Invention are provided WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT THE LICENSED PRODUCTS OR LICENSED METHODS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT. 15.3 IN NO EVENT MAY THE REGENTS BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE INVENTION OR LICENSED PRODUCTS. 15.4 Nothing in this Agreement shall be construed as: (a) a warranty or representation by THE REGENTS as to the validity or scope of any Regents' Patent Rights; (b) a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents of third parties; (c) an obligation to bring or prosecute actions or suits against third parties for patent infringement except as provided in Article 18 (PATENT INFRINGEMENT); 16 Exclusive License Agreement Page 15 of 25 Case No. SD97-026 (d) conferring by implication, estoppel or otherwise any license or rights under any patents of THE REGENTS other than Regents' Patent Rights as defined in this Agreement, regardless of whether those patents are dominant or subordinate to Regent's Patent Rights; or (e) an obligation to furnish any know-how not provided in Regents' Patent Rights. ARTICLE 16. PATENT PROSECUTION AND MAINTENANCE. 16.1 Provided that LICENSEE has paid patent costs as provided for in Paragraph 16.5, THE REGENTS shall diligently prosecute and maintain the United States and foreign patents comprising Regents' Patent Rights using counsel of its choice, and THE REGENTS shall provide LICENSEE with copies of all relevant documentation so that LICENSEE may be informed of the continuing prosecution and LICENSEE agrees to keep this documentation confidential. The Regents' counsel shall take instructions only from THE REGENTS, and all patents and patent applications under this Agreement shall be assigned solely to THE REGENTS. 16.2 THE REGENTS shall use all reasonable efforts to amend any patent application to include claims reasonably requested by LICENSEE to protect the products contemplated to be sold under this Agreement. 16.3 LICENSEE shall apply for an extension of the term of any patent included within Regents' Patent Rights if appropriate under the Drug Price Competition and Patent Term Restoration Act of 1984 and/or European, Japanese and other foreign counterparts of this law. LICENSEE shall prepare all documents for such application, and THE REGENTS agrees to execute such documents and to take any other additional action as LICENSEE reasonably requests in connection therewith. 16.4 In the event THE REGENTS as represented by the licensing associate at UCSD responsible for the administration of the license granted in this Agreement receives notice pertaining to infringement or potential infringement of any issued patent within Regents' Patent Rights pursuant to the Drug Price Competition Act and Patent Term Restoration Act of 1984 (and/or 17 Exclusive License Agreement Page 16 of 25 Case No. SD97-026 European and Japanese counterparts of such law), THE REGENTS shall notify LICENSEE within thirty (30) days after receipt of such notice. 16.5 LICENSEE shall bear the costs of preparing, filing, prosecuting and maintaining all United States and foreign patent applications contemplated by this Agreement. Costs billed to THE REGENTS by THE REGENTS' counsel shall be rebilled to LICENSEE and shall be due within 30 days of rebilling by THE REGENTS. These costs include patent prosecution costs for the Invention incurred by THE REGENTS prior to the execution of this Agreement and any patent prosecution costs that may be incurred with respect to the Invention for patentability opinions, re-examination, re-issue, interferences, or inventorship determinations. Prior costs shall be due on execution of this Agreement and billing by THE REGENTS. Such prior costs will be approximately twenty-two thousand U.S. dollars ($22,000). 16.6 LICENSEE may request THE REGENTS to obtain patent protection on the Invention in foreign countries if available and if it so desires. LICENSEE shall notify THE REGENTS of its decision to obtain or maintain foreign patents not less than sixty (60) days prior to the deadline for any payment, filing, or action to be taken in connection therewith. This notice concerning foreign filing shall be in writing, shall identify the countries desired, and shall reaffirm LICENSEE's obligation to underwrite the costs thereof. The absence of such a notice from LICENSEE to THE REGENTS shall be considered an election not to obtain or maintain foreign rights. 16.7 LICENSEE's obligation to underwrite and to pay patent prosecution costs shall continue for so long as this Agreement remains in effect; provided, however, that LICENSEE may terminate its obligations with respect to any given patent application or patent upon three (3) months' written notice to THE REGENTS. THE REGENTS shall use reasonable efforts to curtail patent costs when such a notice is received from LICENSEE. THE REGENTS may continue prosecution and/or maintenance of such applications or patent(s) at its sole discretion and expense; provided, however, that LICENSEE shall have no further right or licenses thereunder. Non-payment of patent costs may be deemed by THE REGENTS as an election by LICENSEE not to maintain applications) or Patents). 16.8 THE REGENTS may file, prosecute or maintain patent 18 Exclusive License Agreement Page 17 of 25 Case No. SD97-026 applications and/or patents arising therefrom at its own expense in any country in which LICENSEE has not elected to file, prosecute, or maintain such patent applications or patents in accordance with this Article, and those applications and resultant patents shall not be subject to this Agreement. ARTICLE 17. PATENT MARKING. 17.1 LICENSEE shall mark all Licensed Products made, used or sold under the terms of this Agreement, or their containers, in accordance with the applicable patent marking laws. ARTICLE 18. PATENT INFRINGEMENT. 18.1 If LICENSEE learns of the substantial infringement of any patent licensed under this Agreement, LICENSEE shall call THE REGENTS' attention thereto in writing within thirty (30) days after so learning and provide THE REGENTS with reasonable evidence of such infringement. Neither party shall notify a third party of the infringement of any of Regents' Patent Rights without first obtaining consent of the other party, which consent shall not be unreasonably denied. Both parties shall use reasonable efforts in cooperation with each other to terminate infringement without litigation. 18.2 LICENSEE may request that THE REGENTS take legal action against the infringement of Regents' Patent Rights. Such request shall be made in writing and shall include reasonable evidence of such infringement and damages to LICENSEE. If the infringing activity has not abated within ninety (90) days following the effective date of request, THE REGENTS then shall have the right to: (a) commence suit on its own account, or (b) refuse to participate in the suit; and THE REGENTS shall give notice of its election in writing to LICENSEE by the end of the one-hundredth (100th) day after receiving notice of such request from LICENSEE. LICENSEE may thereafter bring suit for patent infringement, at its own expense, if and only if THE REGENTS elects not to commence suit 19 Exclusive License Agreement Page 18 of 25 Case No. SD97-026 and if the infringement occurred during the period and in a jurisdiction where LICENSEE had exclusive rights under this Agreement. If, however, LICENSEE elects to bring suit in accordance with this paragraph, THE REGENTS may thereafter join that suit at its own expense. 18.3 Such legal action as is decided on shall be at the expense of the party bringing suit and all recoveries recovered thereby shall belong to the party bringing suit; provided, however, that legal action brought jointly by THE REGENTS and LICENSEE and fully participated in by both shall be at the joint expense of the parties and all recoveries shall be shared jointly by them in proportion to the share of expense paid by each party. If LICENSEE pays all legal expenses, it shall have the right to offset one half of its out-of-pocket legal expense, to the extent they exceed any recoveries recovered by LICENSEE in such legal action, against any earned royalties payable under Paragraph 6.1; provided, however, that earned royalties payble under Paragraph 6.1 shall not be reduced in any given quarter by more than [***]. Any unused credit may be carried forward until LICENSEE has received full credit for its creditable legal expenses. 18.4 Each party shall cooperate with the other in litigation proceedings instituted hereunder but at the expense of the party bringing suit. Litigation shall be controlled by the party bringing the suit, except that THE REGENTS may be represented by counsel of its choice in any suit brought by LICENSEE. ARTICLE 19. INDEMNIFICATION. 19.1 LICENSEE shall indemnify, hold harmless and defend THE REGENTS, its officers, employees, and agents; the sponsors of the research that led to the Invention; and the Inventors of the patents and patent applications in Regents' Patent Rights and their employers against any and all claims, suits, losses, damage, costs, fees, and expenses resulting from or arising out of exercise of this license or any sublicense. This indemnification will include, but not be limited to, any product liability. 19.2 LICENSEE, at its sole cost and expense, shall insure its activities in connection with the work under this Agreement *** Confidential Treatment Requested 20 Exclusive License Agreement Page 19 of 25 Case No. SD97-026 and obtain, keep in force and maintain insurance as follows, beginning with the date that Licensed Products or Licensed Methods are to used on or by third parties are first manufactured: (a) Comprehensive or commercial form general liability insurance (contractual liability included) with limits as follows! (1) Each Occurrence, $1,000,000, (2) Products/Completed Operations Aggregate, $5,000,000, (3) Personal and Advertising Injury, $1,000,000, and (4) General Aggregate (commercial form only), $5,000,000; and (b) The coverage and limits referred to under the above do not in any way limit the liability of LICENSEE. LICENSEE shall furnish THE REGENTS with certificates of insurance showing compliance with all requirements. Such certificates shall: (1) provide for thirty (30) day advance written notice to THE REGENTS of any modification, (2) indicate that THE REGENTS has been endorsed as an additional insured under the coverage referred to above, and (3) include a provision that the coverage shall be primary and shall not participate with nor shall be excess over any valid and collectable insurance or program of self-insurance carried or maintained by THE REGENTS. 19.3 THE REGENTS shall within a reasonable time notify LICENSEE in writing of any claim or suit brought against THE REGENTS in respect of which THE REGENTS intends to invoke the provisions of this Article. LICENSEE shall keep THE REGENTS informed on a current basis of its defense of any claims under this Article. 21 Exclusive License Agreement Page 20 of 25 Case No. SD97-026 ARTICLE 20. NOTICES. 20.1 Any notice or payment required to be given to either party shall be deemed to have been properly given and effective: (a) on the date of delivery if delivered in person, or (b) five (5) days after mailing if mailed by first-class certified mail, postage paid, to the respective addresses given below, or to such other address as is designated by written notice given to the other party. In the case of LICENSEE: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, California 92121 Attention: Chief Executive Officer In the case of THE REGENTS: University of California, San Diego Technology Transfer Office, Mailcode 0910 9500 Gilman Drive La Jolla, CA 92093-0910 Attention: Director ARTICLE 21. ASSIGNABILITY. 21.1 This Agreement may be assigned by THE REGENTS, but shall be personal to LICENSEE and assignable by LICENSEE only with the written consent of THE REGENTS, which consent shall not be unreasonably withheld. ARTICLE 22. NO WAIVER. 22.1 No waiver by either party of any breach or default of any of the covenants or agreements set forth in this Agreement shall be deemed a waiver as to any subsequent and/or similar breach or default. 22 Exclusive License Agreement Page 21 of 25 Case No. SD97-026 ARTICLE 23. FAILURE TO PERFORM. 23.1 In the event of a failure of performance due under this Agreement and if it becomes necessary for either party to undertake legal action against the other on account thereof, then the prevailing party shall be entitled to reasonable attorneys' fees in addition to costs and necessary disbursements. ARTICLE 24. GOVERNING LAWS. 24.1 THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, but the scope and validity of any patent or patent application shall be governed by the applicable laws of the country of the patent or patent application. ARTICLE 25. PREFERENCE FOR UNITED STATES INDUSTRY. 25.1 Because this Agreement grants the exclusive right to use or sell the Invention in the United States, LICENSEE agrees that any products sold in the U.S. embodying this Invention or produced through the use thereof shall be manufactured substantially in the United States. ARTICLE 26. GOVERNMENT APPROVAL OR REGISTRATION. 26.1 If this Agreement or any associated transaction is required by the law of any nation to be either approved or registered with any governmental agency, LICENSEE shall assume all legal obligations to do so. Licensee shall notify THE REGENTS if it becomes aware that this Agreement is subject to a United States or foreign government reporting or approval requirement. Licensee shall make all necessary filings and pay all costs including fees, penalties, and all other out-of-pocket costs associated with such reporting or approval process. ARTICLE 27. EXPORT CONTROL LAWS. 27.1 LICENSEE shall observe all applicable United States and foreign laws with respect to the transfer of Licensed Products 23 Exclusive License Agreement Page 22 of 25 Case No. SD97-026 and related technical data to foreign countries, including, without limitation, the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations. ARTICLE 28. SECRECY. 28.1 "Confidential Information" shall mean information regarding the Invention disclosed by THE REGENTS to LICENSEE, or information regarding LICENSEE's business disclosed by LICENSEE to THE REGENTS, which if disclosed in writing shall be marked "Confidential", or if first disclosed otherwise, shall within thirty (30) days of such disclosure be reduced to writing by the disclosing party (hereinafter, the "Disclosing Party"), marked as "Confidential" and sent to the receiving party (hereinafter, the "Recipient") 28.2 Recipient hereby agrees: (a) not to use the Confidential Information of the Disclosing Party except for the sole purpose of performing under the terms of this Agreement; (b) to safeguard such Confidential Information against disclosure to others with the same degree of care as it exercises with its own data of a similar nature; and (c) not to disclose such Confidential Information to others (except to its employees, agents or consultants who are bound to Recipient by a like obligation of confidentiality) without the express written permission of the Disclosing Party, except that Recipient shall not be prevented from using or disclosing any of the Confidential Information that: (1) Recipient can demonstrate by written records was previously known to it, (2) is now, or becomes in the future, public knowledge other than through acts or omissions of Recipient, (3) is lawfully obtained by Recipient from sources independent of the Disclosing Party, or (4) is required to be disclosed by the California 24 Exclusive License Agreement Page 23 of 25 Case No. SD97-026 Public Records Act or other requirement of law. 28.3 The secrecy obligations of Recipient with respect to Confidential Information shall continue for a period ending five (5) years from the termination date of this Agreement. ARTICLE 29. DISPUTE RESOLUTION. 29.1 Mediation. Either party to this Agreement may refer a dispute arising under this Agreement and which cannot be resolved among themselves without assistance, to third-party mediation in accordance with the rules of the American Arbitration Association then in effect or successor thereto. Such referral to mediation shall be made by notifying the other party in writing in accordance with the provisions of Article 20 (NOTICES) hereto, stating the nature of the dispute to be resolved by such mediation. Any resolution of such dispute arrived at in such mediation shall not be binding on either of the parties. 29.2 Arbitration. (a) Any such dispute that is not resolved within ninety (90) days after the date of such request for mediation in accordance with this Article 29 may be referred to and decided by arbitration, except for disputes based, in whole or in part, on Article 14 (USE OF NAME AND TRADEMARKS) hereof; Article 15 (LIMITED WARRANTY) hereof; Article 18 (PATENT INFRINGEMENT) hereof; Article 19 (INDEMNIFICATION) hereof; the validity of any claim of any patent or patent application within Regents' Patent Rights; or infringement by a party hereto, or a third party, of any claim of any patent within Regents' Patent Rights. Such referral to arbitration shall be made by notifying the other party in writing in accordance with the provisions of Article 20 (NOTICES) hereof, stating the nature of the dispute to be resolved. (b) The arbitration shall be held in San Diego, California, and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect or any successor thereto. None of the arbitrators selected by the parties to conduct such arbitration shall be employees of the parties. If the parties cannot agree on mutually satisfactory arbitrators within thirty (30) days of 25 Exclusive License Agreement Page 24 of 25 Case No. SD97-026 the request of any party hereto for arbitration hereunder, such arbitrators shall forthwith be appointed pursuant to the aforesaid rules of the American Arbitration Association. The arbitrators shall establish an arbitration timetable resulting in a hearing, within one hundred and twenty (120) days of the original request to arbitrate. (c) The arbitrators as a panel may grant injunctions and any and all other forms of relief in such dispute permitted under the American Arbitration Association rules then in effect or successor thereto; provided, however, that such panel shall not award punitive damages and shall not award costs and expenses, including attorney's fees and expenses. The decision of the panel shall be final, conclusive and binding on the parties to such arbitration, and shall not be appealable. The decision of the panel shall be enforceable in any court of competent jurisdiction. ARTICLE 30. MISCELLANEOUS. 30.1 The headings of the several sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 30.2 This Agreement is not binding on the parties until it has been signed below on behalf of each party. It shall be effective as of the Effective Date. 30.3 No amendment or modification of this Agreement shall be valid or binding on the parties unless made in writing and signed on behalf of each party. 30.4 This Agreement and the Shareholder's Agreement, together, embodies the entire understanding of the parties and supersedes all previous communications, representations or understandings, either oral or written, between the parties relating to the subject matter hereof. The Secrecy Agreement and Letter Agreement are both hereby terminated. 30.5 In case any of the provisions contained in this Agreement is held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this 26 Exclusive License Agreement Page 25 of 25 Case No. SD97-026 Agreement shall be construed as if the invalid, illegal, or unenforceable provisions had never been contained in it. In Witness Whereof, both THE REGENTS and LICENSEE have executed this Agreement, in duplicate originals, by their respective and duly authorized officers on the day and year written. SIGNAL PHARMACEUTICALS, INC.: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA: By /s/ CARL BOBKOSKI By /s/ ALAN S. PAAU ---------------------------- ----------------------------------- (Signature) (Signature) Name: EVP Alan S. Paau, Ph.D --------------------------- Title Carl Bobkoski Director, Technology --------------------------- Transfer Office Date Februaty 23, 1998 Date 2/25/98 ---------------------------- ------------------------------- EX-10.38 6 EXHIBIT 10.38 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.38 COLLABORATIVE DEVELOPMENT AND LICENSING AGREEMENT AMONG SIGNAL PHARMACEUTICALS, INC., AND TANABE SEIYAKU CO., LTD. 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS................................................................. 1 2. RESEARCH AND DEVELOPMENT COLLABORATION; RESEARCH PERIOD..................... 10 3. PRODUCT DEVELOPMENT. ....................................................... 22 4. PAYMENT..................................................................... 23 5. LICENSES OF TECHNOLOGY...................................................... 25 6. GLOBAL RELATIONSHIP......................................................... 33 7. ARBITRATION................................................................. 34 8. CONFIDENTIALITY, DISCLOSURE AND PUBLICATION................................. 34 9. INDEMNIFICATION............................................................. 37 10. INDEPENDENT CONTRACTORS..................................................... 38 11. NO SOLICITATION OF EMPLOYEES................................................ 38 12. TERM. ..................................................................... 39 13. TERMINATION OF AGREEMENT.................................................... 39 14. PUBLIC ANNOUNCEMENT OF AGREEMENT............................................ 40 15. INVENTIONS AND PATENT MATTERS............................................... 41 16. RESEARCH EXPENSES........................................................... 46 17. REPRESENTATIONS AND WARRANTIES.............................................. 46 18. OPTION TO EXPAND TERRITORY.................................................. 48 19. MISCELLANEOUS............................................................... 48
i. 3 COLLABORATIVE DEVELOPMENT AND LICENSING AGREEMENT This Agreement is made effective as of the 31st day of March, 1996 (the "Effective Date") by and among Signal Pharmaceuticals, Inc., a California corporation, with its principal office at 5555 Oberlin Drive, San Diego, California, USA ("Signal") and Tanabe Seiyaku Co., Ltd., a Japanese corporation, with its principal office at 2-10 Dosho-machi 3-chome, Chuo-ku, Osaka 541, Japan ("Tanabe"). RECITALS WHEREAS, the parties desire to collaborate in the discovery and development and commercialization of therapeutic products for the prevention and treatment of inflammation and osteoporosis. NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. DEFINITIONS 1.1 "Active Development" means, with respect to any Compound, that Tanabe is using at least such level of effort, in accordance with Tanabe's business, legal, medical and scientific judgement and Tanabe's normal practices and procedures, to continue the development of such Compound through preclinical and clinical studies and other registration directed activities as Tanabe spends on its own products in pre-clinical and clinical study with similar technical and commercial potential. 1.2 "Affiliates" means, with respect to any specified Person, a Person that is controlled by, controlling or under common control with the Person specified. For the purposes of this definition, control of a corporation or other business entity shall mean (i) direct or indirect beneficial ownership of greater than fifty percent (50%) of the voting stock or a greater than fifty percent (50%) interest in the income of such corporation or other business entity or (ii) the power to direct or cause the direction of the management of such corporation or other business entity. 1.3 "Agreement" means this Agreement, all exhibits and attachments referenced herein and all amendments and modifications hereto and thereto. 1.4 "Chemical Lead Compound" means any Potential Compound which (i) the applicable Research and Development Committee determines has met the requirements set forth on Exhibit A hereto, or (ii) Tanabe has selected in writing as a Chemical Lead Compound from a Signal Compound Library or a Joint Compound Library, or (iii) Tanabe has selected, in its sole discretion, from a Tanabe Compound Library for inclusion in the Collaborative Project. 4 1.5 "Chemical Modification" means any compound resulting from process or activity (initiated after the date of this Agreement) of deriving alternative chemical structures from a Chemical Lead Compound or a chemical modification of a Chemical Lead Compound, e.g. development of analogs. 1.6 "Collaborative Project" means the joint research and development collaboration of the Parties described in Article 2 of this Agreement, in Exhibit C and in the annual workplans prepared in coordination with the applicable Research and Development Committees, pursuant to which the parties shall test, evaluate and identify compounds as Potential Compounds, shall test and evaluate Potential Compounds and chemical modifications of Potential Compounds as potential Chemical Lead Compounds, and shall chemically modify, test and evaluate Compounds as potential Clinical Candidates. 1.7 "Compound" means any Chemical Lead Compound and all Chemical Modifications thereof. A Compound shall be either a Signal Compound, a Tanabe Compound or a Collaboration Compound. 1.7.1 "Signal Compound" means any Compound which is owned by or licensed to Signal or its Affiliates (other than from Tanabe pursuant to this Agreement), together with all Chemical Modifications thereof developed by Signal, by Tanabe, or by their Affiliates. 1.7.2 "Tanabe Compound" means any Compound which is owned by or licensed to Tanabe or its Affiliates (other than from Signal pursuant to this Agreement) together with all Chemical Modifications thereof developed by Signal, Tanabe, or by their Affiliates. 1.7.3 "Collaboration Compound" means a Compound which is neither a Signal Compound nor a Tanabe Compound but is contained in a Joint Compound Library, together with all Chemical Modifications thereof developed by Signal or Tanabe, or by their Affiliates. 1.8 "Clinical Candidate" means a Compound which (i) Tanabe determines meets the criteria set forth in Exhibit B or (ii) which Tanabe has otherwise selected in writing as a Clinical Candidate. 1.9 "IND" means an Investigational New Drug application filed with the United States Food and Drug Administration, or an equivalent application filed with a foreign regulatory authority. 1.10 "Inflammation" means a localized protective response or non-specific immune response, including but not limited to a hypersensitive response (an "inflammatory response"), elicited by injury, invasion or destruction of tissues, which 2. 5 serves to destroy, dilute, or wall off both the injurious agent and the injured tissue. Inflammation shall include, without limitation, the following generally recognized categories of inflammation: acute, chronic, subacute, adhesive, atrophic, catarrhal, croupous, fibrinous, diffuse, disseminated, exudative, fibroid, focal, granulomatous, hyperplastic, hypertrophic, interstitial, metastatic, necrotic, obliterative, parenchymatous, pseudomembranous, purulent, sclerosing, serous, simple, specific, toxic, traumatic, and ulcerative. Inflammation may be manifested, without limitation, as a condition, symptom, process or component in those diseases, disease processes, or host conditions (collectively, "Inflammatory Diseases") in which the inflammatory response is etiological in the health of the host and/or exacerbates (as opposed to ameliorates) the severity of the host's disease, disease process, symptom or condition, and in which the therapeutic goal is to directly intervene in the host's disease, disease process, symptom or condition by reducing, controlling or limiting the level or degree of the inflammatory response. Inflammatory Diseases shall include, without limitation, rheumatism (including arthritis), lupus (including discoid and systemic erythematosus, pernio and vulgaris), glomerulonephritis, transplant rejections, allergies, asthma and autoimmune diseases, but shall exclude osteoarthritis, multiple sclerosis, cardiovascular disease, oncologic indications and neuro-degenerative diseases, even where such diseases may have an inflammatory component. 1.11 "Joint Compound Libraries" means all chemical compounds (excluding Chemical Modifications of Tanabe Compounds or Signal Compounds) owned jointly by the Parties or licensed jointly to the Parties during the Research Period which they have the right to select or license for further development and commercialization pursuant to this Agreement. 1.12 "Joint Inflammation Committee" means the committee of two Signal scientific representatives and one Signal business representative and two Tanabe scientific representatives and one Tanabe business representative appointed by such respective Party to coordinate the research and development activities with respect to Compounds for the prevention and treatment of Inflammation under the Collaborative Project and carry out such other duties as are agreed to in writing by the Parties from time to time. 1.13 "Joint Invention" has the meaning set forth in Section 15.3. 1.14 "Joint Osteoporosis Committee" means the committee of two Signal scientific representatives and one Signal business representative and two Tanabe scientific representatives and one Tanabe business representative appointed by such respective Party (with the business representatives on the Joint Inflammation Committee and the Joint Osteoporosis Committee being for each party the same individual) to coordinate the research and development activities with respect to Compounds for the prevention and treatment of Osteoporosis under the Collaborative Project and carry out such other duties as are agreed to in writing by the Parties from time to time. 3. 6 1.15 "Joint Patent" means all patents and inventors' certificates and applications therefor throughout the world, including any renewal, division, continuation or continuation-in-part of any such applications and any patents issuing thereon, and any reissues, extensions, substitutions, confirmations, registrations, revalidations, revisions and additions of or to any such patents, to the extent that such patents, inventors' certificates and applications claim a discovery or an invention (including any Joint Invention) that is made, conceived or reduced to practice by one or more employees or agents from each Party in performing the Collaborative Project, and as to which such employees or agents would be inventors under the applicable patent laws. 1.16 "Main Activity Compound" means (i) any compound which, with respect to Inflammation and Osteoporosis, demonstrates, as of the Effective Date or during the Research Period, potency in an Inflammation Pathway or an Osteoporosis Pathway, respectively, at a level at least as high as the activity shown for that compound in any other signaling pathway, and (ii) any analog of any compound described in clause (i) above from the Signal Compound Libraries, Tanabe Compound Libraries or Joint Compound Libraries, or any chemical modification of any compound described in clause (i) above which chemical modification is identified during the term of this Agreement, in each case which demonstrates potency in an Inflammation Pathway or an Osteoporosis Pathway, respectively, at a level at least as high as the activity shown for that compound in any other signaling pathway. 1.17 "Net Sales" means with respect to any Product, the aggregate amount invoiced by a Party (including by its Affiliates, licensees and sublicensees) for or on account of any sale to a non-affiliated purchaser of such Product, less (i) normal and customary trade discounts, cash discounts, quantity discounts, rebates and other price reduction programs to purchasers allowed and taken; (ii) rebates to wholesalers; (iii) credits, allowances, discounts and rebates to, and chargebacks from the account of, such purchasers for spoiled, damaged, out-dated and returned Product; (iv) actual freight and insurance costs incurred or accrued in transporting such Product; (v) sales, value-added and other direct taxes (other than taxes on income); (vi) customs duties, surcharges and other governmental charges incurred in connection with the exportation or importation of such Product; and (vii) contributions made by Tanabe to the Japanese Fund for Sufferers from Adverse Drug Reactions not to exceed 1% of what would otherwise be Net Sales (the "Fund Contribution Cap"); provided that in no event shall items (i) and (ii) exceed that amount equal to the average discount, price reduction or rebate for a similar class of Tanabe products sold or offered to the same class of customer, such average to be weighted according to dollar volume ("Discount Ceiling"); provided further that the Parties agree to discuss in good faith a possible renegotiation of such Fund Contribution Cap and the Discount Ceiling before the first Product is launched for commercial sale in the Territory, taking into account then existing market conditions. In the event that Tanabe shall be required with respect to a Product to pay royalties to a third party (other than Signal or its licensors) for the sale of such Product, then Tanabe shall be entitled to deduct the amount of any such royalty actually paid by 4. 7 it from the amount that would otherwise constitute "Net Sales," provided such aggregate deduction shall not exceed 5% of Net Sales. Any commercial use of a Product by a Party (including its Affiliates, licensees and sublicensees) shall be considered a sale hereunder for accounting and royalty purposes. Notwithstanding the foregoing, (i) with respect to a Product which is sold in combination with one or more therapeutically active ingredients as a combination product (a "Combination Product"), then Net Sales of such Product shall be determined by multiplying the Net Sales of such Combination Product by a fraction, as determined by the mutual agreement of the parties, which represents the proportionate economic value of such Product relative to the economic value contributed by the other therapeutically active ingredients in such Combination Product; and (ii) with respect to a Product which is sold together with any other products and/or services at one unit price, whether packaged together or separately (a "Bundled Product"), then Net Sales of such Product shall be determined by multiplying the Net Sales of such Bundled Product by the fraction A/(A+B), where A is the average selling price of such Product if sold separately, and B is the total average selling price of such other products and/or such services in such Bundled Product if sold separately; provided, however, if either the average selling price of such Product or the total average selling price of such other products and/or such services in such Bundled Product is not available as of such date, then Net Sales of such Product shall be determined by multiplying the Net Sales of such Bundled Product by a fraction, as determined by the mutual agreement of the parties, which represents the proportionate economic value of such Product relative to the economic value contributed by the other products and/or such services in such Bundled Product; and (iii) with respect to a Product which is sold as a pharmaceutical product in a Delivery System (the "Delivery System Product"), then Net Sales of such Product shall be determined by reducing the Net Sales of such Delivery System Product by the amount of the reasonable fully-burdened cost to Tanabe, its Affiliate, licensee or sublicensee of such Delivery System determined in accordance with the standard accounting practices of Tanabe, its Affiliate, licensee or sublicensee (as applicable), consistently applied. For purposes of this Section 1.17, "Delivery System" means, with respect to a Product, any drug delivery system comprising the device(s), equipment, instrumentation or other components (but not solely containers or packaging) designed to accomplish or assist in the administration of such Product. 1.18 "Osteoporosis" means any disease, disease process and/or condition involving bone resorption and demineralization of bone (including abnormal rarefaction of bone and a general reduction in the mass of bone per unit of volume), bone formation, bone growth, calcium and phosphorus metabolism (including calcium and phosphorus absorption and reabsorption) and deformities such as loss of stature and pathological fractures. 1.19 "Party(ies)" means Signal and Tanabe. 5. 8 1.20 "Person" means an individual, a partnership, a joint venture, a corporation, a trust, an estate, an unincorporated organization or any other entity. 1.21 "Phase III Clinical Trials" means those pivotal human clinical trials in a particular country which are most nearly equivalent to those described as such in the United States Federal Food, Drug, and Cosmetics Act, as amended. 1.22 "Potential Compound" means a compound (a) which is identified prior to or during the term of the Research Period to have potential for the prevention or treatment of either (i) Inflammation, [***] or (ii) Osteoporosis, [***]; (b) which was tested, evaluated or derived by either or both Parties pursuant to the Collaborative Project; and (c) which possesses at least the following characteristics: (i) [***] 1.23 "Pricing Approval" means the determination of an allowable resale price for a Product by the applicable governmental authority in any situation in which commercial sales of such Product are not permitted until such Pricing Approval has been received. 1.24 "Product" means any composition (whether in the form of drug substance, bulk drug or final dosage form), which may be used in the prevention or treatment of either (i) Inflammation, [***] or (ii) Osteoporosis, [***] and that contains a Compound as an active ingredient. 1.25 "Regulatory Approval" means the granting of all governmental or regulatory approvals required, if any, for the sale of a Product in a given country or jurisdiction within the Territory. 1.26 "Research and Development Committee(s)" means the Joint Inflammation Committee and the Joint Osteoporosis Committee. 1.27 "Research Period" shall have the meaning given in Section 2.1. 6. ***Confidential Treatment Requested 9 1.28 "Rest of the World" means all of the nations of the world other than those in the Territory. 1.29 "Signal Compound Libraries" means all chemical compounds owned by Signal or licensed to Signal (other than by Tanabe) as of the Effective Date or during the Research Period which Signal has the right to select or license for further development and commercialization pursuant to this Agreement. 1.30 "Signal Technical Information" shall mean either "Signal Lead Identification Information," "Signal Compound Information," or "Signal Product Information," each as defined below: (a) "Signal Lead Identification Information" shall mean as to each Potential Compound, the information in Signal's or its Affiliates' possession or control which is necessary or useful to allow Tanabe to conduct its obligations pursuant to the Collaborative Project, and which is necessary or useful to allow the appropriate Research and Development Committee and Tanabe to evaluate whether or not such Potential Compound satisfies the Selection Criteria set forth on Exhibit A or otherwise is desirable for Tanabe to designate as a Chemical Lead Compound. Such information shall include information regarding Signal's non-proprietary and/or functional assays useful for confirming activity, but shall exclude information regarding the design or substance of any Signal proprietary primary or high throughput screening assays. (b) "Signal Compound Information" shall mean as to any Compound, (i) the information in Signal's or its Affiliates' possession or control regarding such Compound, which is necessary or useful to allow the appropriate Research and Development Committee and Tanabe to evaluate whether or not such Compound satisfies the Selection Criteria set forth on Exhibit B or otherwise is desirable for Tanabe to designate as a Clinical Candidate, or which is necessary or desirable to enable Tanabe to determine structure activity relationship and to synthesize and evaluate Chemical Modifications thereof, and (ii) provided that the Parties have first entered into a mutually acceptable written agreement regarding the reciprocal sharing of additional information (without additional charge, other than direct translation costs) regarding such Compound, such additional information regarding such Compound as the Parties mutually agree in writing which is in Signal's, its Affiliates' or sublicensees' (including the Western Pharmaceutical Partner's) possession or control regarding such Compound, and which is necessary or useful to the preclinical development of such Compound in the Territory. (c) "Signal Product Information" shall means as to any Compound and any Product containing such Compound, provided that the Parties have first entered into a mutually acceptable written agreement regarding the reciprocal sharing of information (without additional charge, other than direct translation costs) regarding such Compound, such information regarding such Compound as the Parties 7. 10 mutually agree in writing which is in Signal's, its Affiliates' or sublicensees' (including the Western Pharmaceutical Partner's) possession or control regarding such Compound, and which is necessary or useful to the clinical development, regulatory approval and commercialization of such Compound in the Territory. 1.31 "Signal Patents" means, with the exclusion of the Joint Patent Rights, all rights of Signal in any patents and inventors' certificates and applications therefor throughout the world, including any renewal, division, continuation or continuation-in-part of any such applications and any patents issuing thereon, and any reissues, extensions, substitutions, confirmations, registrations, revalidations, revisions and additions of or to any such patents, to the extent that such patents, inventors' certificates and applications claim a Compound or a Product or any use or method or process of manufacture of a specific Compound or Product. 1.32 "Signal Screens" means any primary or high throughput assays which are designed to test for activity in the same cell type/signaling pathway combination as any of the assays being employed by Signal in the Collaborative Project which assays are set forth in Exhibit C or as subsequently set forth in an annual workplan approved by the applicable Research and Development Committee (whether or not such assays are protected by any patent rights, trade secrets or other intellectual property rights of Signal). 1.33 "Tanabe Compound Libraries" means all chemical compounds (including organic compounds and extracts of microbial metabolites) owned by Tanabe or licensed to Tanabe (other than by Signal) as of the Effective Date or during the Research Period which Tanabe has the right to select or license for further development and commercialization pursuant to this Agreement. 1.34 "Tanabe Other Screens" means any primary or high throughput assays, other than Signal Screens, developed or in-licensed by Tanabe (excluding animal model and functional assays). 1.35 "Tanabe Patents" means, with the exclusion of the Joint Patent Rights, all rights of Tanabe in any patents and inventors' certificates and applications therefor throughout the world, including any renewal, division, continuation or continuation-in-part of any such applications and any patents issuing thereon, and any reissues, extensions, substitutions, confirmations, registrations, revalidations, revisions and additions of or to any such patents, to the extent that such patents, inventors' certificates and applications claim a Compound or a Product or any use or method or process of manufacture of a specific Compound or Product. 1.36 "Tanabe Technical Information" shall mean either "Tanabe Lead Identification Information," "Tanabe Compound Information," or "Tanabe Product Information," each as defined below: 8. 11 (a) "Tanabe Lead Identification Information" shall mean as to each compound from the Tanabe Compound Libraries which Tanabe, in its sole discretion, provides to Signal for screening under the Collaborative Project, the information in Tanabe's or its Affiliates' possession or control which is necessary or useful to allow Signal to conduct its obligations pursuant to the Collaborative Project, or which is necessary or desirable to enable Signal to determine structure activity relationship and to synthesize and evaluate chemical modifications thereof, and which is necessary or useful to allow the appropriate Research and Development Committee to evaluate whether or not such Potential Compound satisfies the Selection Criteria set forth on Exhibit A. (b) "Tanabe Compound Information" shall mean as to any Compound, (i) the information in Tanabe's or its Affiliates' possession or control regarding such Compound, which is necessary or useful to allow the appropriate Research and Development Committee to evaluate whether or not such Compound satisfies the Selection Criteria set forth on Exhibit B, and (ii) provided that the Parties have first entered into a mutually acceptable written agreement regarding the reciprocal sharing of additional information (without additional charge, other than direct translation costs) regarding such Compound, such additional information regarding such Compound as the Parties mutually agree in writing which is in Tanabe's, its Affiliates' or sublicensees' possession or control regarding such Compound, and which is necessary or useful to the preclinical development of such Compound in the Rest of the World. (c) "Tanabe Product Information" shall mean as to any Compound and any Product containing such Compound, provided that the Parties have first entered into a mutually acceptable written agreement regarding the reciprocal sharing of information (without additional charge, other than direct translation costs) regarding such Compound, such information regarding such Compound as the Parties mutually agree in writing which is in Tanabe's, its Affiliates' or sublicensees' possession or control regarding such Compound, and which is necessary or useful to the clinical development, regulatory approval and commercialization of such Compound in the Rest of the World. 1.37 "Territory" means Japan, China, South Korea, Taiwan, Thailand, Cambodia, Laos, Vietnam, Indonesia, Nepal, the Philippines, Singapore, Malaysia, Hong Kong, Myanmar and Brunei; provided that in the event that the option set forth in Section 18 is exercised, the "Territory" shall also include Australia, New Zealand and other Oceania countries. 1.38 "Use or Structure Contribution" means, with respect to Tanabe, Signal or both, an invention or discovery made by Tanabe, Signal or both, as applicable, regarding the composition of matter or use of any Compound which invention or discovery is claimed in a pending patent application or issued patent (a "Contribution 9. 12 Patent") in any of the following countries: United States, Japan, France, Germany and the United Kingdom (the "Measurement Countries"). 1.39 "Western Pharmaceutical Partner(s)" means one or more pharmaceutical companies other than Tanabe with which Signal from time to time agrees to collaborate to develop and/or market products for the prevention or treatment of Inflammation and/or Osteoporosis outside the Territory. 2. RESEARCH AND DEVELOPMENT COLLABORATION; RESEARCH PERIOD 2.1 Research Period. Unless the Collaborative Project is sooner terminated pursuant to Section 2.3(f), 13.4 or 13.5, the Collaborative Project shall terminate upon the date which is four (4) years from the Effective Date in Inflammation and Osteoporosis, respectively (the "Research Period"); provided that the Research Period may be extended twice for periods of one (1) year each by mutual written agreement of the Parties. 2.2 Joint Obligations. (a) Prioritization of Efforts. The Parties mutually agree that during the term of the Research Period each of the Parties (i) shall use its commercially reasonable efforts to carry out its responsibilities under the Collaborative Project; (ii) shall accord the Collaborative Project at least as high a priority as its other active research programs at similar stages with similar technical and commercial potential; and (iii) shall cooperate with each other in the Collaborative Project for the development of Products for the prevention or treatment of Inflammation and Osteoporosis. (b) Exchange of Technical Information During Research Period. During the term of the Research Period, (i) Signal shall inform the appropriate Research and Development Committee and Tanabe, to the extent it has not already done so, of all Signal Lead Identification Information, Signal Compound Information and Signal Product Information; (ii) Tanabe shall inform the appropriate Research and Development Committee and Signal, to the extent it has not already done so, of all Tanabe Lead Identification Information, Tanabe Compound Information and Tanabe Product Information; and (iii) each Party shall provide to the other Party, to the extent it has not already done so, summary written reports regarding such additional information regarding Potential Compounds, Compounds and Main Activity Compounds which is necessary or useful for the other Party to monitor the other Party's activities and progress. Each Party will permit access at reasonable times and with reasonable frequency to the appropriate personnel of the other Party to accomplish such information exchange. Each Party shall, at least at each meeting of each Research and Development Committee, (i) provide the other party with a progress report on its efforts and results on the Collaborative Project with respect to Inflammation and Osteoporosis, as appropriate, 10. 13 and (ii) inform the other Party of any Technical Information obtained by it to the extent and at the time required by this Section 2.2(b). Notwithstanding the foregoing, Signal shall not be entitled to disclose Tanabe Technical Information to any Western Pharmaceutical Partner until Tanabe and such Western Pharmaceutical Partner have mutually agreed in writing to share such information. (c) Exchange of Technical Information After Research Period. During the term of this Agreement, but after the expiration or termination of the Research Period, (i) Signal shall inform Tanabe, to the extent it has not already done so, of all Signal Compound Information and Signal Product Information; (ii) Tanabe shall inform Signal, to the extent it has not already done so, of all Tanabe Compound Information and Tanabe Product Information; and (iii) each Party shall provide to the other Party, to the extent it has not already done so, summary written reports regarding such additional information regarding Potential Compounds, Compounds and Main Activity Compounds which is necessary or useful for the other Party to monitor the other Party's activities and progress. Each Party will permit access at reasonable times and with reasonable frequency to the appropriate personnel of the other Party to accomplish such information exchange. Notwithstanding the foregoing, Signal shall not be entitled to disclose Tanabe Technical Information to any Western Pharmaceutical Partner until Tanabe and such Western Pharmaceutical Partner have mutually agreed in writing to share such information. 2.3 Obligations of Signal. (a) Screening Efforts. Signal shall screen those compounds which Tanabe selects in its sole discretion from Tanabe Compound Libraries, all compounds from Signal Compound Libraries and all compounds from Joint Compound Libraries using Signal's proprietary and non-proprietary whole-cell and enzyme assays and carry out its other obligations as set forth in Exhibit C and the annual workplans submitted hereunder. In performing the screening, Signal shall use its commercially reasonable efforts to identify a primary Compound and a back-up Compound for at least one molecular target within each of following pathways within Inflammation: [***]; and within Osteoporosis: (i) [***]. Signal shall allocate sufficient time, effort, equipment and facilities to the Collaborative Project, and shall proceed diligently, to conduct its obligations under the Collaborative Project and to accomplish the objectives thereof. Signal shall present all results of its screening of Potential Compounds to Tanabe and the applicable Research and Development Committee for review and for the applicable Research and Development Committee to determine whether a Potential Compound meets the criteria set forth in Exhibit A. When Signal discovers a Potential Compound during the Research Period that Signal believes may meet the Selection Criteria set forth on Exhibit A hereto or otherwise determines that a Potential Compound may be desirable to Tanabe as a Chemical Lead Compound, Signal shall 11. ***Confidential Treatment Requested 14 promptly notify the applicable Research and Development Committee and present the applicable Signal Lead Identification Information. Such Research and Development Committee shall review the results of Signal's screening of such Potential Compound and such other information and notify Tanabe and Signal in writing of its determination within ninety (90) days of the receipt of such information. If such Research and Development Committee determines that a Potential Compound meets the criteria set forth in Exhibit A or otherwise determines that a Potential Compound may be desirable to Tanabe as a Chemical Lead Compound, Signal promptly shall present and supply such Potential Compound to Tanabe in accordance with Section 2.4(d). Such presentation shall include all Signal Lead Identification Information as reasonably necessary to verify the Potential Compound meets the criteria set forth in Exhibit A and sufficient quantities of drug substance to allow Tanabe to conduct studies to confirm Signal's test results. In addition, Signal shall transfer to Tanabe Signal's non-proprietary functional assays and shall assist Tanabe in implementing such assays and to confirm the activity of such Potential Compounds in such assays (provided that Tanabe shall reimburse Signal for its direct out-of-pocket costs incurred in connection with such transfer or assistance). At the end of the second year of the Research Period, the Parties will jointly reassess the appropriateness of the staffing levels and will determine whether any material changes are appropriate. If so, then the parties will in good faith determine an adjustment for the following year. (b) Visiting Tanabe Scientist. During the Research Period, Signal shall accept at its research facilities up to [***] who shall be mutually agreeable to the Parties for Inflammation and/or Osteoporosis projects. Tanabe shall be responsible for all expenses relating to visas, transportation, lodging, salaries and benefits of such Tanabe scientist and Signal shall be responsible for expenses, including laboratory space, office space, instruments, equipment and materials, necessary to allow such Tanabe scientist to engage in research under the Collaborative Project on Signal's premises. The Tanabe scientist shall, to the extent possible, be included in the activities of Signal's research team for the Collaborative Project and shall be required to execute all confidentiality agreements as are used from time to time by Signal. It is acknowledged and agreed that Signal shall also be conducting research and development activities outside the scope of the Collaborative Project and shall be entitled to exclude the Tanabe scientist from participation in projects to the extent required to protect the confidentiality of such non-Collaborative Project work. (c) Ongoing Screening Services. Signal shall, for a period of one (1) year following the full completion of the Research Period (all four years), provide to Tanabe, at Tanabe's request, ongoing screening services for assays developed during (and not before or after) the Research Period on compounds developed or acquired by Tanabe following the end of the Research Period. Tanabe shall pay Signal the greater of [***] and shall owe Signal the same (as applicable) license terms and royalty terms therein as outlined in Sections 4.3 and 5.4. 12. ***Confidential Treatment Requested 15 (d) Assistance in Chemical Modification. As and when requested by the applicable Research and Development Committee, Signal may conduct any in-vitro screening described on Exhibit A with respect to Chemical Modifications or chemical modifications of compounds from the Tanabe Compound Libraries, selected by Tanabe in its sole discretion, for the purpose of identifying Potential Compounds or Compounds under the Collaborative Project. (e) Assistance in In-Vitro Studies. As and when requested by Tanabe, Signal shall study a compound, which originated from a Tanabe Compound Library and the composition of matter and use of which is characterized as a Tanabe Use or Structure Contribution, using Signal's proprietary and non-proprietary assays to attempt to define the mechanism of action of such compound in the Inflammation Pathways or Osteoporosis Pathways, as applicable. The data resulting from such studies shall be owned by Tanabe. (f) Development Obligations During Research Period. .1 Western Pharmaceutical Partner. Signal shall enter into a collaborative research and development agreement with respect to either its Inflammation program or its Osteoporosis program not later than August 31, 1996 (a "Minimum Partnering Transaction"). If a Minimum Partnering Transaction has not occurred on or before August 31, 1996, then Tanabe shall have the right to give Signal advance written notice of, and opportunity to cure, its failure to complete a Minimum Partnering Transaction. If Signal has failed to cure such default within such notice period, then Tanabe shall be entitled to terminate the Collaborative Project with such termination being effective six (6) months after the expiration, without cure, of such notice period. The applicable notice period shall be (i) ninety (90) days or (ii) one-hundred-eighty days in the event that Tanabe has selected at least one (1) Chemical Lead Compound which is first identified after screening in a Signal primary or high throughput assay on or before the date of such notice. .2 Periodic Reviews. At Tanabe's request and not more frequently than once in every six (6)-month period, Signal shall review with Tanabe its cash flow and headcount allocations to the Collaborative Project. As part of such review Signal shall demonstrate to Tanabe's reasonable satisfaction that (i) Signal has the ability over the following six (6)-month period to fund the Inflammation program at a level of at least [***] in [***] and [***] per year in [***] and the Osteoporosis program at a level of at least [***] in [***] and [***] per year in [***] (or such lesser or greater amount agreed to by the Parties and reflected in the workplan for that period); and (ii) Signal is expending effort at an activity level in the Inflammation program and in the Osteoporosis program consistent with the expenditure levels set forth in clause (i) above (or such lesser or greater amount agreed to by the Parties and reflected in the workplan for that period). If Signal defaults in its obligations under clause (i) or (ii) above, then Tanabe shall have the right to give 13. ***Confidential Treatment Requested 16 Signal advance written notice of, and opportunity to cure, its defaults in its obligations under clause (i) or (ii) above. If Signal has failed to cure such default within such notice period, then Tanabe shall be entitled to terminate the Collaborative Project with such termination being effective six (6) months after the expiration, without cure, of such notice period. The applicable notice period shall be [***]. .3 Commitment of FTEs. Signal shall allocate at least that number of research personnel (measured as full-time equivalents ("FTEs") and post-doctoral fellows ("Post-Docs")) to the Inflammation program and the Osteoporosis program as are set forth in the following schedule ("Minimum Staffing Requirement"):
Inflammation Program Allocated FTEs & Post-Docs -------------------- -------------------------- [***] [***]
Osteoporosis Program Allocated FTEs & Post-Docs -------------------- -------------------------- [***] [***]
If the Minimum Staffing Requirement has not been met during any one year period, then Tanabe shall have the right to give Signal advance written notice of, and opportunity to cure, its failure to meet the Minimum Staffing Requirement. If Signal has failed to cure such default within such notice period, then Tanabe shall be entitled to terminate the Collaborative Project with such termination being effective six (6) months after the expiration, without cure, of such notice period. The applicable notice period shall be [***]. (g) Active Development in Inflammation and Osteoporosis. Signal must use at least such level of efforts, in accordance with Signal's business, legal, medical and scientific judgement and Signal's normal practices and procedures, to continue the development of Compounds, Clinical Candidates or Products licensed to Signal in this Agreement through pre-clinical and clinical studies, and other registration directed activities as Signal spends on its own products in pre-clinical and clinical study with similar technical and commercial potential in the Rest of the World. 14. ***Confidential Treatment Requested 17 2.4 Obligations of Tanabe. (a) Delivery of Compound Library. As soon as reasonably feasible, but in no event later than sixty (60) days after the execution of this Agreement, Signal shall request and Tanabe shall deliver to Signal up to [***] organic compounds and [***] samples of [***] which shall be selected by Tanabe in its sole discretion from Tanabe Compound Libraries in a high throughput format reasonably necessary to enable Signal to screen, for use in Signal's screening activities. Thereafter, Tanabe shall make available such additional compounds from the Tanabe Compound Libraries as Tanabe determines in its sole discretion. All compounds from Tanabe Compound Libraries provided to Signal under this Agreement shall be and remain the sole property of Tanabe, shall (other than Compounds) be used by Signal solely for the purpose of carrying out its obligations under this Agreement, and shall (other than Compounds) not be transferred to any other Person for any purpose unless agreed to by the Parties pursuant to Section 6 of this Agreement. Tanabe may request Signal to conduct chemical modification, structural elucidation and testing of compounds from Tanabe Compound Libraries. Except to the extent so requested, Signal shall not undertake any efforts to elucidate the structure of any compound from the Tanabe Compound Libraries delivered to it by Tanabe for in-vitro testing or make any chemical modifications thereof until such compound is designated as a Chemical Lead Compound pursuant to Section 2.4(d) below. (b) Tanabe Screening Activities. Subject to the provisions of Sections 5.4(a)(v), (vi), (vii) and (viii) below, during the Research Period, Tanabe shall have the right to screen any compounds in any assays whatsoever. (c) Assistance in Screening Activities. As and when requested by the applicable Research and Development Committee, Tanabe may conduct any animal studies described on Exhibit A with respect to Potential Compounds. Tanabe agrees that it will not, in connection with any such studies, undertake any efforts to elucidate the structure of any Potential Compounds from the Signal Compound Libraries delivered to it by Signal for animal testing until such Potential Compounds are designated as Chemical Lead Compounds pursuant to Section 2.4(d) below. (d) Evaluation Obligations; Chemical Lead Compounds. The applicable Research and Development Committee shall have a period of ninety (90) days from the date a Potential Compound is delivered to it pursuant to Section 2.3(a), to review such Potential Compound for the purpose of confirming that such Potential Compound meets the Selection Criteria set forth on Exhibit A hereto. Tanabe shall have the right, within thirty (30) days after such ninety (90) day period, to either (i) designate such Potential Compound for Active Development as a Chemical Lead Compound or (ii) reject such Potential Compound. Tanabe shall request samples of such Potential Compound not later than two (2) months after first notification by Signal to the 15. ***Confidential Treatment Requested 18 applicable Research and Development Committee of Signal's determination pursuant to Section 2.3(a) that such Potential Compound may meet the Selection Criteria set forth on Exhibit A hereto or that a Potential Compound otherwise may be desirable to Tanabe as a Chemical Lead Compound (to allow Tanabe to set up its feasibility tests). Provided that Signal has assisted Tanabe in transferring and implementing such feasibility tests pursuant to Section 2.3(a), Tanabe shall notify Signal in writing within thirty (30) days after receipt of the drug substance of a Potential Compound whether it agrees with the determination of the applicable Research and Development Committee that a Potential Compound meets the criteria set forth in Exhibit A or that a Potential Compound otherwise shall be designated by Tanabe as a Chemical Lead Compound. Any Potential Compound designated by Tanabe (whether or not it meets the Selection Criteria set forth in Exhibit A) shall thereafter be a "Chemical Lead Compound." Any Potential Compound which is presented to Tanabe and not designated by Tanabe as a Chemical Lead Compound shall thereafter no longer be subject to the Collaborative Project. Prior to the designation of a Potential Compound from a Signal Compound Library as a Chemical Lead Compound pursuant to Section 2.4(d), Tanabe shall not engage in any attempts to elucidate the chemical structure of such Potential Compound, make any chemical modification to such Potential Compound, or test such Potential Compound for use outside the Inflammation Pathways or the Osteoporosis Pathways, as applicable. (e) Development and Qualification of Chemical Lead Compounds. Once a Potential Compound has been designated as a Chemical Lead Compound for any of (i) with respect to Inflammation: [***], and (ii) with respect to Osteoporosis [***], then Tanabe shall promptly conduct any chemical modifications or studies necessary with respect to such Compound to determine whether or not any such Compound meets the criteria for a Clinical Candidate as set forth in Exhibit B or Tanabe otherwise desires to designate such Compound as a Clinical Candidate. Subject to the limitations of Section 4.3, any Compound that Tanabe designates as a Clinical Candidate shall thereafter be a "Clinical Candidate" and such designation shall be subject to the milestone payment as described in Section 4.3(a) below. If Tanabe files in the Territory a request for initiation of human clinical studies of a Compound prior to designating such Compound as a Clinical Candidate, then upon the filing in the Territory of a request for initiation of human clinical studies for such Compound, such Compound thereafter shall be a "Clinical Candidate" and such designation shall be subject to the milestone payment as described in Section 4.3(a) below. All Potential Compounds from Signal Compound Libraries provided to Tanabe under this Agreement shall be and remain the sole property of Signal, shall (other than Compounds) be used by Tanabe solely for the purpose of carrying out its obligations under this Agreement and shall (other than Compounds) not be transferred to any other Person for any purpose unless agreed to by the Parties pursuant to this Agreement. Tanabe agrees that it will not, in connection with any such studies, undertake any efforts to elucidate the structure of any Potential Compounds 16. ***Confidential Treatment Requested 19 from the Signal Compound Libraries delivered to it by Signal until such Potential Compounds are designated as Chemical Lead Compounds pursuant to Section 2.4(d) above. All Chemical Modifications developed from (i) Signal Compounds shall constitute Signal Compounds, (ii) Tanabe Compounds shall constitute Tanabe Compounds, and (iii) Collaboration Compounds shall constitute Collaboration Compounds. To the extent either Party creates a Chemical Modification, such Party shall endeavor to provide the other Party with [***] of each Chemical Modification and a summary report describing how such Chemical Modification was synthesized and characterized. (f) Reversion of Rights to Compounds. Notwithstanding any other Section of this Agreement, if Tanabe "abandons its efforts" to conduct research, pre-clinical and clinical development, application for Regulatory Approval and commercialization of Compounds, Clinical Candidates and Products which may be used in the prevention or treatment of Inflammation in the Territory, then upon ninety (90) days prior written notice from Signal, the exclusive right and license granted to Tanabe under Section 5.1 in all Compounds, Clinical Candidates and Products which may be used in the prevention or treatment of Inflammation in the Territory shall terminate and such exclusive right and license granted to Tanabe under Section 5.1 shall revert to Signal. Tanabe shall not have "abandoned its efforts" if Tanabe at any such time either [***] Notwithstanding any other Section of this Agreement, if Tanabe "abandons its efforts" to conduct research, pre-clinical and clinical development, application for Regulatory Approval and commercialization of Compounds, Clinical Candidates and Products which may be used in the prevention or treatment of Osteoporosis in the Territory, then upon ninety (90) days prior written notice from Signal, the exclusive right and license granted to Tanabe under Section 5.1 in all Compounds, Clinical Candidates and Products which may be used in the prevention or treatment of Osteoporosis in the Territory shall terminate and such exclusive right and license granted to Tanabe under Section 5.1 shall revert to Signal. Tanabe shall not have "abandoned its efforts" if Tanabe at any such time either [***] (g) Visiting Signal Scientist. During the Research Period, Tanabe shall accept at its research facilities up to [***] who shall be mutually agreeable to the Parties for Inflammation and/or Osteoporosis projects. Signal 17. ***Confidential Treatment Requested 20 shall be responsible for all expenses relating to visas, transportation, lodging, salaries and benefits of such Signal scientist and Tanabe shall be responsible for expenses, including laboratory space, office space, instruments, equipment and materials, necessary to allow such Signal scientist to engage in research on Tanabe's premises under the Collaborative Project. The Signal scientist shall, to the extent possible, be included in the activities of Tanabe's research team for the Collaborative Project and shall be subject to all confidentiality obligations as are imposed usually by Tanabe. It is acknowledged and agreed that Tanabe shall also be conducting research and development activities outside the scope of the Collaborative Project and shall be entitled to exclude the Signal scientist from participation in projects to the extent required to protect the confidentiality of such non-Collaborative Project work. 2.5 Research and Development Committees. In order to effectively coordinate and communicate their respective research and development efforts in Inflammation and Osteoporosis: (i) Signal and Tanabe shall each promptly appoint their representatives to the Joint Inflammation Committee and the Joint Osteoporosis Committee; and (ii) each of Signal and Tanabe shall delegate the powers and authority to the Joint Inflammation Committee and the Joint Osteoporosis Committee that each Party deems desirable to allow each Research and Development Committee to effectively coordinate and communicate the Parties' respective efforts under the Collaborative Project in Inflammation and Osteoporosis, respectively; provided, that neither such Research and Development Committee shall have the power to enter into contracts or otherwise bind either of the Parties. Without limitation, each Research and Development Committee shall be responsible for (i) coordinating the research activities with respect to Compounds for the treatment of Inflammation or Osteoporosis, as applicable; (ii) working with Signal to prepare annual workplans for the testing, evaluation and identification of Potential Compounds as potential Chemical Lead Compounds, and the Chemical Modification, testing, evaluation and identification of Compounds as potential Clinical Candidates; (iii) assisting Signal in preparing annual budgets corresponding to such workplans; (iv) monitoring performance under the Collaborative Project in relation to the annual workplans and expenditures in relation to the corresponding budgets; and (v) reviewing the information regarding Potential Compounds and determining whether Potential Compounds satisfy the criteria set forth in Exhibit A. Each Party may change any of its representatives at any time and from time to time by written notice to the other Party prior to appointing a new representative to either Committee. Any vacancy on a Research and Development Committee caused by death, resignation, disability or otherwise shall be filled within thirty (30) days following the occurrence of such vacancy. 2.6 Meetings of the Research and Development Committees. The Research and Development Committees shall each meet, during the term of the Research Period, at least every six (6) months beginning as soon as possible after the Effective Date of this Agreement, and thereafter upon request by either Party (not to exceed four (4) meetings per year unless mutually agreed upon), at sites which shall be 18. 21 designated by each of the Parties in alternating sequence, with the first meeting to be held as soon as practicable. Meetings are expected to be held either at the offices of Signal or Tanabe or at some other mutually agreeable site. Each Party shall pay its own costs in attending meetings of each Research and Development Committee. Executive officers from Signal or Tanabe may attend such meetings at their discretion. Once during each year, at annual meetings during the Research Period, the Research and Development Committees will conduct an annual review of the actual progress of the Collaborative Project with respect to Inflammation or Osteoporosis, as appropriate (the "Annual Review"), will review and approve the development plans, workplans and budgets and objectives for the Collaborative Project for the following year, and will take such mutually agreeable actions as may be reasonable to facilitate the commercial success of the Collaborative Project with respect to Inflammation or Osteoporosis, as appropriate. 2.7 Procedure. A hosting Party shall designate a member to act as Chairman of each Research and Development Committee meeting. Each such Chairman shall be responsible for developing an agenda for the meeting to be chaired by him or her and shall distribute such agenda no later than fourteen (14) days prior to the scheduled meeting. The Chairman shall promptly, after each meeting, prepare and distribute to the members minutes reflecting the discussions of the Research and Development Committee. All meetings shall be conducted and records kept in English. 2.8 Dispute Resolution. In the event that a Research and Development Committee is unable to resolve any disagreement, either Party shall do their best efforts to resolve the dispute amicably, and shall prior to proceeding with any dispute resolution mechanisms conduct a meeting of the president of Signal and the Senior Executive Director of Research and Development of Tanabe to attempt in good faith to resolve such dispute. 2.9 Exclusivity. (a) Signal Obligations. (i) During the Research Period, Signal shall not, and shall cause its Affiliates and (sub)licensees collaborating with Signal in the development of Compounds, including the Western Pharmaceutical Partner, not to, conduct any research, development or commercialization activities relating to the discovery or use of compounds in an Inflammation Pathway(s) for the prevention or treatment of Inflammation (to the extent, with respect to any (sub)licensee, such collaboration involves such Inflammation Pathway(s)), or in an Osteoporosis Pathway(s) for the prevention or treatment of Osteoporosis (to the extent, with respect to any (sub)licensee, such collaboration involves such Osteoporosis Pathway(s)), in the Territory, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any 19. 22 compounds developed for use in the respective pathways shall be licensed to Tanabe hereunder in the Territory; (ii) Following the Research Period but during the term of this Agreement, Signal shall not, and shall cause its Affiliates and (sub)licensees collaborating with Signal in the development of Compounds, including the Western Pharmaceutical Partner, not to, conduct any research, development or commercialization activities relating to the use of Main Activity Compounds in an Inflammation Pathway(s) for the prevention or treatment of Inflammation (to the extent, with respect to any (sub)licensee, such collaboration involves such Inflammation Pathway(s)), or in an Osteoporosis Pathway(s) for the prevention or treatment of Osteoporosis (to the extent, with respect to any (sub)licensee, such collaboration involves such Osteoporosis Pathway(s)), in the Territory, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any Main Activity Compounds developed for use in the respective pathways shall be licensed to Tanabe hereunder in the Territory; (iii) During the term of the Agreement and subject to the provisions of Section 2.4(f), Signal shall not, and shall cause its Affiliates and (sub)licensees collaborating with Signal in the development of Compounds, including the Western Pharmaceutical Partner, not to, conduct any research, development or commercialization activities relating to the use of (a) Compounds, (b) Potential Compounds or (c) chemical modifications of Potential Compounds which if they were tested during the Research Period would have been Potential Compounds, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any compounds described in clauses (a) through (c) above developed for use in the respective pathways shall be licensed to Tanabe hereunder in the Territory; and (iv) During the term of this Agreement, Signal shall not, and shall cause its Affiliates and (sub)licensees collaborating with Signal in the development of Compounds, including the Western Pharmaceutical Partner, not to, conduct any research, development or commercialization activities relating to the use of any Tanabe Compound other than in the prevention or treatment of Inflammation or Osteoporosis in the Rest of the World, for its own benefit, or with or for the benefit of any other Person, unless such Tanabe Compound first is designated by Tanabe as a Clinical Candidate or Signal, its Affiliate or sublicensee has [***] (b) Tanabe Obligations. (i) During the Research Period, Tanabe shall not, and shall cause its Affiliates and (sub)licensees collaborating with Tanabe in the development of Compounds not to, conduct any research, development or commercialization activities relating to the discovery or use of compounds in an Inflammation Pathway(s) for the 20. ***Confidential Treatment Requested 23 prevention or treatment of Inflammation (to the extent, with respect to any (sub)licensee, such collaboration involves such Inflammation Pathway(s)), or in an Osteoporosis Pathway(s) for the prevention or treatment of Osteoporosis (to the extent, with respect to any (sub)licensee, such collaboration involves such Osteoporosis Pathway(s)), in the Rest of the World, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any compounds developed for use in the respective pathways shall be licensed to Signal hereunder in the Rest of the World; (ii) Following the Research Period but during the term of this Agreement, Tanabe shall not, and shall cause its Affiliates and (sub)licensees collaborating with Tanabe in the development of Compounds not to, conduct any research, development or commercialization activities relating to the use of Main Activity Compounds in an Inflammation Pathway(s) for the prevention or treatment of Inflammation (to the extent, with respect to any (sub)licensee, such collaboration involves such Inflammation Pathway(s)), or in an Osteoporosis Pathway(s) for the prevention or treatment of Osteoporosis (to the extent, with respect to any (sub)licensee, such collaboration involves such Osteoporosis Pathway(s)), in the Rest of the World, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any Main Activity Compounds developed for use in the respective pathways shall be licensed to Signal hereunder in the Rest of the World; (iii) During the term of the Agreement, Tanabe shall not, and shall cause its Affiliates and (sub)licensees collaborating with Tanabe in the development of Compounds not to, conduct any research, development or commercialization activities relating to the use of (a) Compounds, (b) Potential Compounds, (c) chemical modifications of Potential Compounds which if they were tested during the Research Period would have been Potential Compounds, or (d) compounds identified from the Tanabe Compound Libraries which if they were tested during the Research Period would have been Potential Compounds, for its own benefit, or with or for the benefit of any other Person, other than to the extent that any compounds described in clauses (a) through (d) above developed for use in the respective pathways shall be licensed to Signal hereunder in the Rest of the World; and (iv) During the term of this Agreement, Tanabe shall not, and shall cause its Affiliates and (sub)licensees collaborating with Tanabe in the development of Compounds not to, conduct any research, development or commercialization activities relating to the use of any Signal Compound other than in the prevention or treatment of Inflammation or Osteoporosis in the Territory, for its own benefit, or with or for the benefit of any other Person, unless such Signal Compound first is designated by Tanabe as a Clinical Candidate. 21. 24 3. PRODUCT DEVELOPMENT. 3.1 Development Activities. Tanabe shall control all activities regarding the pre-clinical and clinical development, application for Regulatory and Pricing Approval and commercialization of all Compounds, Clinical Candidates and Products in the Territory. Signal shall control all activities regarding the pre-clinical and clinical development, application for Regulatory Approval and commercialization of all Compounds, Clinical Candidates and Products in the Rest of the World. If the parties mutually agree, Signal and Tanabe shall, in mutual cooperation with one another, establish a development plan for each Compound, Clinical Candidate and Product with respect to the development and regulatory approval of such Product on a worldwide basis (the "Development Plan"). In the event that both Parties are unable to agree on the Development Plan, Tanabe's decisions shall control all activities regarding the pre-clinical and clinical development, application for Regulatory and Pricing Approval and commercialization of all Compounds, Clinical Candidates and Products in the Territory and Signal's decisions shall control all activities regarding the pre-clinical and clinical development, application for Regulatory and Pricing Approval and commercialization of all Compounds, Clinical Candidates and Products in the Rest of the World; provided that in no event will either Party (and Signal shall similarly bind its Western Pharmaceutical Partner) knowingly take any action that will unnecessarily impair the other Party's efforts to have a Product achieve the relevant Regulatory Approvals. Each Party shall immediately inform the other at such time as it receives notice of any governmental or regulatory approvals and disapprovals for Products. Signal shall not be entitled to share any information received pursuant to this Section 3.1 with its Western Pharmaceutical Partner until Tanabe and such Western Pharmaceutical Partner have reached an agreement covering such exchange of information. 3.2 Development Efforts. Once a Clinical Candidate has been designated by Tanabe, Tanabe shall use its good faith efforts in proceeding with (i) the development, testing and, where applicable, manufacturing of a Product based on such Clinical Candidate or Chemical Modification thereof, including, without limitation, pre-clinical and clinical development, (ii) obtaining Regulatory and Pricing Approvals in the Territory and (iii) the subsequent manufacturing, marketing and sale of that Product in the Territory. Tanabe shall exercise its reasonable efforts and diligence in conducting such activities with respect to any Compound, Clinical Candidate or Product in accordance with Tanabe's business, legal, medical and scientific judgment and Tanabe's normal practices and procedures for compositions having similar technical and commercial potential for similar uses. 3.3 Inflammation Clinical Matters. Tanabe shall take all reasonable action and bear all costs to conduct the regulatory application and pre-clinical and clinical testing and the development of all Inflammation Products that result from the Collaborative Project contemplated by this Agreement within the Territory. 22. 25 3.4 Osteoporosis Clinical Matters. Tanabe shall take all reasonable action and bear all costs to conduct the regulatory application and pre-clinical and clinical testing and the development of all Osteoporosis Products that result from the Collaborative Project contemplated by this Agreement within the Territory. 3.5 Synthesized Compounds; Manufacturing. In the event Tanabe synthesizes Compounds or Clinical Candidates, Tanabe agrees to cooperate with Signal, based upon its manufacturing and supply capabilities, to make a reasonable effort to make research quantities of such Compounds or Clinical Candidates, as the case may be, available to Signal at a reasonable cost plus shipping charges. Tanabe agrees that, during the term of this Agreement, Tanabe will at the request of Signal negotiate in good faith with Signal with respect to entering into a manufacturing and supply agreement pursuant to which Tanabe would provide Signal with Signal's (but not its Western Pharmaceutical Partner's, which shall be subject to Tanabe's agreement with such Western Pharmaceutical Partner) requirements of each Inflammation and Osteoporosis Compound or Product selected for development hereunder. 4. PAYMENT. 4.1 Initial Payment. Within ten (10) days following execution of this Agreement, Tanabe shall pay to Signal, in consideration of the licenses granted by Signal to Tanabe hereunder, [***] by wire transfer of immediately available funds to the Signal bank account set forth in Section 4.4. 4.2 Research Funding. In consideration of Signal's research obligations set forth in Section 2 hereof, Tanabe shall pay to Signal the following amounts: (a) with respect to the Inflammation Program, [***] per year of the Research Period; and (b) with respect to the Osteoporosis Program, (i) [***] per annum for the [***] following the Effective Date [***], and (ii) [***] per year of the Research Period for each year following [***]. The per annum payments shall be made in two (2) equal semi-annual installments, in advance, with the first payment being due within ten (10) days following execution of this Agreement and subsequent payments being due and payable at each six (6) month interval thereafter by wire transfer of immediately available funds to the Signal bank account set forth in Section 4.4. At the end of each year, Signal shall determine its actual spending with respect to each program on a fully-allocated cost basis and in the event that the research funding received from Tanabe exceeds [***] of Signal's actual expenditures in [***] of the Research Period for Inflammation and in years [***] of the Research Period for Osteoporosis, then Signal shall refund such excess to Tanabe within ninety (90) days after the end of each of [***], and shall prepare and provide Tanabe with a written report in reasonable specific detail of all expenditures by Signal (on a fully-allocated cost basis determined in accordance with generally accepted accounting principles consistently applied) under the Collaborative Project during the 23. ***Confidential Treatment Requested 26 preceding one (1) year period, compared to the budgeted amounts therefor, and itemized by program and major cost category for such reporting period. In the event that Tanabe terminates the Research Period with respect to either Inflammation or Osteoporosis or both prior to the completion of [***], pursuant to Section 2.3(f), 13.4 and 13.5 hereof, then Tanabe shall continue to fund its otherwise applicable funding obligations until the effective date of such termination. Signal shall keep complete and accurate records in sufficient detail to properly reflect all expenditures by Signal under the Collaborative Project. Upon the written request of Tanabe and not more than once in each calendar year, Signal shall permit an independent certified public accounting firm of internationally recognized standing, selected by Tanabe and reasonably acceptable to Signal, at Tanabe's expense, to have access during normal business hours to such of the records of Signal as may be reasonably necessary to verify the accuracy of the research expenditure reports hereunder for any year ending not more than twenty-four (24) months prior to the date of such request. The accounting firm shall disclose to Tanabe only whether the reports are correct or not and the specific details concerning any discrepancies. No other information shall be shared. 4.3 Milestone Payments. Tanabe shall pay to Signal each of the amounts set forth below, by wire transfer of immediately available funds to the Signal bank account set forth in Section 4.4, upon the first achievement of each of the milestones set forth below, except that if a Compound is subsequently approved for indications other than Inflammation or Osteoporosis, the milestone payment described in Section 4.3(d) if not previously paid with respect to such Compound will be payable by Tanabe to Signal for such approved indication. (a) Upon the [***] (b) Upon the [***] (c) Upon the [***] (d) Upon receipt of governmental Pricing Approval for a Product, but in no event later than the first end user sale of such Product for any 24. ***Confidential Treatment Requested 27 [***] Notwithstanding the foregoing, (i) Tanabe shall not be required to [***], and (ii) the maximum aggregate amount which Tanabe shall be required to pay pursuant to this Section 4.3 with respect to all Compounds and Products shall be [***], and (iii) [***] 4.4 Payment Terms. All payments under this Agreement shall be by wire transfer of immediately available funds to the bank account set forth below and shall be non-refundable (except as otherwise set forth herein). First Interstate Bank of California #657 136 2nd Avenue P.O. Box 1488 San Mateo, California 94401-0870 Routing: 122000218 Name: Signal Pharmaceuticals, Inc. Account Number: [***] 5. LICENSES OF TECHNOLOGY; ROYALTIES. 5.1 License to Tanabe. (a) Subject to the terms and conditions of this Agreement and the payment in full of any milestone obligations which are owing to Signal as set forth in Section 4.3, Signal hereby grants to Tanabe an exclusive (even as to Signal) license under the Signal Patents, the Joint Patents and, to the extent required to be provided pursuant to Section 2.2 and 2.3, the Signal Technical Information to develop, make, have made, use, sell, have sold and import Products in the Territory. (b) Subject to the terms and conditions of this Agreement, Tanabe shall have the right to grant licenses or sublicenses to develop, make, have made, use, sell, have sold, and import Products in the Territory, provided that such licensees and sublicensees agree in writing to be bound by the applicable terms, if any, of this Agreement. Tanabe shall be responsible for the operations and activities of its licensees and sublicensees as if such operations and activities were carried out by Tanabe. As to each sublicense of a Signal Patent or a Joint Patent, Tanabe agrees to deliver to Signal notification of each sublicense granted by Tanabe and termination thereof, within fifteen 25. ***Confidential Treatment Requested 28 (15) days after execution or termination, setting forth the name of the sublicensee and the territory as to which the sublicense is effective. 5.2 License to Signal. (a) Subject to the terms and conditions of this Agreement, Tanabe hereby grants to Signal an exclusive (even as to Tanabe), license under the Tanabe Patents, the Joint Patents and, to the extent required to be provided pursuant to Section 2.2, the Tanabe Technical Information, to develop, make, have made, use, sell, have sold and import Products in the Rest of the World. (b) Subject to the terms and conditions of this Agreement, including, without limitation, Section 6.3 hereof, Signal shall have the right to grant licenses or sublicenses to develop, manufacture, market and sell all Products in the Rest of the World provided that such licensees and sublicensees agree in writing to be bound by the applicable terms, if any, of this Agreement. Signal shall be responsible for the operations and activities of its licensees and sublicensees as if such operations and activities were carried out by Signal. As to each sublicense of a Tanabe Patent or a Joint Patent, Signal agrees to deliver to Tanabe notification of each sublicense granted by Signal and termination thereof, within fifteen (15) days after execution or termination, setting forth the name of the sublicensee and the territory as to which the sublicense is effective. 5.3 Improvements. Any modification or improvement to the Compounds and/or Products (including any Tanabe Technical Information or Signal Technical Information regarding to such modification) licensed under this Agreement made before the termination of this Agreement shall be included in the license(s) granted under this Section 5 without additional charge to the licensing Party. The Parties agree to promptly disclose any such modifications or improvements. 5.4 Royalty Payments; Reports. Tanabe shall, (i) for a period equaling the longer of ten (10) years from the date of the initial sale of each Product for each indication in the Territory or the expiration of the last Signal Patent, Joint Patent or Tanabe Patent (including in each case patents deemed to exist as a result of a Use or Structure Contribution by Tanabe, Signal or both Parties) which claims the use or sale of such Product in the country of sales, pay to Signal a royalty in U.S. dollars equal to the percentages ("Royalty Rates") set forth in Exhibit D and (ii) for so long as sales of any Product gives rise to an obligation by Signal to pay patent royalties to a Third Party, reimburse Signal for any and all such Third-Party patent royalties ("Third-Party Royalties"), subject to Section 5.4(e) below, due by Signal pursuant to its license ("Reimbursements"). Thereafter, [***] Tanabe shall remain liable for all royalties payable by its Affiliates or sublicensees. 26. ***Confidential Treatment Requested 29 (a) The applicable Royalty Rate shall be determined on the basis of: (i) [***] (ii) [***] (iii) [***] (iv) [***] (v) [***] (A) if the applicable Research and Development Committee determines that the greater therapeutically relevant activity of such Compound is identified in the Tanabe Other Screen, the screening of such Compound shall constitute a Signal Use or Structure Contribution (to the extent there exists either a Signal or a Tanabe Contribution Patent which claims the use of such Compound); provided, however, that the applicable Royalty Rate in the Territory shall be reduced by [***], the applicable Royalty Rate in the Rest of the World shall be increased by [***], the applicable milestone credit shall be increased by [***]; and (B) if the applicable Research and Development Committee determines that the greater therapeutically relevant activity of 27. ***Confidential Treatment Requested 30 such Compound is identified in the Signal Screen, the screening of such Compound shall constitute a Signal Use or Structure Contribution (to the extent there exists either a Signal or a Tanabe Contribution Patent which claims the use of such Compound). (vi) If Signal demonstrates to the satisfaction of the applicable Research and Development Committee that a Compound is Active in a Signal Screen when screened by Signal, and Tanabe is unable to demonstrate to the satisfaction of the applicable Research and Development Committee that such Compound is Active in a Tanabe Other Screen when screened by Tanabe, then for purposes of calculating the applicable Royalty Rate in the Territory and the Rest of the World and the applicable milestone credit, the screening of such Compound shall constitute a Signal Use or Structure Contribution (to the extent there exists either a Signal or a Tanabe Contribution Patent which claims the use of such Compound). (vii) If Signal is unable to demonstrate to the satisfaction of the applicable Research and Development Committee that a Compound is Active in a Signal Screen when screened by Signal, and Tanabe demonstrates to the satisfaction of the applicable Research and Development Committee that such Compound is Active in a Signal Screen or a Tanabe Other Screen when screened by Tanabe, then for purposes of calculating the applicable Royalty Rate in the Territory and the Rest of the World and the applicable milestone credit, the screening of such Compound shall constitute a Tanabe Use or Structure Contribution (to the extent there exists either a Tanabe or a Signal Contribution Patent which claims the use of such Compound). (viii) For purposes of Sections 5.4(a)(v), (vi) and (vii), "Active" means, with respect to any Compound in any Signal Screen or Tanabe Other Screen, that such Compound exhibits at least [***] in such Signal Screen or Tanabe Other Screen. (ix) In the event the applicable claim(s) of a Structure Patent or a Use Patent falls within the scope of the applicable claim(s) of another Structure Patent or Use Patent, the Parties shall determine whether any of the claims of one such patent "dominate" the claims of the other patent(s) and the applicable Royalty Rate shall be determined on the basis of which patents are "Dominant Patents." For purposes of this Agreement, a "Dominant Patent" means, with respect to any Compound, a patent application or issued patent of which the priority date is the earliest among all patent applications or patents which claim the composition of matter (in the case of Structure Patents) or the use (in the case of Use Patents) which would be infringed, absent the ownership thereof or the licenses granted herein, by the use or sale of a Product containing such Compound as an active ingredient. 28. ***Confidential Treatment Requested 31 (x) In the event that a majority of the members of the applicable Research and Development Committee is unable to agree upon any determination or decision under Section 5.4(a)(v), (vi) or (vii) above, then the parties first shall attempt to resolve such disagreement pursuant to Section 2.8 above, and if the parties are unable to so resolve such disagreement, such disagreement shall be finally resolved by binding arbitration pursuant to Article 7 below. In the event the applicable claim(s) of a Structure Patent or a Use Patent falls within the scope of the applicable claim(s) of another Structure Patent or Use Patent, the Parties shall determine whether any of the claims of one such patent "dominate" the claims of the other patent(s) and the applicable Royalty Rate shall be determined on the basis of which patents are "Dominant Patents." For purposes of this Agreement, a "Dominant Patent" means, with respect to any Compound, a patent application or issued patent of which the priority date is the earliest among all patent applications or patents which claim the composition of matter (in the case of Structure Patents) or the use (in the case of Use Patents) which would be infringed, absent the ownership thereof or the licenses granted herein, by the use or sale of a Product containing such Compound as an active ingredient. (b) If the Compound originated from a Tanabe Compound Library which is a "natural product library", then the applicable Royalty Rate shall [***] unless annual Net Sales of the Product in the Territory are [***] in which case the Royalty Rate in any such year shall not be reduced. (c) A [***] Royalty Rate corresponding to [***] shall apply as follows: Annual Net Sales Royalty Rate Tier [***] [***] [***] [***] [***] [***] For example, if a Product contains a Compound which originated from a compound in a Tanabe Compound Library, was screened by Signal in its primary assays resulting in a Signal Use or Structure Contribution (and is claimed or deemed to be claimed in a Signal Use Patent), and was chemically modified by Tanabe resulting in a Tanabe Use or Structure Contribution (and is claimed or deemed to be claimed in a Tanabe Structure Patent), then the Royalty Rates applicable to sales of the Product in the Territory are 6.5% for annual Net Sales less than $50,000,000 (Tier 1), 7.5% for annual Net Sales between $50,000,000 and $100,000,000 (Tier 2) and 8.5% for annual Net Sales above $100,000,000 (Tier 3). With respect to Signal's sales of the Product in 29. ***Confidential Treatment Requested 32 the Rest of the World, the applicable Royalty Rate is [***]. (d) Tanabe shall be entitled to credit up to the percentage set forth on Exhibit D of its aggregate milestone payments made pursuant to Section 4.3 above against up to [***] of any royalty payment then due Signal (excluding from such credit any pass-throughs of Third Party Royalties). (e) Reimbursements payable by Tanabe with respect to Third- Party Royalties in the Territory shall not exceed (i) [***] with respect to each Product derived from a Tanabe Compound Library or (ii) [***] of Net Sales, with respect to each Product derived from a Signal Compound Library. Any Third Party Royalties payable with respect to a Joint Compound Library derived Product shall be paid by the Party responsible for the sale(s) on which a Third-Party Royalty is payable, including sales by its Affiliates, licensees and sublicensees (other than the other Party). (f) Tanabe shall provide a royalty report and, if applicable, a royalty payment to Signal every six (6) months. The report and payment relating to Net Sales shall be provided within sixty (60) days after the end of March and September of each calendar year, and shall include all sales of Products by Tanabe and its Affiliates and sublicensees. (g) Tanabe shall provide Signal with a nonbinding, but good faith estimate, quarterly forecast of its projected sales of any Product during the upcoming calendar year not later than thirty (30) days prior to the start of each calendar year. (h) Signal shall provide to Tanabe a report detailing the calculation of the Reimbursements, together with a copy of the agreement providing for such Third Party royalties, within two (2) months of receiving the Tanabe royalty report. The payment for the Reimbursements shall be due and payable within one (1) month of receipt by Tanabe. (i) Tanabe shall keep, and require any Affiliate, licensee and sublicensee to keep, for a period of not less than seven (7) years, complete and accurate records of all Net Sales (including all discounts, rebates, returns and allowances) of each Product. Signal shall have the right, at Signal's sole expense, through an independent certified public accounting firm of internationally recognized standing, selected by Signal and reasonably acceptable to Tanabe, and following reasonable notice, to examine such records during regular business hours during the life of the Tanabe obligation to pay royalties on Net Sales of each Product, Delivery Systems Product and Combination Product; provided, however, that such examination shall not (i) be of records for any year ending not more than twenty-four (24) months prior to the date of such request, and (ii) take place more than once in any calendar year; and provided, further, that, such 30. ***Confidential Treatment Requested 33 accountants shall report to Signal only as to the accuracy of the royalty statements and payments. Copies of such reports shall be supplied to Tanabe. In the event the report demonstrates that Tanabe has underpaid royalties, Tanabe shall pay such royalties immediately upon request of Signal. If Tanabe has overpaid royalties, Tanabe may deduct such overpayments from future royalties owed to Signal. The fees charged by such accounting firm shall be paid by Signal; provided, however, if the audit discloses that the royalties payable by Tanabe for the audited period are more than one hundred ten percent (110%) of the royalties actually paid for such period, then Tanabe shall pay the reasonable fees and expenses charged by such accounting firm. Signal shall treat all financial information subject to review under this Section 5.4(i) as confidential, and shall cause its accounting firm to retain all such financial information in confidence. (j) Any tax paid or required to be withheld by Tanabe for the benefit of Signal on account of royalties payable to Signal under this Agreement shall be deductible from the amount of royalties otherwise due. Tanabe shall secure and send to Signal proof of any such taxes withheld and paid by Tanabe for the benefit of Signal and shall, at Signal's request, provide reasonable assistance to Signal in recovering said taxes, if possible. (k) The parties shall use all reasonable efforts to minimize any withholding taxes required to be taken on any amounts paid hereunder. 5.5 Signal and its sublicensees shall, (i) for a period equalling the longer of ten (10) years from the date of the initial sale of each Product in the Rest of the World or the expiration of the last Signal Patent, Joint Patent or Tanabe Patent (including in each case patents deemed to exist as a result of a Use or Structure Contribution by Tanabe, Signal or both Parties) which claims the use or sale of such Product in the country of sales, pay to Tanabe a royalty in U.S. dollars equal to the percentages ("Royalty Rates") set forth in Exhibit D and (ii) [***], reimburse Tanabe for any and all such Third-Party patent royalties ("Third-Party Royalties"), subject to Section 5.5(b) below, due by Tanabe pursuant to its license ("Reimbursements"). Thereafter, the [***]. Signal shall remain liable for all royalties payable by its Affiliates or sublicensees. (a) The applicable Royalty Rate shall be determined on the basis set forth in Section 5.4(a) above and on Exhibit D. (b) Reimbursements payable by Signal with respect to Third- Party Royalties in the Rest of the World (on patent applications or patents claiming composition of matter or use licensed by Tanabe from a Third Party) shall not exceed (i) [***] of Net Sales, with respect to each Product derived from a Signal Compound Library or (ii) [***], with respect 31. ***Confidential Treatment Requested 34 to each Product derived from a Tanabe Compound Library. Any Third Party Royalties payable with respect to a Joint Compound Library derived Product shall be paid by the Party responsible for the sale(s) on which a Third-Party Royalty is payable, including sales by its Affiliates, licensees and sublicensees (other than the other Party). (c) Signal shall provide a royalty report and, if applicable, a royalty payment to Tanabe every six (6) months. The report and payment relating to Net Sales shall be provided within sixty (60) days after the end of March and September of each calendar year, and shall include all sales of Products by Signal and its Affiliates and sublicensees. (d) Signal shall provide Tanabe with a nonbinding, but good faith estimate, quarterly forecast of its projected sales of any Product during the upcoming calendar year not later than thirty days prior to the start of each calendar year. (e) Tanabe shall provide to Signal a report detailing the calculation of the Reimbursements, together with a copy of the agreement providing for such Third Party Royalties, within two (2) months of receiving the Signal royalty report. The payment for the Reimbursements shall be due and payable within one (1) month of receipt by Signal. (f) Signal shall keep, and require any Affiliate, licensee and sublicensee to keep, for a period of not less than seven (7) years, complete and accurate records of all Net Sales (including all discounts, rebates, returns and allowances) of each Product. Tanabe shall have the right, at Tanabe's sole expense, through an independent certified public accounting firm of internationally recognized standing, selected by Tanabe and reasonably acceptable to Signal, and following reasonable notice, to examine such records during regular business hours during the life of the Signal obligation to pay royalties on Net Sales of each Product, Delivery System Product and Combination Product; provided, however, that such examination shall not (i) be of records for any year ending not more than twenty-four (24) months prior to the date of such request, and (ii) take place more than once in any calendar year; and provided, further, that, such accountants shall report to Tanabe only as to the accuracy of the royalty statements and payments. Copies of such reports shall be supplied to Signal. In the event the report demonstrates that Signal has underpaid royalties, Signal shall pay such royalties immediately upon request of Tanabe. If Signal has overpaid royalties, Signal may deduct such overpayments from future royalties owed to Tanabe. The fees charged by such accounting firm shall be paid by Tanabe, provided, however, if the audit discloses that the royalties payable by Signal for the audited period are more than one hundred ten percent (110%) of the royalties actually paid for such period, then Signal shall pay the reasonable fees and expenses charged by such accounting firm. Tanabe shall treat all financial information subject to review under this Section 5.5(f) as confidential, and shall cause its accounting firm to retain all such financial information in confidence. 32. 35 (g) Any tax paid or required to be withheld by Signal for the benefit of Tanabe on account of royalties payable to Tanabe under this Agreement shall be deductible from the amount of royalties otherwise due. Signal shall secure and send to Tanabe proof of any such taxes withheld and paid by Signal for the benefit of Tanabe and shall, at Tanabe's request, provide reasonable assistance to Tanabe in recovering said taxes, if possible. (h) The parties shall use all reasonable efforts to minimize any withholding taxes required to be taken on any amounts paid hereunder. 6. GLOBAL RELATIONSHIP. 6.1 Overall Relationship. Signal intends to enter into one or more relationships with a Western Pharmaceutical Partner(s) to develop therapeutic products for the prevention or treatment of Inflammation and Osteoporosis and the Parties agree that the Collaborative Project may benefit from the joint efforts of Signal, Tanabe and such Western Pharmaceutical Partner(s). To this end, the Parties agree that in the event that Signal enters into a collaborative agreement with a Western Pharmaceutical Partner and the Western Pharmaceutical Partner and Tanabe have each chosen to develop a therapeutic product for the prevention or treatment of Inflammation and/or Osteoporosis containing the same Compound in development and having substantially the same identity for marketing, sales or regulatory purposes (a "Mutual Product"), the Parties shall consider in good faith whether it is in their mutual best interest to enter into a global collaboration with such Western Pharmaceutical Partner. 6.2 Global Development Plan; Coordination. If the Parties and the Western Pharmaceutical Partner mutually agree in writing to enter into such a global collaboration, such a global collaboration would be on mutually acceptable financial and other terms and conditions and evidenced by a separate mutually acceptable definitive written agreement duly approved, executed and delivered by Tanabe, Signal and the Western Pharmaceutical Partner. Subject to the mutual agreement of Tanabe, Signal and the Western Pharmaceutical Partner, such global collaboration may (i) establish a worldwide development plan for such Mutual Product with respect to each indication, the pre-clinical and clinical studies of such Mutual Product, to coordinate their respective development efforts and to create and maintain a single worldwide safety database and shall share the results of the clinical trials in order to facilitate such development, including, when feasible, elimination of duplicate development efforts; (ii) establish a collaborative committee to coordinate and communicate the research, development and commercialization efforts under the collaboration; and (iii) provide that each of Tanabe, Signal and the Western Pharmaceutical Partner would have certain license or other rights to access certain technical information (including without limitation Compound Information and Product Information) of the others, on mutually acceptable license terms and conditions, for the purpose of developing and commercializing the Mutual Product. It is understood and agreed that Signal will use its commercially reasonable 33. 36 efforts to negotiate a provision similar to that contained in Section 6.3 below, in its definitive agreement with its Western Pharmaceutical Partner allowing disclosure to Tanabe of pre-clinical and clinical data generated by such Western Pharmaceutical Partner based on any Compound designated by Tanabe which is also chosen for development by the Western Pharmaceutical Partner. 6.3 Transfer of Information; License Obligations. Once Signal has identified the Western Pharmaceutical Partner to Tanabe and each of Tanabe and the Western Pharmaceutical Partner has agreed to accept reciprocity on exchanges of Technical Information, then during the term of this Agreement, Signal, Tanabe and the Western Pharmaceutical Partner shall make available, without charge, to each other the applicable Signal, Tanabe or Western Pharmaceutical Partner such Compound Information and Product Information, respectively as the three parties mutually agree, for any Compound which is simultaneously under development by Tanabe and by such Western Pharmaceutical Partner in whatever form is best suited to fully deliver such information. Notwithstanding the foregoing, Tanabe, Signal and the Western Pharmaceutical Partner shall at all times make available to each other any information required to be disclosed by Section 9.1. 7. ARBITRATION. All disputes arising in any way out of or related to this Agreement, including, without limitation, its existence, validity, scope, application, termination or breach of this Agreement and the ownership of any inventions, the obligations of the Parties or these arbitration provisions shall be referred to and finally resolved by arbitration at the request of either Party in accordance with the provisions of the Commercial Rules of Arbitration of the American Arbitration Association in force at such time, which rules are deemed to be incorporated by reference into this Agreement. 7.1 Arbitration Tribunal. Unless otherwise agreed to by the parties, the arbitration tribunal shall consist of three (3) arbitrators, including two (2) members and a chairman. Tanabe and Signal shall each appoint one member. The chairman shall be appointed according to the American Arbitration Association Commercial Arbitration Rules. 7.2 Situs of Arbitration. The arbitration shall be held in Osaka, Japan. 8. CONFIDENTIALITY, DISCLOSURE AND PUBLICATION. 8.1 Prior Agreement. This Agreement supersedes but does not invalidate or cancel any and all previous agreements and understandings, whether oral or written, between the Parties regarding the treatment of confidential information. 8.2 Confidentiality. During the term of this Agreement and for ten (10) years thereafter, each Party shall maintain in confidence all information and materials disclosed by the other Party and marked as confidential or which such Party knows or 34. 37 has reason to know are or contain trade secrets or other proprietary information of the other, including, without limitation, information relating to the Technical Information of the other Party, Joint Inventions and inventions of the other Party, and the business plans of the other Party, including information provided by either Party to the other Party prior to the Effective Date (collectively, the "Confidential Information and Materials"), and shall not use the Confidential Information and Materials of the other Party for any purpose except as permitted by this Agreement or disclose the same to anyone other than those of its Affiliates, sublicensees, employees, consultants, agents or subcontractors as are necessary in connection with such Party's activities as contemplated in this Agreement. Each Party shall obtain binding agreement from any such employee, and binding written agreement from each such Affiliate, sublicensee, consultant, agent and subcontractor, prior to disclosure, to hold in confidence and not make use of the Confidential Information and Materials of the other Party for any purpose other than those permitted by this Agreement. 8.3 Exceptions. (a) The obligation of confidentiality contained in this Agreement shall not apply to the extent that: (i) either Party (the "Recipient") is required to disclose Confidential Information or Materials of the other Party by order or regulation of a governmental agency or a court of competent jurisdiction, provided that the Recipient shall not make any such disclosure (other than a filing of information or materials with the U.S. Securities and Exchange Commission, a similar filing of information or materials with the National Association of Securities Dealers or state securities regulators or a filing of information or materials pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder, as amended or an equivalent filing with a foreign applicable authority) without first notifying the other Party and allowing the other Party a reasonable opportunity to seek injunctive relief from (or protective order with respect to) the obligation to make such disclosure; or (ii) the Recipient can demonstrate that (A) the disclosed information was at the time of such disclosure to the Recipient already in (or thereafter enters) the public domain other than as a result of actions of the Recipient, its Affiliates, employees, sublicensees, agents or subcontractors in violation hereof; (B) the disclosed information was rightfully known by the Recipient or its Affiliates (as shown by its written records) prior to the date of disclosure to the Recipient in connection with the negotiation, execution or performance of this Agreement; or (C) the disclosed information was received by the Recipient or its Affiliates on an unrestricted basis from a source unrelated to any Party to this Agreement and not under a duty of confidentiality to the other Party; or (D) the disclosed information was independently developed by the Recipient or its Affiliates (as shown by written records) by persons without access to or use of the Confidential Information and Materials of the other Party; or (iii) disclosure is required to be made to a government regulatory agency as part of such agency's product license approval process. 35. 38 (b) In the event (i) that each of Tanabe and the Western Pharmaceutical Partner have agreed in writing to accept reciprocity on exchanges of Technical Information and (ii) that Signal's Western Pharmaceutical Partner chooses to develop a Product for the prevention or treatment of Inflammation and/or Osteoporosis based on a Compound and (iii) provided the Western Pharmaceutical Partner agrees to be bound by the terms specified in Section 6 of this Agreement, Signal shall have the right to disclose to the Western Pharmaceutical Partner any applicable Compound Information and Product Information with respect to such Compound provided to Signal by Tanabe. As a condition to such disclosure, Signal will require its Western Pharmaceutical Partner to enter into confidentiality provisions equivalent to those set forth in this Section 8. 8.4 Publications. Prior to any public disclosure or submission for publication by or on behalf of the Parties of a manuscript or other document describing the results of any aspect of the Collaborative Project or other scientific or clinical activity or collaboration between Tanabe and Signal or their Affiliates, the Party disclosing or submitting such a manuscript ("Disclosing Party") shall first send a copy of the manuscript to the applicable Joint Inflammation Committee or the Joint Osteoporosis Committee for their review for a period of 15 days. If such Research and Development Committee approves such publication, the Disclosing Party shall then send the other Party ("Responding Party") a copy of the manuscript to be submitted and shall allow the Responding Party not less than thirty (30) days from the date of receipt in which to determine whether the manuscript contains subject matter for which patent protection should be sought prior to publication of such manuscript for the purpose of protecting an invention of commercial value to the Responding Party, or whether the manuscript contains confidential information belonging to the Responding Party or whether such disclosure implicates issues regarding compliance with applicable securities laws. After the expiration of such thirty (30) day period, if the Responding Party has not objected in writing, the Disclosing Party may submit such manuscript for publication and publish or otherwise disclose to the public such research results. If the Responding Party believes the subject matter of the manuscript contains confidential information or a patentable invention of commercial value to the Responding Party, then prior to the expiration of such thirty (30) day period, the Responding Party shall notify the Disclosing Party in writing of its determination. Upon receipt of such written notice from the Responding Party, the Disclosing Party shall delay public disclosure of such information or submission of the manuscript to permit preparation and filing of a patent application on the disclosed subject matter. The Disclosing Party shall thereafter be free to publish or disclose such manuscript, except that the Disclosing Party may not disclose any confidential information of the Responding Party in violation of this Section 8 without the prior written consent of the Responding Party and that no publication of a patentable invention shall be made until a patent application covering such invention has been filed. Determination of authorship for any manuscript shall be in accordance with accepted scientific practice. Should any questions on authorship arise, this will be 36. 39 determined by good faith consultation between the members of the appropriate Research and Development Committee. 9. INDEMNIFICATION. Each Party shall defend, indemnify and hold the other Party, any Affiliate of the other Party, any officer, director or employee of such other Party or of any of its Affiliates (individually, an "Exculpated Party") harmless from and against any damage, loss, liability or expense (including, without limitation, reasonable attorneys' fees, settlement costs, litigation costs and costs on appeal regardless of outcome) incurred or suffered by any Exculpated Party arising out of any claim, demand, action or other proceeding by any person or entity (other than an Affiliate of the Exculpated Party) arising out of: (a) the material breach of any covenant or agreement by such Party; (b) any material misrepresentation or breach of warranty made by such Party pursuant to this Agreement; (c) any claim arising from the gross negligence or intentional misconduct of any of such Party's by or on behalf of such Party or its Affiliates, licensees, sublicensees, employees, consultants, agents or subcontractors (other than the other Party or its Affiliates) pursuant to its rights under this Agreement; (d) any claim of any kind whatsoever arising from the testing, manufacture, use, sale, consumption, distribution or advertising of any of the Compounds or Products by or on behalf of such Party or its Affiliates, licensees, sublicensees, employees, consultants, agents or subcontractors (other than the other Party or its Affiliates) pursuant to its rights under this Agreement; or (e) the operations or activities of such a Party's Affiliates, licensees or sublicensees in material contravention of the requirements of this Agreement (and such Party shall terminate immediately any such sublicense where a breach of its obligations by a sublicensee cannot be readily compensated through monetary damages). 9.1 Each Party shall notify the other immediately of any information concerning any material adverse side effect, injury, toxicity or sensitivity reaction, whether or not serious or unexpected (collectively, any "adverse event"), or any unexpected incidence, and the severity thereof, associated with the clinical uses, studies, investigations, tests and marketing of any Product, whether or not determined to be attributable to such Product. Without limiting the generality of the foregoing, each Party shall notify the other Party of any event or incidence regarding any Product, which it is required to notify or report to any governmental authority of the country in which it sells such Product, prior to the date when it is required to give such notice or to make such report. Each Party further shall immediately notify the other of any information received regarding any threatened or pending action by a governmental agency or any other third party arising out of or relating to an alleged adverse effect or unexpected incidence regarding any Product. Upon receipt of any such information, the Parties shall consult with each other in an effort to arrive at a mutually acceptable procedure for taking appropriate action; provided, however, that nothing contained herein shall be construed as restricting either Party's right to make a timely report of such matter to any government agency or take other action that it deems to be appropriate or required by applicable law or regulation, including the right of a Party to recall or withdraw such 37. 40 Product from marketing and selling. Signal shall cause any Western Pharmaceutical Partner to agree in writing to be bound by the provisions of this Section 9.1. The obligations in this Section 9.1 pertaining to Products shall survive the expiration or termination of this Agreement. 9.2 Either Party (the "Notifying Party") shall promptly notify the other Party (the "Indemnifying Party") of the existence of any third party claim, demand or other action giving rise to a claim for indemnification under this Agreement (a "Third Party Claim") and shall give the Indemnifying Party a reasonable opportunity to defend the same at its own expense and with its own counsel, provided that the Notifying Party shall at all times have the right to participate in such defense at its own expense. If, within a reasonable time after receipt of notice of a Third Party Claim, the Indemnifying Party shall fail to undertake to so defend, the Notifying Party shall have the right, but not the obligation, to defend and to compromise or settle (exercising reasonable business judgment) the Third Party Claim for the account and at the risk and expense of the Indemnifying Party. The indemnity obligations under this Article 9 shall not apply to amounts paid in settlement of any claim, demand, action or other proceeding if such settlement is effected without the consent of the Indemnifying Party, which consent shall not be withheld unreasonably. The Indemnifying Party may not settle the action or otherwise consent to an adverse judgment in such action that diminishes the rights or interests of the Exculpated Party without the express written consent of the Exculpated Party. Each Party shall make available to the other at the other's expense such information and assistance as the other shall reasonably request in connection with the defense of a Third Party Claim. 9.3 Notwithstanding anything to the contrary in this Agreement, except as set forth in the first paragraph of this Article 9, neither Party shall be liable to the other Party for any special, consequential or incidental damages arising out of or related to this Agreement. 10. INDEPENDENT CONTRACTORS. Both Parties shall act solely as independent contractors and nothing in this Agreement shall be construed to give either Party the power or authority to act for, bind or commit the other Party. Each Party shall indemnify the other and hold it harmless against any claim based on a representation of authority in excess of that provided herein, subject to the provisions of Section 9.2. 11. NO SOLICITATION OF EMPLOYEES. During the Research Period and for [***] thereafter, neither Party shall solicit the other's employees (or advisors and collaborators who are individuals and are identified in writing at the time of execution of this Agreement) without the prior written approval of the other Party. This provision will not preclude any Party from hiring any such employees, advisors and collaborators if they independently apply for a job without solicitation or pursuant to a general solicitation not specifically directed at such employee, advisor or collaborator. 38. ***Confidential Treatment Requested 41 12. TERM. This Agreement shall become effective as of the Effective Date first written above and, unless sooner terminated pursuant to the provisions of Section 13 below, shall remain in full force and effect for so long as Tanabe or Signal shall be obligated to make royalty or Reimbursement payments to the other Party pursuant to Section 5.4 or 5.5. Upon a termination of this Agreement pursuant to this Article 12, (a) Tanabe shall have a non-exclusive, royalty-free license to continue to make, have made, use, and sell Products in the Territory, and (b) Signal shall have a non-exclusive, royalty-free license to continue to make, have made, use, and sell Products in the Rest of the World. 13. TERMINATION OF AGREEMENT. 13.1 Termination by Mutual Agreement. This Agreement may be terminated in its entirety by mutual written agreement of both Parties. 13.2 Breach of Material Term. This Agreement may be terminated at the option of either Party upon written notice to the other, if such other Party is in material breach or default with respect to any material term or provision hereof (other than any breach or default described in Section 2.3(f) hereof, which breach or default shall be subject to the provisions of Section 2.3) and fails to cure the same within sixty (60) days (one-hundred and twenty (120) days if a cure would be impossible in sixty (60) days but can be accomplished within the 120 day period) after written notice of said breach or default. Such termination rights shall be in addition to and not in substitution of any other remedies that may be available to the Party serving such notice against the Party in default. Termination pursuant to this Section 13.2 shall not relieve the Party in default from liability and damages to the other Party for breach of this Agreement. 13.3 Termination Upon Bankruptcy. This Agreement may be terminated at the option of either Party upon written notice to the other, if such other Party is adjudged bankrupt, files or has filed against it any petition under any bankruptcy, insolvency or similar law, which petition is not dismissed within sixty (60) days, has a receiver appointed for its business or property or makes a general assignment for the benefit of its creditors. 13.4 Infringement of Third Party Patents. If, as a result of any claim, proceeding or litigation by any Third Party against Signal regarding Signal's proprietary whole-cell and enzyme assays occurring during the term of this Agreement, Signal or Tanabe is barred from carrying out its future material obligations herein, Tanabe has a right to terminate the Collaborative Project. 13.5 Termination of the Collaborative Project by Tanabe. Except as set forth in this Section 13.5, the Collaborative Project with respect to Inflammation or Osteoporosis or both, may be terminated prior to its four (4) year period at Tanabe's option upon six (6) months' advance written notice to Signal. Tanabe may not deliver 39. 42 such notice of termination to Signal prior to the completion of two (2) years from the Effective Date. Tanabe further may not deliver such notice of termination with respect to the Inflammation program if either (i) Signal has delivered to Tanabe at least two (2) Potential Compounds, which are first identified after screening in a Signal proprietary assay, which have been designated as Chemical Lead Compounds for any one or more Inflammation Pathways, or (ii) Signal has delivered to Tanabe at least one (1) Potential Compound, which is first identified after screening in a Signal proprietary assay, which has been designated as a Clinical Candidate for any one or more Inflammation Pathways. Tanabe further may not deliver such notice of termination with respect to the Osteoporosis program if either (i) Signal has delivered to Tanabe at least two (2) Potential Compounds, which are first identified after screening in a Signal primary or high throughput assay, which have been designated as Chemical Lead Compounds for any one or more Osteoporosis Pathways, or (ii) Signal has delivered to Tanabe at least one (1) Potential Compound, which is first identified after screening in a Signal proprietary assay, which has been designated as a Clinical Candidate for any one or more Osteoporosis Pathways. Additionally, such termination shall not be effective during any period where Tanabe has failed to meet its obligations pursuant to Section 2.4. 13.6 Effect of Termination; Survival. Termination of this Agreement for any cause shall not release a Party from any liability, which at the time of termination has already accrued to another Party, or which thereafter may accrue in respect of any act or omission prior to such termination. The obligations and rights established in Sections 4 and 5 (with respect to Compounds subject to a license to Tanabe) shall survive the termination of this Agreement by Tanabe pursuant to Section 13.2 or 13.3. The obligations and rights established in Sections 4 and 5 (with respect to Compounds subject to a license to Signal) shall survive the termination of this Agreement by Signal pursuant to Section 13.2 or 13.3. The obligations and rights established in Sections 7, 8, 9, 11, 15 and 19 shall survive the termination of this Agreement for any reason. 14. PUBLIC ANNOUNCEMENT OF AGREEMENT. Except as required to comply with federal and state securities laws or equivalent Japanese laws or any order of a court or government agency, and except as provided below, neither Party shall release information concerning this Agreement or the subject matter hereof to the public, news media, or other media, without first sending the other Party by express mail or facsimile, a copy of the information to be disclosed and allowing the other Party a reasonable time (as soon as reasonably possible but in no event greater than four (4) business days from the date of receipt) in which to comment on the information. If the other Party objects to the information to be disclosed and prior to the expiration of the four (4) business day period, the other Party shall so notify the disclosing Party who shall then delay public disclosure of the information and make reasonable efforts to accommodate any request for revisions by the other Party. If no notification is received during the four (4) business day period, the Party proposing disclosure shall be free to disclose the information. The Parties designate the following individuals to receive and approve announcements under this provision: Signal, its Executive Vice President; Tanabe, its 40. 43 President. The Parties agree that Signal may discuss the general terms of the Agreement with potential Western Pharmaceutical Partners and other potential investors in Signal without disclosing any Confidential Information of Tanabe or Tanabe Technical Information without Tanabe's prior written consent; and that the parties will cooperate in good faith with one another to formulate a form of announcement that Signal and Tanabe may release as soon as practicable after the Effective Date. 15. INVENTIONS AND PATENT MATTERS. The ownership rights and other matters regarding discoveries and inventions (whether or not patentable) first conceived or reduced to practice under the Collaborative Project pursuant to this Agreement (together with all patents and other intellectual property rights thereto) shall be as follows: 15.1 Signal Inventions and Patent Rights. Any Compounds or Products or other discoveries or inventions first made, conceived or reduced to practice solely by one or more employees or agents of only Signal or its Affiliates ("Signal Inventions"), together with all patents and other intellectual property rights thereto, shall be owned by Signal, subject to the licenses granted herein. 15.2 Tanabe Inventions and Patent Rights. Any Compounds or Products or other discoveries or inventions first made, conceived or reduced to practice solely by one or more employees or agents of only Tanabe or its Affiliates ("Tanabe Inventions"), together with all patents and other intellectual property rights thereto, shall be owned by Tanabe, subject to the licenses granted herein. 15.3 Joint Inventions and Patent Rights. All inventions or other discoveries first made, conceived or reduced to practice by one or more employees or agents from each party ("Joint Inventions"), together with all patents and other intellectual property rights thereto, shall be owned by each party with the other party as equal, undivided property, subject to the licenses granted herein. Each party shall promptly disclose to the other party and applicable Research and Development Committee the conception or reduction to practice of Joint Inventions. Signal shall control the filing, prosecution, issuance and maintenance of Joint Patents in the Rest of the World. Tanabe shall control the filing, prosecution, issuance and maintenance of Joint Patents in the Territory. Each Party shall retain patent counsel reasonably acceptable to the other Party to assist in the filing, prosecution, issuance and maintenance of Joint Patents. Each Party shall cause to be provided to the other Party the text of such patent applications before filing them and consider in good faith and incorporate the other Party's reasonable requests related thereto. In all other matters related to the filing, prosecution, issuance and maintenance of Joint Patents, each Party shall provide to the other Party copies of any official action or submission and shall confer with the other Party giving due consideration to the other Party's reasonable requests. 41. 44 15.4 General Provisions Relating to Prosecution and Maintenance. (a) Signal shall be responsible for and shall control the preparation, filing, prosecution and maintenance of all patents and patent applications which claim a Signal Invention, and shall pay all costs incurred in connection therewith. Signal shall use its good faith efforts to provide Tanabe with an opportunity to review and comment on the text of each patent application which constitutes a Structure Patent or a Use Patent in the Territory before filing such application in the Territory and shall supply Tanabe with a copy of such patent application as filed, together with notice of its filing date and serial number and shall keep Tanabe generally informed regarding the status thereof. Tanabe shall cooperate with Signal, execute all lawful papers and instruments and make all rightful oaths and declarations as may be necessary in the preparation, prosecution and maintenance of all such patent applications which constitute a Structure Patent or a Use Patent in the Territory. Any information provided to Tanabe under this Section 15.4(a) shall be deemed Confidential Information and Materials of Signal. If Signal decides to abandon or not to maintain a Signal Patent in the Territory, Signal shall first offer to assign to Tanabe such Signal Patent without charge or obligation at least ninety (90) days prior to the expiration of any time limit for response or payment due date. (b) Tanabe shall be responsible for and shall control the preparation, filing, prosecution and maintenance of all patents and patent applications which claim a Tanabe Invention, and shall pay all costs incurred in connection therewith. Tanabe shall use its good faith efforts to provide Signal with an opportunity to review and comment on the text of each patent application which constitutes a Structure Patent or a Use Patent in the Rest of the World before filing such application in the Rest of the World and shall supply Signal with a copy of such patent application as filed, together with notice of its filing date and serial number and shall keep Signal generally informed regarding the status thereof. Signal shall cooperate with Tanabe, execute all lawful papers and instruments and make all rightful oaths and declarations as may be necessary in the preparation, prosecution and maintenance of all such patent applications which constitute a Structure Patent or a Use Patent in the Rest of the World. Any information provided to Signal under this Section 15.4(b) shall be deemed Confidential Information and Materials of Tanabe. If Tanabe decides to abandon or not to maintain a Tanabe Patent in the Rest of the World, Tanabe shall first offer to assign to Signal such Tanabe Patent without charge or obligation at least ninety (90) days prior to the expiration of any time limit for response or payment due date. (c) For any and all Joint Inventions, the parties shall exert reasonable efforts in cooperation with each other, through the Research and Development Committee or otherwise, to investigate, evaluate, and determine to the mutual satisfaction of both parties the manner of obtaining and protecting their respective intellectual property rights in such Joint Inventions, including whether any patent applications are to be filed, by whom, and where. Patent applications for Joint 42. 45 Inventions shall be filed initially in the United States or in Japan, unless the appropriate Research and Development Committee determines for a compelling business reason that the application should first be filed in another jurisdiction. Each party shall cooperate and assist the other party in connection with its filing, prosecution, issuance and maintenance of Joint Patents. Each party shall keep the other party informed at regular intervals, or upon request, of the status of all patent applications and patents with respect to Joint Patents for which it has responsibility. Where appropriate, each party shall sign or cause to have signed all documents relating to the patent applications or patents for the Joint Patents and shall cause such patent applications and patents to be assigned to Signal and Tanabe jointly. In the event that Signal or Tanabe elect not to file, prosecute, issue or maintain a Joint Patent, they shall each promptly provide adequate notice to the other Party and allow the other Party, at its expense, the opportunity to proceed with a Joint Patent. During the prosecution of patent applications filed on such Joint Inventions, the party receiving copies of correspondence from the respective patent office shall keep the other party timely informed of such communications, thereby providing the other party with a reasonable opportunity for comment. Such communication is intended to promote coordination and consistency in the prosecution of patent applications for Joint Inventions throughout the world. 15.5 Payments; Disputes. With respect to Joint Patent application filings, each Party shall bear all costs and expenses for fees or other payments required to submit and maintain joint applications and patents in their respective territories. In the event there is a dispute as to whether a particular invention constitutes a Joint Invention or should be the subject of a Signal Patent or Tanabe Patent, the issue shall be resolved by the appropriate Research and Development Committee. 15.6 Infringement of Signal Patents by a Third Party. If at any time either Party hereto shall become aware of any infringement or threatened infringement by a third party in the Territory of any or all of the Signal Patents, Tanabe Patents or Joint Patents to which the Party having the knowledge thereof claims an interest pursuant to the Agreement, the Party having the knowledge thereof shall forthwith give notice thereof to the other Party. Upon notice of any such infringement, the Parties shall promptly consult with one another with a view toward reaching agreement on a course of action to be pursued. (a) Signal shall take all reasonable steps to defend Signal Patents against infringement and Tanabe shall in such event give all reasonable assistance to Signal with respect to patent and legal questions against reimbursement by Signal to Tanabe of all out-of-pocket costs occasioned thereby and in case any monetary recovery is obtained, such recovery shall belong to Signal. In addition, Tanabe shall have the right to join any suit by Signal covering the enforcement of a Signal Patent in the Territory. 43. 46 (b) Except as provided in Section 15.6(a), (c) and (d), in the event any monetary recovery in connection with the prosecution of such infringement action is obtained, such monetary recovery shall be applied in the following priority: first, to the reimbursement of Signal and Tanabe for their out-of-pocket expenses (including attorneys' fees) in prosecuting such infringement action; second, the balance of the monetary recovery to be shared equally by Signal and Tanabe. If the monetary recovery is less than the out-of-pocket expenses of Signal and Tanabe, reimbursement shall be on a pro-rata basis, based upon cost incurred. Any expense or liability in connection with the prosecution of such infringement action (including legal costs incurred by the defendant(s)) shall be shared equally by Signal and Tanabe. To the extent only one Party is permitted to bring suit, Signal and Tanabe shall consult in good faith to determine the most appropriate Party to bring suit, with the sharing of recoveries as set forth above, to the extent permitted by law. Any expense or liability in connection with the defense of any counterclaim or cross-claim action shall be borne by the Parties as determined in the court proceeding for said counterclaim or cross-claim. (c) If Signal declines to bring suit to enforce a Signal Patent, Tanabe may, subject to the written consent of Signal which shall not be unreasonably withheld, file an infringement action in the Territory in its name or on behalf of Signal where necessary, at its own expense. In such case, Tanabe shall be the sole recipient of the proceeds of any recovery, provided that Tanabe shall indemnify Signal against any expenses or liability incurred by Signal relating to such proceedings, excluding however any expenses or liabilities relating to the defense by Signal of any counterclaim or cross-claim that may be brought against Signal. (d) If Signal and Tanabe, after consultation with each other, elect not to bring suit, individually or jointly, or if Signal and/or Tanabe, as the case may be, are/is not able to stop such infringing activities, the Parties shall renegotiate in good faith their arrangement applicable in the country affected by such infringement, including but not limited to, a reduction of royalty rate payable by Tanabe to Signal. 15.7 Infringement of Tanabe Patents by a Third Party. If at any time either Party hereto shall become aware of any infringement or threatened infringement by a third party in the Rest of the World of any or all of the Signal Patents, Tanabe Patents or Joint Patents to which the Party having the knowledge thereof claims an interest pursuant to the Agreement, the Party having the knowledge thereof shall forthwith give notice thereof to the other Party. Upon notice of any such infringement, the Parties shall promptly consult with one another with a view toward reaching agreement on a course of action to be pursued. (a) Tanabe shall take all reasonable steps to defend Tanabe Patents against infringement and Signal shall in such event give all reasonable assistance to Tanabe with respect to patent and legal questions against reimbursement by Tanabe to Signal of all out-of-pocket costs occasioned thereby and in case any monetary recovery 44. 47 is obtained, such recovery shall belong to Tanabe. In addition, Signal shall have the right to join any suit by Tanabe covering the enforcement of a Tanabe Patent in the Rest of the World. (b) Except as provided in Section 15.7(a), (c) and (d), in the event any monetary recovery in connection with the prosecution of such infringement action is obtained, such monetary recovery shall be applied in the following priority: first, to the reimbursement of Signal and Tanabe for their out-of-pocket expenses (including attorneys' fees) in prosecuting such infringement action; second, the balance of the monetary recovery to be shared equally by Signal and Tanabe. If the monetary recovery is less than the out-of-pocket expenses of Signal and Tanabe, reimbursement shall be on a pro-rata basis, based upon cost incurred. Any expense or liability in connection with the prosecution of such infringement action (including legal costs incurred by the defendant(s)) shall be shared equally by Signal and Tanabe. To the extent only one Party is permitted to bring suit, Signal and Tanabe shall consult in good faith to determine the most appropriate Party to bring suit, with the sharing of recoveries as set forth above, to the extent permitted by law. Any expense or liability in connection with the defense of any counterclaim or cross-claim action shall be borne by the Parties as determined in the court proceeding for said counterclaim or cross-claim. (c) If Tanabe declines to bring suit to enforce a Signal Patent, Signal may, subject to the written consent of Tanabe which shall not be unreasonably withheld, file an infringement action in the Rest of the World in its name or on behalf of Tanabe where necessary, at its own expense. In such case, Signal shall be the sole recipient of the proceeds of any recovery, provided that Signal shall indemnify Tanabe against any expenses or liability incurred by Tanabe relating to such proceedings, excluding however any expenses or liabilities relating to the defense by Tanabe of any counterclaim or cross-claim that may be brought against Tanabe. (d) If Signal and Tanabe, after consultation with each other, elect not to bring suit, individually or jointly, or if Signal and/or Tanabe, as the case may be, are/is not able to stop such infringing activities, the Parties shall renegotiate in good faith their arrangement applicable in the country affected by such infringement, including but not limited to, a reduction of royalty rate payable by Tanabe to Signal. 15.8 Alleged Infringement of Patents. In the event of dispute concerning a third party's patent rights in the Territory, Signal and Tanabe will proceed as follows: (a) While a dispute concerning an alleged infringement of a third party's patent rights is in progress, the Party which had a claim brought against it by a third party (the "Defendant Party") will use its commercially reasonable best efforts to defend against the infringement claim and resolve the dispute; and the Defendant Party will pay all of its attorneys' fees and expenses associated with the resolution of this dispute. Additionally, the other Party will assist and use its commercially reasonable best 45. 48 efforts to help the Defendant Party resolve the dispute on favorable terms, with the other Party to bear its own expenses. (b) In the event the dispute is resolved against Signal and Tanabe, with a finding of an infringement, then each Party shall bear its own costs and expenses; provided the Party who made, manufactured or sold the Product in the area where the infringement was deemed to have occurred, shall bear the entire responsibility for all damages to the third party and shall indemnify and hold harmless the other Party for the payment of such damages. 16. RESEARCH EXPENSES. Except as otherwise expressly provided by this Agreement, each Party shall bear its own internal research, development and regulatory costs. 17. REPRESENTATIONS AND WARRANTIES. Signal and Tanabe each represent and warrant to the other as set forth below: 17.1 Representations and Warranties of Signal. Signal represents and warrants that: (a) The execution, delivery and performance of this Agreement by Signal will not, with or without notice, the passage of time or both, result in any violation of, be in conflict with, or constitute a default under any material contract, obligation or commitment to which Signal is a party or by which it is bound, or to Signal's knowledge, any statute, rule or governmental regulation applicable to Signal. (b) Signal has all requisite legal and corporate power and authority to enter into this Agreement, to grant the licenses to be granted by Signal hereunder and to carry out and perform its obligations under the terms of this Agreement. It has the capacity and skills required to carry out its obligations with respect to the research and development of Compounds and Products as contemplated by this Agreement. All corporate action on the part of Signal, its officers and directors necessary for the grants of licenses pursuant hereto and the performance of Signal's obligations hereunder has been taken. This Agreement constitutes a valid and binding obligation of Signal, enforceable in accordance with its terms, except as: (i) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium or other similar law as affecting the enforcement of creditors' rights generally; (ii) the availability of equitable remedies (e.g., specific performance, injunctive relief and other equitable remedies) may be limited by equitable principles or general applicability; (iii) to the extent the indemnification provisions contained in this Agreement may be limited by applicable federal or state securities law; and (iv) that no representation is made regarding the effect of laws relating to competition, antitrust or misuse or the effect of Tanabe's or third parties' intellectual property rights. 46. 49 (c) All employees of Signal who are expected to participate in the Collaborative Project have signed agreements regarding proprietary information and inventions with Signal in a form reasonably considered by Signal and its counsel to assure Signal's title to any Joint Inventions, Signal Technical Information or Signal Patents that may arise or be developed by such employees hereunder. Such agreements are legal, valid and binding obligations of Signal and its employees and are enforceable in accordance with their terms, except as limited by applicable bankruptcy laws and other similar laws affecting the creditors' rights and remedies generally and except insofar as the availability of equitable remedies may be limited. 17.2 Representations and Warranties of Tanabe. Tanabe represents and warrants that: (a) The execution, delivery and performance of this Agreement by Tanabe will not, with or without notice, the passage of time or both, result in any violation of, be in conflict with, or constitute a default under any material contract, obligation or commitment to which Tanabe is a party or by which Tanabe is bound, or to Tanabe's knowledge, any statute, rule or governmental regulation applicable to Tanabe. (b) Tanabe has all requisite legal and corporate power and authority to enter into this Agreement, to grant the licenses to be granted by Tanabe hereunder and to carry out and perform its obligations under the terms of this Agreement. It has the capacity and skills required to carry out its obligations with respect to the development and the marketing/sales of the Products as contemplated by this Agreement. All corporate action on the part of Tanabe and its officers and directors necessary for the grants of licenses pursuant hereto and the performance of Tanabe's obligations hereunder has been taken. This Agreement constitutes a valid and binding obligation of Tanabe, enforceable in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium or other similar law as affecting the enforcement of creditors' rights generally, (ii) the availability of equitable remedies (e.g., specific performance, injunctive relief, and other equitable remedies) may be limited by equitable principles or general applicability, (iii) to the extent the indemnification provisions contained in this Agreement may be limited by applicable law and (iv) and that no representation is made regarding the effect of laws relating to competition, antitrust or misuse or the effect of Signal's or third parties' intellectual rights. (c) All employees of Tanabe who are expected to participate in the Collaborative Project have agreements regarding proprietary information and inventions with Tanabe in a form reasonably considered by Tanabe and its counsel to assure Tanabe's title to any Joint Inventions or Tanabe Technical Information that may arise or be developed by such employees hereunder. Such agreements are legal, valid and binding obligations of Tanabe and its employees and are enforceable in accordance with their terms, except as limited by applicable bankruptcy laws and other similar laws 47. 50 affecting the creditors' rights and remedies generally and except insofar as the availability of equitable remedies may be limited. 17.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, SIGNAL AND TANABE MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 18. OPTION TO EXPAND TERRITORY. If Signal's Western Pharmaceutical Partner or its Affiliates do not have operations in Australia or New Zealand and if the Western Pharmaceutical Partner does not require rights in Australia or New Zealand in order for Signal to complete a research collaboration with such Western Pharmaceutical Partner in Signal's judgment, Signal will grant to Tanabe the exclusive option set forth below to acquire exclusive rights to commercialize Compounds or Products in Australia, New Zealand and other Oceania countries (the "Marketing Option") on terms and conditions to be negotiated. Prior to entering into any agreement with a third party to grant exclusive rights to commercialize a Compound or a Product in Australia, New Zealand and other Oceania countries, Signal shall notify Tanabe in writing of the terms of any such proposed agreements. Such notice shall be deemed an offer to Tanabe to enter into agreements on the proposed terms and conditions. Tanabe shall have thirty (30) days to accept the offer contained in such notice. Upon acceptance by Tanabe, the parties will negotiate in good faith to draft and execute definitive agreements within two (2) months of acceptance. Signal and Tanabe shall negotiate in good faith with respect to the option described in this Section 18. In the event that Signal and Tanabe are not able to negotiate an agreement on mutually agreeable terms within two (2) months of the beginning of negotiations with respect to the Marketing Option, Signal hereby agrees that if Signal intends to accept any offer from a third party which is not more favorable to it than Tanabe's last offer, Signal shall promptly notify Tanabe and Tanabe shall have the right to enter into an agreement with Signal on the terms and conditions of such third party offer. This right of first refusal shall survive termination of negotiations pursuant to this Section 18 for a period of nine (9) months. 19. MISCELLANEOUS. 19.1 Successors and Assigns. This Agreement shall be binding on the Parties hereto and their respective successors and assigns. Neither of the Parties hereto shall be entitled to assign this Agreement or any of its rights or obligations hereunder, including an assignment to one of its Affiliates, without the consent of the other. If either Party is acquired or merged with another entity, that entity shall succeed to all of the rights and obligations of the disappearing Party; provided in the event either Party is acquired or merged with another entity, such acquiring or successor entity shall expressly assume in writing the due and punctual performance and observance of all obligations under this Agreement of the Party it has acquired or with which it has merged, with the 48. 51 same effect as if such entity had originally been such Party hereunder; and further provided if such acquiring or successor entity does not so assume the obligations of the Party it has acquired or with which it has merged, the other Party may terminate this Agreement pursuant to Section 13 hereof. Notwithstanding the foregoing, nothing contained in this Section 19.1 shall be construed as preventing either Party from sublicensing its rights to any Products granted hereunder. 19.2 Further Assurances. Signal and Tanabe shall cooperate with each other and execute and deliver to each other such other instruments and documents and take such other actions as may be reasonably requested from time to time in order to carry out, evidence and confirm the rights and intended purposes of this Agreement. 19.3 English Language. This Agreement is entered into in the English language. All meetings and correspondence between the Parties are to be in English. In the event of any dispute concerning the construction or meaning of this Agreement, reference shall be made only to this Agreement as written in English and not to any translation into any other language. 19.4 Governing Law. Disputes arising out of or based upon this Agreement shall be governed by and construed in accordance with the laws of the State of California, United States of America, as applied to agreements among California residents entered into and to be performed entirely within California. 19.5 Notices. Notices, demands or other communications required or permitted to be given or made hereunder shall be in writing and delivered personally or sent by private overnight mail delivery, with recorded delivery or by legible telefax or by any other lawful means addressed to the intended recipient at its address set forth below in this Section or to such other address or telefax number as any Party may from time to time duly notify to the other. Any such notice, demand or communication shall, unless contrary as proved, be effective upon receipt. Correspondence to Signal shall be addressed to: Carl F. Bobkoski Executive Vice President Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 Telefax number: (619) 558-7513 49. 52 with a copy to: Brobeck, Phleger & Harrison Two Embarcadero Place 2200 Geng Road Palo Alto, CA 94303 Attn: J. Stephan Dolezalek Telefax number: (415) 496-2736 Correspondence to Tanabe shall be addressed to: Tanabe Seiyaku Co., Ltd. 2-10 Dosho-machi 3-chome Chuo-ku, Osaka 541, Japan Attn: President Telefax number: (06) 205-5509 19.6 Entire Agreement. This Agreement, together with the schedules, appendices and exhibits hereto, constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior representations, understandings and agreements between the Parties regarding the subject matter hereof. Except as otherwise expressly provided no modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless made in writing specifically referred to this Agreement and duly signed and delivered by the Parties hereto. 19.7 No Waiver. No failure or delay on the part of Signal or Tanabe in exercising any right under this Agreement, irrespective of the length of time for which such failure or delay shall continue, will operate as a waiver of, or impair, any such right. No single or partial exercise of any such right will preclude any other or further exercise thereof or the exercise of any other right. No waiver of any such right will be effective unless given in a signed writing. No waiver of any such right will be deemed a waiver of any other right hereunder or thereunder. 19.8 Severability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the Parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 19.9 Force Majeure. Neither Party shall be held liable or responsible to the other Party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any terms of this Agreement to the extent, and for so long as, such failure or delay is caused by or results from fires, floods, embargoes, government regulations or administrative guidance, prohibitions or interventions, war, 50. 53 acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts, acts of God, or any other cause beyond their respective reasonable control, but they shall make every reasonable effort to remove any such cause of their failure or delay as soon as possible. 19.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 51. 54 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date written above. SIGNAL PHARMACEUTICALS, INC. By: [SIG] ------------------------------------- Name: (Illegible) Title: PRESIDENT TANABE SEIYAKU CO., LTD. By: /s/ TETSUYA TOSA ------------------------------------- Tetsuya Tosa, Ph.D. Senior Executive Director Research and Development Representative Director [SIGNATURE PAGE TO COLLABORATIVE DEVELOPMENT AND LICENSING AGREEMENT] 52. 55 EXHIBIT A SELECTION CRITERIA FOR A CHEMICAL LEAD COMPOUND A. Definition A Chemical Lead Compound is a [***]: Tanabe may designate a specific compound as a Chemical Lead Compound even if the compound fails to meet one or more such criteria. B. [***] A-1 ***Confidential Treatment Requested 56 C. [***] A-2 ***Confidential Treatment Requested 57 EXHIBIT B SELECTION CRITERIA FOR THE CLINICAL CANDIDATE [***] B-1 ***Confidential Treatment Requested 58 EXHIBIT C INFLAMMATION PROGRAM [***] C-1 ***Confidential Treatment Requested 59 EXHIBIT D [***] ***Confidential Treatment Requested EX-10.41 7 EXHIBIT 10.41 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 16 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.41 AGREEMENT THIS AGREEMENT is made this ____ day of July, 1996 (the "Effective Date") between N.V. ORGANON, Molenstraat 110, P.O. Box 20, 5340 BH Oss, the Netherlands (hereinafter referred to as "Organon") and SIGNAL PHARMACEUTICALS, 5555 Oberlin Drive, San Diego, California 92121, USA (hereinafter referred to as "Signal"). INTRODUCTION A. Signal has considerable experience in making biological assays useful for screening compounds: B. Organon has experience in medicinal chemistry and has certain proprietary technology regarding the optimization of lead compounds arising from screening in assay systems. C. Organon wishes to retain the services of Signal to assist Organon in the discovery and development of new assays for the targets which are selected as provided below. THEREFORE THE PARTIES HEREBY AGREE AS FOLLOWS: 1. DEFINITIONS 1.1. "Affiliate" means in the case of each party any entity that directly or indirectly controls, is controlled by, or is under common control with that party. For such purpose the terms "control" means ownership or control of at least 50% of the voting interest in the entity in question. 1.2. "Compound Patent" means a patent or patent application claiming an invention or discovery specific to a Lead Compound and a genus of compounds reasonably expected to have the same or similar activity, which Lead Compound or genus of compounds result from the use of a Research Assay. 1.3. "Development Compound" means a compound which has undergone preclinical animal studies, formulation and production work necessary to commence formal animal toxicology studies, and is selected for formal animal toxicology studies in preparation for the submission of an U.S. IND or an equivalent foreign filing. 1.4. "Executive Committee" means the committee to be established pursuant to Article 2 hereof. 1.5. "FTE" means the full time equivalent effort, for one year, of one person who participates directly in the research and development activities contemplated under 1. 2 this Agreement. Such participation includes, without limitation, production of chemical, biological and/or other materials or reagents provided for use under this Agreement (and the resupply thereof if shelf stock is provided, as reasonably determined by Signal). 1.6. "Gene/gen products Patents" means a patent or patent application claiming an invention or discovery specific to [***], having been identified under the Target Research. 1.7. "Lead Compound" will have the meaning assigned in Section 3.2. 1.8. "Library" means a library or mixture of compounds, including the compounds contained or proposed to be contained therein. 1.9. "Net Sales" means the total revenue from commercial sales received by a party hereto, its Affiliates and/or licensees from the sale of an Organon Product to independent third parties less the following amounts: (i) discounts, including cash discounts, trade allowances or rebates actually allowed or granted and taken, (ii) credits or allowances actually granted upon claims or returns, regardless of the party requesting the return, (iii) separately itemized freight charges paid for delivery and (iv) taxes or other governmental charges levied on or measured by the invoiced amount, whether absorbed by the billing party or the billed party. 1.10. "Organon Compound" means a compound selected from an Organon Library, Organon internal development or otherwise from a third party source other than Signal engaged by Organon to provide compounds. 1.11. "Organon Library" means a Library designed and/or synthesized or acquired by Organon (alone or with third parties) 1.12. "Organon Product" means any product in the Target Research Field which contains one or more active compounds (i) selected by use of a Research Assay (ii) derived from one or more compounds so selected or (iii) significantly altered or advanced to the next stage of development by use of a Research Assay (a "Selected Compound"). Organon shall inform Signal about all compounds identified as having biological activity in any Research Assays and whether such compounds are Selected 2. ***Confidential Treatment Requested 3 Compounds or were selected by Organon through other means prior to running such compounds in a Research Assay. If such compounds were selected by Organon through other means prior to running such compounds in a Research Assay, Organon will provide Signal access to its lab journals and demonstrate to Signal's reasonable satisfaction that such compounds were selected by Organon through other means prior to running such compounds in a Research Assay. All Organon Products, containing the same active compound, or a compound which is derived from the active compound (such as a different salt, ester, crystal form or the like), regardless of other differences, such as dose, dosage form, indication and the like shall be considered a single Organon Product, as the case may be, unless such Organon Product also contains another active compound that is selected by use of a Research Assay or is derived from such a compound. Organon Product shall exclude any compound that was already "in active development" by Organon before screening such compound in a Research Assay or was already selected by Organon prior to screening with the Research Assays as described above, except as set forth below. The compound will be deemed to be in "active development" after (i) toxicology studies have been finished, and/or (ii) efficacious results in an animal model have been obtained, and/or (iii) efficacious results in at least two in vitro models have been obtained. Notwithstanding the foregoing, such a compound shall be an Organon Product if the compound's development is significantly altered by the results of screening the compound in a Research Assay. 1.13. "Research Assay" means an assay based on [***]. 1.14. "Research Assay Patent" means a patent or patent application claiming a Research Assay. 1.15. "Research Committee" means a team to be established for the purposes of the Target Research pursuant to Section 3.1.2 hereof. 1.16. "Research Plan" shall mean the research activities to be conducted by the parties pursuant to the Target Research. The initial Research Plan is attached as Exhibit A which may be amended from time to time upon the mutual agreements of the parties. 1.17. "Research Term" shall mean the term of the Target Research referenced in Article 3. 3. ***Confidential Treatment Requested 4 1.18. "Signal Compound" means a compound selected from a Signal Library, Signal internal development or otherwise from a third party source engaged by Signal to provide compounds. 1.19. "Signal Library" means a Library designed and/or synthesized or acquired by Signal (alone or with third parties). 1.20. "Signal Technology" means all inventions, know-how, trade secrets, and other proprietary information (whether patented or not), which are owned by Signal as of the Effective Date or developed during the Research Term, as to which Signal has the right to grant to Organon a license hereunder, and consisting of methods and materials for the production and/or use of biological assays. Signal Technology shall not include any inventions covered by any Research Assay Patent, Gene/gen product Patent or Compound Patent. 1.21. "Signal Technology Patents" means all patents and patent applications (including provisionals, divisionals, continuations, continuations in part, reissues, re-examinations, substitutions, additions and any extensions to such patents) claiming Signal Technology. Signal Technology Patents shall not include any Research Assay Patent, Gene/gen product Patent or Compound Patent. 1.22. "Target Research" means the research and development program directed toward the Target Research Field conducted by the parties pursuant to Article 3 of this Agreement. 1.23. "Target Research Field" means [***], for human therapeutic and/or diagnostic use; provided, however, the Target Research shall exclude [***]. 2. EXECUTIVE COMMITTEE 2.1. The parties will establish an Executive Committee for the purposes of developing, reviewing and monitoring research plans, research budgets and changes thereto, and supervising the Target Research within the parameters established in this Agreement. The Executive Committee shall have such even number of members as the parties shall agree, half of the members being appointed by each party, with each of Signal and Organon having one vote. In the event of deadlock on any issue, such issue shall be referred for decision to a senior officer designated by each party, which officer shall have the appropriate responsibility and authority to represent and bind such party with respect to such issue or dispute. During the Research Term, the Executive 4. ***Confidential Treatment Requested 5 Committee shall meet not less than twice per year, and the location of such meetings shall alternate between San Diego and Oss, all unless otherwise agreed by the parties. 3. TARGET RESEARCH The Target Research shall commence upon the Effective Date and shall continue for three years thereafter, extendible for up to two additional years under substantially the same FTE funding and other terms as are set forth herein, with mutual consent. If the milestone described in Exhibit B is not met within 8 months after the Effective Date Organon at its sole discretion may forthwith terminate the Target Research by written notice effective as of the first anniversary of the Effective Date. If the milestone described in Exhibit C is not met within 18 months after the Effective Date Organon at its sole discretion may terminate the Target Research effective as of the second anniversary of the Effective Date. For purposes of this Agreement, the "Research Term" shall be the period from the Effective Date until the Target Research expires or is terminated pursuant to this Article 3. Under the Target Research Signal shall use reasonable efforts to deliver up to [***] Research Assays to Organon. If Organon elects to terminate the Target Research (a) at the end of the first year as provided above or (b) prior to receiving the [***] and paying the first milestone under Section 3.2.1(a), whichever is earlier, then this Agreement and all licenses granted hereunder shall terminate, except that the provisions listed in Section 9.3(b) shall survive. Otherwise, this Agreement shall survive termination or expiration of the Target Research. 3.1. RESEARCH PROGRAM 3.1.1. The parties agree to execute the Research Plan subject to the following: (a) Signal agrees that, during the Research Term, Signal shall collaborate exclusively with Organon within the Target Research Field. (b) Signal will not actively participate with third parties in the design of new Research Assays, for use within the Target Research Field, during the Research Term or for one year after termination of the Target Research by Organon pursuant to Section 3 above. If the Target Research continues for the full three year term, Signal will refrain from such activities for one year after the end of the Research Term, provided, however, if any milestone payments pursuant to Sections 3.2.1(b) or 3.2.1(c) are made during such four-year period, then Signal will refrain from such activities for five years after the end of the Research Term, and if any royalties are paid under Section 5. ***Confidential Treatment Requested 6 3.2.3 during such five-year period, then Signal will refrain from such activities for the term of this Agreement. (c) Organon shall, at its discretion, provide access to its proprietary technologies and know-how, as may be useful in connection with the Target Research. For clarity of understanding, Signal shall not have the right to utilize such technologies and know-how other than in connection with the Target Research. 3.1.2. The Target Research shall be implemented by the Research Committee which shall be comprised of an equal number of members, but not more than four, from each party. Membership of the Research Committee will be determined according to the needs of the particular project. The leaders of the Research Committee shall be nominated by the Executive Committee. In the event of deadlock on any matter the Research Committee shall refer such matter to the Executive Committee. The Research Committee shall meet as often as may be required for the purposes of the Target Research but in any event not less than four times per year, again unless otherwise agreed by the parties. Written reports of such meetings and of the status of the individual projects shall be submitted to the Executive Committee. Unless otherwise agreed, meetings shall alternate between the relevant sites of Signal and Organon. 3.1.3. In consideration of the exclusive rights given to it Organon shall pay, within five (5) days after the Effective Date, to Signal a fee of One Million Dollars (U.S. $1,000,000). 3.1.4. In addition, Organon shall pay Signal's fully-burdened costs per year per FTE actively engaged in the Target Research. The initial rate shall be [***] per FTE per year, this amount to be increased annually, effective January 1 of each calendar year, commencing January 1, 1998, based on increases in the United States Consumer Price Index for all Urban Consumers, all items not seasonally adjusted (sources Bureau of Labor Statistics) for the previous calendar year. This payment also compensates Signal for all ordinary travel expenses incurred by such FTE's in attending meetings or the Research Committee and/or Executive Committee. Unless otherwise agreed in writing, Signal shall make available, on average, the FTEs as set forth in Exhibit D. Such FTEs shall include a balanced group of Ph.D. or equivalent, scientists and other technical support personnel. The annual cost of such FTEs shall be due and payable in equal quarterly installments in advance, on the following schedule. The first such payment shall be due 6. ***Confidential Treatment Requested 7 and payable upon the Effective Date, and shall cover the FTE cost from such date through the end of the then current quarterly period, on a prorated basis. Thereafter, for the remainder of the Target Research, FTE payments for each quarterly period shall be due and payable on each January 15, April 15th, July 15th and September 15th in U.S. dollars by bank wire transfer. Signal shall submit corresponding invoices to Organon no later than forty-five (45) days before the date upon which payment is due, with the last payment also being prorated. Such payments shall be subject to reconciliation in accordance with Section 3.1.5 herein. 3.1.5. Signal will keep records of the time spent by its FTEs on the Target Research, Organon shall have the right to have these records audited, in the same manner as is set forth in Section 6.4. Signal will report the level of FTE effort to Organon on a quarterly basis. During the course of the Target Research, Signal will notify Organon if it becomes apparent that the level of effort at Signal is expected to deviate from the level required under Section 3.1.4. If the level of effort is less than an average, on an annual basis, of the number of FTE's required pursuant to Section 3.1.4, Organon will be entitled to additional FTE effort in subsequent quarterly periods, such that the required annual average is restored. Conversely, if the average annual level of effort by Signal exceeds the number of FTE's required and funded pursuant to Section 3.1.4, Signal will be entitled to reduce the FTE effort in subsequent quarterly periods, such that the required annual average is restored. At the end of the Target Research the parties will restore any such imbalance between actual and funded FTE's either through appropriate payments or refunds, or through the extension of the Target Research until the balance is restored, as mutually agreed to by the parties. 3.2. DEVELOPMENT AND COMMERCIALIZATION The provisions of this Section 3.2 shall apply to all compounds (the "Lead Compounds") which result from the use of Research Assays. 3.2.1. ORGANON MILESTONE PAYMENTS. (a) Organon shall pay Signal [***]. (b) [***]. 7. ***Confidential Treatment Requested 8 (c) For Development Compounds, the following milestone payments shall be made by Organon to Signal. (i) [***] (ii) [***] (iii) [***] For clarity of understanding the milestones referred to in Section 3.2.1(c) shall each be payable only once for each compound; such that the maximum aggregate milestone payments for a single compound will be [***]. (d) If more than one Organon Product is commercialized originating from the same selection criteria and Research Assay(s) as a back-up to another Organon Product for which milestones have already been paid, and which is approved for the same therapeutic indication as such Organon product, Organon shall pay Signal retroactively the payments under Section 3.2.1(b) and (c) upon the date of first commercial sale of each such second or further Organon Product. 3.2.2. THIS SECTION INTENTIONALLY LEFT BLANK 3.2.3. ROYALTIES As a further compensation for providing the Research Assays to Organon, on each Organon Product Organon shall pay the following royalties to Signal: (a) For each Organon Product which contains an Organon Compound, or an analog, derivative or homolog of an Organon Compound and not an analog, derivative or homolog of a Signal Compound, Organon shall pay to Signal royalties on Net Sales made by Organon, its Affiliates or licensees, at the rate of [***] of Net Sales if aggregate annualized worldwide Net Sales for the Organon Product do not exceed [***], at the rate of [***] if aggregate annualized worldwide Net Sales for the Organon Product are greater than [***] and do not exceed [***], and [***] of Net Sales if aggregate annualized worldwide Net Sales for the Organon Product exceed [***]. 8. ***Confidential Treatment Requested 9 For each Organon Product which contains a Signal Compound, or an analog, derivative or homolog of a Signal Compound, Organon shall pay to Signal royalties on Net Sales made by Organon, its Affiliates or licensees, at the rate of [***] of Net Sales if aggregate annualized worldwide Net Sales for the Organon Product does not exceed [***], at the rate of [***] if aggregate annualized worldwide Net Sales for such Organon Product are greater than [***] and do not exceed [***], and [***] of Net Sales if aggregate annualized worldwide Net Sales for such Organon Product exceed [***]. (b) In addition to the royalties set forth above, Organon shall pay to Signal all royalties owed by Signal, pursuant to its agreements with third parties, for the use of Signal Compounds, Compound Patents, Signal Technology, Signal Technology Patents, Research Assay Patents or Gene/gen product Patents in the Target Research or otherwise under this Agreement. Notwithstanding the foregoing, Signal shall notify the Research Committee before using in the Target Research, any Signal Technology or invention covered by Signal Technology Patents, Research Assay Patents or Gene/gen product Patents (but not Signal Compounds or Compound Patents) which is subject to such a royalty obligation to a third party. If the Research Committee elects to make use of such technology or inventions, Organon shall pay such royalties as provided above. If the Research Committee elects not to make use of such technology or invention, no such royalties shall be owed by Organon and neither party shall apply such technology or invention to the Target Research. As of the date of this Agreement, Signal has no agreements with third parties pertaining to the use of Signal Compounds, Compound Patents, Signal Technology, Signal Technology Patents, Research Assay Patents or Gene/gen product Patents under which royalties will be due for the use of such compounds, technology or patents in the manner contemplated under this Agreement. (c) Royalties shall be paid until the later of (i) the expiration or disclaimer of the last Research Assay Patent Genes/Receptor Patent Compound Patent, a Signal Technology Patent that covers the relevant Organon Product or the manufacture or use thereof for an approved indication on a country by country basis or (ii) ten (10) years from the first commercial launch in each country. Each party acknowledges and agrees that the Signal Technology generally, and the Research Assays in particular, constitute highly valuable materials and information, as reflected for example in the payments to be made by Organon under Section 3.2.1(a), as well as those to be made under Sections 3.1.3 and 3.1.4. Signal has made every effort to retain such materials and information in 9. ***Confidential Treatment Requested 10 confidence. Irrespective of whether the Research Assays, for example, are covered by Research Assay Patents, access to such assays will provide Organon with substantial competitive advantage in the discovery and development of products in the Target Research Field. In order to induce Signal to make such assays available to Organon, in addition to other payments provided in this Agreement, Organon agrees to pay, even if no Research Assay Patents or other patents cover such Organon Product, (i) royalties on Net Sales in North America at the rate set forth above for [***] from commercial launch of each Organon Product in each North American country, and (ii) a royalty of [***] on Net Sales in each other country for [***] from commercial launch of each Organon Product in each such country. 3.2.4. Lead Compound Development; Abandoned Products (a) Organon agrees to use commercially reasonable diligence to develop and commercialize Lead Compounds for development and commercialization as an Organon Product. Organon will keep Signal informed of the progress of its development of products under this Section 3.2, at each meeting of the Executive Committee during the Research Term, and not less frequently than once per year thereafter. (b) If at any time Organon has conducted no significant development activity with regard to a particular Signal Compound for a period of twelve months, Signal will have the right to develop and commercialize products incorporating such Signal Compound ("Abandoned Products"), subject to the following. Signal shall not develop or commercialize any Abandoned Product so long as Organon is developing an Organon Product with demonstrated activity in the same Research Assay (or set of Research Assays) as the Abandoned Product demonstrates activity in. Signal may not commence development of any Abandoned Product until the first anniversary of the conclusion of the Target Research. (c) For the one year period commencing on the date Signal first obtains the right to develop an Abandoned Product, Organon shall have the following right of first negotiation to re-acquire rights to such Abandoned Product. Upon notice by either party during such one year period, the parties shall negotiate in good faith for up to sixty (60) days to reach a Term Sheet providing for Organon to re-acquire such rights. If a Term Sheet can be agreed upon, the parties shall negotiate in good faith for up to sixty (60) additional days to reach a definitive agreement. If no definitive agreement is executed within such time period, Signal shall be free to pursue such Abandoned Product alone or with third parties subject only to royalties at the following rates: [***] of Net Sales if aggregate annualized worldwide Net Sales for the Abandoned Product do not exceed [***], [***] of Net Sales if aggregate annualized worldwide Net Sales for the Abandoned Product are greater than [***] and do not exceed [***], 10. ***Confidential Treatment Requested 11 and [***] of Net Sales if aggregate annualized worldwide Net Sales for the Abandoned Product exceed [***], which shall be paid in accordance with the mechanisms set forth in Sections 3.2.3(c) and Section 6 with respect to Organon Products. 3.3. TITLE TO NEW INVENTIONS AND PATENT RIGHTS 3.3.1. Inventions and discoveries made by inventors employed by Signal shall be owned by Signal, Inventions and discoveries made by inventors employed by Organon shall be owned by Organon. Inventions and discoveries made by both inventors employed by Signal as inventors employed by Organon shall be jointly owned. Each party shall provide the other party with any and all available information and documentation needed to prepare, file, prosecute, re-examine patent applications. Both parties shall refrain from any action that might endanger possible patent rights arising from the Target Research. 3.3.2. PATENT COMMITTEE. The parties shall form a joint Patent Committee to review the preparation and prosecution of patents arising from the Target Research. The Patent Committee shall include a patent attorney designated by each party and the chemistry program head designated by each party. All patent applications arising from the Target Research shall be evaluated in accordance with the following process: (a) The designated patent attorneys from each party shall advise the Executive Committee on inventorship issues related to patents arising from the Target Research. (b) Unless otherwise agreed, patents and patent applications owned by one party shall be drafted, filed, prosecuted and maintained by the party that owns the patent rights, as provided in Section 3.3.1 at that party's expense. The Patent Committee shall decide which party will draft and prosecute joint patents in consultation with the other party: the expenses for the drafting and prosecution of such patent shall be shared equally between the parties. In all cases, each party shall keep the other party informed as to the status and progress of all relevant patents and patent applications; and shall draft, file, prosecute and maintain joint patents and patent applications in consultation with the other party. (c) If there is a dispute between Signal and Organon related to patents arising from the Target Research, including, without limitation, issues regarding patent claims, the scope of patent claims; and inventorship, the parties shall refer the matter to an independent patent attorney acceptable to both parties for resolution. 11. ***Confidential Treatment Requested 12 3.4. LICENSES AND OPTION RIGHTS Subject to the terms and conditions of this Agreement, Signal hereby grants to Organon a world-wide non-exclusive license, during the Research Term only under the Signal Technology within the Target Research Field to conduct research in accordance with the Research Plan. Subject to the terms of this Agreement, Signal hereby grants to Organon a world-wide exclusive license, for the period following the end of the Research Term until this Agreement expires or is terminated, to use the Signal Compounds and under the Research Assay Patents, Gene/gen product Patents and Compound Patents to research, develop, make, have made, use and sell Organon Products; provided, however, that any compound from any source that is useful for the [***] shall be specifically excluded from the scope of the foregoing license. If, however, a compound has been selected in the Target Research Field that potentially is useful for the [***], the parties shall negotiate in good faith, together with any of Signal's licensee(s) in such field, a possible extension of the foregoing license with regard to such compound. Subject to the terms of this Agreement, Signal hereby grants to Organon a world-wide non-exclusive license, for the period following the end of the Research Term until this Agreement expires or is terminated, to use the Signal Technology and Signal Technology Patents for any purpose in the Target Research Field. Organon shall have the right to grant sublicenses under its exclusive license rights, with the prior written consent of Signal, not to be unreasonably withheld; provided that such consent shall not be required for sublicenses to Organon's Affiliates. 4. PATENT ENFORCEMENTS 4.1. INFRINGEMENT ACTION BY A THIRD PARTY 4.1.1. NOTICE. Each party shall promptly notify the other party if any legal proceedings are commenced against any party or any purchaser of a Organon Product, claiming that the manufacture, use or sale of such Organon Product is an infringement of a third party's patent or other intellectual property rights. 4.1.2. DEFENSE OF CLAIMS INVOLVING ORGANON PRODUCT. Organon shall have the right, and to the extent required by Section 5.1, the obligation to assume and solely manage the defense of any such infringement claim relating to the Organon Product in its own name or in the name of Signal, if necessary, in such event. (i) Signal shall take all appropriate or necessary actions to assist in the defense of such action or claim (ii) Organon shall bear all costs and expenses associated with such action or claim (including, without limitation, legal fees and expenses). 12. ***Confidential Treatment Requested 13 (iii) Organon shall not settle any such claim in any manner which adversely affects Signal without Signal's prior written consent. 4.2. INFRINGEMENT ACTION AGAINST A THIRD PARTY 4.2.1. NOTICE. Each party shall promptly notify the other party if it becomes aware of any infringement of any Signal Patents or Organon Patents by any third party. 4.2.2. MAINTENANCE OF LAWSUITS INVOLVING SIGNAL PATENTS. Signal shall have the first right (but not the obligation) to file and maintain lawsuits for infringement of any Signal Patents by any third party, in its own name or in the name of Organon, if necessary. If Signal exercises its right to file and maintain such a lawsuit, Signal shall promptly notify Organon thereof and Organon shall have the right to join Signal in such action. Within 30 days of the date of such notice, (i) Organon shall exercise or waive its right to join Signal in such action; and (ii) representatives of Signal and Organon shall meet and confer (whether or not Organon joins Signal in such action) to allocate between the parties (a) the costs incurred in maintaining such an action and (b) any monetary recovery in connection with any such infringement. Organon shall give Signal all reasonable assistance and cooperate in any such proceedings filed by Signal, including the entry into additional agreements necessary to perfect Signal's right to bring or maintain such lawsuits. If Signal does not exercise its rights to enforce a patent covering Organon Product within 90 days after the date of such notice of infringement under Section 4.2.1, Organon shall have the right to file and maintain such infringement action at its own cost and expense, provided that the third party product which is the subject of such infringement action is a competing product with respect to the Organon Product. [***] of the costs incurred by Organon in maintaining such infringement action shall be credited against Organon's royalty obligation with respect to sales of Organon Product in such country pending the conclusion of such infringement action, provided that such credit shall not exceed [***] of the royalty otherwise payable by Organon in any quarter (the "Royalty Offset"). Any monetary recovery in connection with any such infringement action shall first be applied to reimburse the party bringing such suit for all costs and expenses incurred by such party, both internal and external, including attorney's fees and expenses (excluding any amounts funded out of the Royalty Offset). In the event that Signal declines to file and maintain a lawsuit for infringement of Signal Patents and Organon assumes the maintenance of such claim, then any sums withheld by Organon by virtue of the Royalty Offset shall be reimbursed to Signal pro rata with Organon's recovery of its costs and expenses which were not covered 13. ***Confidential Treatment Requested 14 by the Royalty Offset. Any remaining recovery shall be divided equally between the parties unless Organon elects not to bear [***] the expenses of a suit brought by Signal, in which case Signal shall retain any remaining recovery, unless otherwise agreed by the parties as a part of a cost recovery agreement between the parties. 4.2.3. MAINTENANCE OF CLAIMS INVOLVING ORGANON PATENTS. Organon shall have the first right (but not the obligation) to file and maintain lawsuits for infringement of any Organon Patents by any third party in its own name or in the name of Signal, if necessary. If Organon exercises its right to file and maintain such a lawsuit, and the infringer is developing or marketing a product that would compete with an Abandoned Product which Signal is developing or commercializing, then Organon shall promptly notify Signal thereof and Signal shall have the right to join Organon in such an action. Within 30 days of the date of such notice (i) Signal shall exercise or waive its right to join Organon in such action; and (ii) representatives of Signal and Organon shall meet and confer (whether or not Signal joins Organon in such action) to allocate between the parties (a) the costs incurred in maintaining such an action and (b) any monetary recovery in connection with any such infringement. In any case, Signal shall give such Organon all reasonable assistance and cooperation in any such proceedings filed by Organon, including the entry into additional agreements necessary to perfect Organon's right to bring or maintain such lawsuits. If Organon does not exercise its right to enforce an Organon Patent within 90 days after the date of such notice of infringement under Section 4.2.1, then Signal shall have the right to file and maintain such infringement action at its own cost and expense, provided that the third party product which is the subject of such infringement action is a competing product with respect to the Abandoned Product which Signal is developing or commercializing. [***] of the costs incurred by Signal in maintaining such infringement action shall be credited against Signal's royalty obligations with respect to sales of such Abandoned Product in such country pending the conclusion of such infringement action, provided that such credit shall not exceed [***] of the royalty otherwise payable by Organon in any quarter (the "Royalty Offset"). Any monetary recovery in connection with any such infringement action first will be applied to reimburse the party bringing such suit for all costs and expenses incurred by such party, both internal and external, including attorneys' fees and expenses (excluding any amounts funded out of the Royalty Offset). In the event that Organon declines to file and maintain a lawsuit for infringement of such an Organon Patent, and Signal assumes the maintenance of such claim, then any sums withheld by Signal by virtue of the Royalty Offset shall be reimbursed to Organon pro rata with Signal's recovery of its costs and expenses which were not covered by the Royalty Offset. Any remaining recovery shall be divided equally between the parties unless Signal elects not to bear [***] the expenses of a suit brought by Organon, in which case Organon shall retain any remaining 14. ***Confidential Treatment Requested 15 recovery, unless otherwise agreed by the parties as a part of a cost recovery agreement between the parties 5. INDEMNITY; NO WARRANTIES 5.1. ORGANON PRODUCTS 5.1.1. Organon agrees to indemnify, defend and hold harmless Signal, and its respective officers, directors, shareholders, and employees from and against all claims, losses, costs, damages and liability of any kind, including without limitation attorneys fees, (collectively "Liabilities") arising in connection with the development, manufacture, use or sale of Organon Products, except for Liabilities arising as a result of breach by Signal of its obligations under this Agreement, or any manufacturing, marketing or other agreement between the parties with respect to the product in question. Signal shall not make any admission of liability nor take any other action which could prejudice the defense of such claim or lawsuit by Organon. 5.1.2. Signal shall promptly notify Organon of receipt of any claim or lawsuit subject to Section 5.1.1 and shall cooperate with Organon in connection with the investigation and defense of such claim or lawsuit. Organon shall have the right to control the defense, with counsel of its choice, provided that the indemnified party shall have the right to be represented by advisory counsel at its own expense. 5.2. ABANDONED PRODUCTS 5.2.1. Signal agrees to indemnify, defend and hold harmless Organon, and its respective officers, directors, shareholders, and employees from and against all Liabilities arising in connection with the development, manufacture, use or sale of Abandoned Products, except for Liabilities arising as a result of breach by Organon of its obligations under this Agreement, or any manufacturing, marketing or other agreement between the parties with respect to the product in question. Organon shall not make any admission of liability nor take any other action which could prejudice the defense of such claim or lawsuit by Signal. 5.2.2. Organon shall promptly notify Signal of receipt of any claim or lawsuit subject to Section 5.2.1 and shall cooperate with Signal in connection with the investigation and defense of such claim or lawsuit. Signal shall have the right to control the defense, with counsel of its choice, provided that the indemnified party shall have the right to be represented by advisory counsel at its own expense. 5.3. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WARRANTIES OF 15. 16 MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY LIBRARIES OR OTHER BIOLOGICAL OR CHEMICAL MATERIALS OR INFORMATION PROVIDED TO THE OTHER PARTY PURSUANT TO THIS AGREEMENT OR THE PATENTABILITY OR FREEDOM FROM INFRINGEMENT OF ANY OF THE FOREGOING. 6. PAYMENTS AND ACCOUNTING 6.1. All payments hereunder shall be made in U.S. Dollars. 6.2. Organon shall keep true and correct accounts of sales of all products in respect of which royalties are payable to Signal pursuant to this Agreement, and the calculation of Net Sales and royalties with respect thereto, and shall deliver to Signal written statements thereof in such form as both shall agree upon within sixty (60) days following the end of each calendar quarter and at the same time shall pay to Signal the amount of such royalties shown to be due. 6.3. All royalties shall be earned in the local currency of the country where the applicable Net Sales are made, but shall be converted for payment into U.S. Dollars, in accordance with the standard procedures used by the Organon in converting currencies of world-wide product sales for its products generally. If royalties cannot be remitted from a country, the parties will work together to arrive at an equitable solution for paying such royalties to Signal. Unless the parties mutually agree to the contrary, such obligation shall be satisfied if royalty payments are paid to an account of the party in the country in question. Any withholding or other tax that Organon is required by law to withhold and pay on behalf of Signal with respect to the royalties payable to Signal under this Agreement shall be deducted from said royalties and paid contemporaneously with the remittance to Signal; provided, however, that in regard to any tax so deducted, Organon shall furnish Signal with proper evidence of the taxes paid on its behalf. 6.4. Signal shall have the right to have an independent certified public accountant of its own selection and at its own expense, except one to whom Organon may have reasonable objection, examine the relevant books and records of account of Organon during reasonable business hours, to determine whether appropriate accounting and payment have been made hereunder. Said independent certified public accountant shall treat as confidential, and shall not disclose to Signal any other information not pertaining to the royalty amounts payable under this Agreement. Such examination can be undertaken at any time within two years after the date on which such royalty amounts were due and payable. 16. 17 7. PUBLICITY AND PUBLICATION 7.1. The parties will mutually agree on a press release to be issued upon execution of this Agreement. Neither party shall make any subsequent public announcement concerning the terms of this Agreement not previously made public without the prior written approval of the other party with regard to the form, content and precise timing of such announcement, except such as may be required to be made by either party in order to comply with applicable law, regulations or court orders. Such consent shall not be unreasonably withheld or delayed by the other party. Prior to any such public announcement, the party wishing to make the announcement will submit a draft of the proposed announcement of the other party in sufficient time to enable the other party to consider and comment thereon. Nothing in this section shall preclude disclosures by either party to third parties under confidentiality restrictions in order to carry out the purposes of this Agreement or to define the scope of rights which may be granted to a third party without violating this Agreement. 7.2. PUBLICATIONS. Neither party will publish or publicly disclose results arising from the Target Research without the prior consent of the other party, which consent shall not be unreasonably withheld. With respect to any proposed publication or public disclosure of such results, the following shall apply: 7.2.1. The Research Committee shall review any proposed publication with respect to the content, authorship, acknowledgment, and shall either approve release of the publication, or propose revisions to the publication. Any disputes relating to the contents or authorship of any publication(s) prepared by Signal and Organon scientists participating in the Target Research shall be referred to the Executive Committee for resolution. 7.2.2. The proposed publication shall be reviewed by the patent departments and any other departments of Organon and Signal in accordance with their customary procedures. 7.2.3. At such time as the proposed publication has been reviewed and approved by the Research Committee and the patent and/or other departments of Organon and Signal, the publication may be submitted for publishing. 8. CONFIDENTIALITY 8.1. Except as specifically authorized under the terms of this Agreement each party shall, for the term of this Agreement and for five (5) years after its termination for any reason whatsoever, treat any proprietary information disclosed to it by the other party as strictly confidential, and shall not disclose such proprietary information to third parties or use it for purposes other than those authorized therein. 17. 18 Except as set forth in the exceptions hereinafter any information, data or material, including without limitation, software, technology, business plans or information, communicated to the other which is identified as confidential, or which the other party has reason to believe is confidential, will be deemed and treated as Proprietary Information. Proprietary Information also includes proprietary chemical, physical or biological materials, identified as confidential, exchanged pursuant to this Agreement. Access to such Proprietary Information will be limited to those employees or consultants of the party receiving such information or of such party's Affiliates or sublicensees, who reasonably require such information in order to carry out activities authorized pursuant to this Agreement. Such employees or consultants will be advised of the confidential nature of the Proprietary Information and the related confidentiality undertaking. Proprietary Information shall not include, and the above confidentiality undertaking shall in no event restrict or impair each party's right to use or disclose any information which: (a) at the time of disclosure is in the public domain or thereafter becomes part of the public through no fault of the party receiving such information; (b) the party receiving such information can conclusively establish that it was in its possession prior to the time of disclosure; (c) is independently made available to the party receiving such information by a third party who is not thereby in violation of a confidential relationship with the other party; or (d) the receiving party can establish was independently developed without use of the Proprietary Information of the other party. The receiving party shall not be restricted from disclosing such information as is required to be disclosed by law, regulation, or court or governmental order, provided that the receiving party reasonably notifies the disclosing party prior to such disclosure of such requirement. Upon termination of this Agreement, and provided the Proprietary Information is still of a confidential nature, the party recipient of the Proprietary Information will upon request from the disclosing party either return any such information or destroy the same. 18. 19 9. TERM AND TERMINATION 9.1. The Research Term shall be as set forth in Article 3. 9.2. Unless terminated earlier under Section 9.3, this Agreement shall continue in full force and effect until the expiration of all milestone and royalty obligations or Organon under Article 3. Upon expiration of this Agreement under this Section 9.2, Organon shall have fully paid-up licenses, respectively, under Section 3.4.1, and the provisions identified in Section 9.3(a) shall survive expiration hereof. 9.3. Early termination. (a) In the event of material breach of this Agreement by either party, the matter shall be submitted for resolution to the chief executive officers of each party. If, 30 days after submission to the respective chief executive officers, no resolution is achieved, then the non-breaching party may send written notice of the alleged default to the breaching party. If the material breach is not cured with sixty (60) days following receipt of such notice, the non-breaching party may terminate this Agreement immediately upon written notice to the breaching party. (b) The parties acknowledge that under this Agreement, each party holds a complex series of ongoing technology rights and licenses, development rights and obligations, and economic rights and obligations; the breach of which may not be adequately compensated in monetary damages alone. The parties therefore agree that each may be entitled to remedies in the nature of specific performance of the obligations of the other. (c) In all cases of early termination or expiration of this Agreement, the following provisions shall survive, together with any other obligations of either party which have accrued as of the effective date of termination or expiration: Articles 5, 7, 8, 9 and 10 and Section 6.4. 9.4. All licenses granted under this Agreement and deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to "intellectual property" as defined in Section 101 of such Code. The parties agree that Organon may fully exercise all of its rights and elections under the Bankruptcy code. The parties further agree that, in the event Organon elects to retain its rights as a licensee under such Code, Organon shall be entitled to complete access to any technology licensed to it hereunder and all embodiments of such technology. Such embodiments of the technology shall be delivered to Organon not later than: 19. 20 (a) the commencement of bankruptcy proceedings against Signal, upon written request, unless Signal elects to perform its obligations under the Agreement, or (b) if not delivered under (a) above, upon the rejection of this Agreement by or on behalf of Signal, upon written request by Organon. 9.5. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR LOST PROFITS OR ANY CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES TO THE OTHER PARTY, HOWEVER CAUSED, IN CONNECTION WITH THIS AGREEMENT, PROVIDED THAT NOTHING IN THIS SECTION 9.5 SHALL LIMIT THE INDEMNIFICATION OBLIGATIONS OF EITHER PARTY PURSUANT TO ARTICLE 5 AS TO CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES TO THIRD PARTIES FOR WHICH THE INDEMNITEES MAY BE LIABLE. 10. MISCELLANEOUS 10.1. Neither party shall have the right to assign its rights or obligations under this Agreement to any third party, other than an Affiliate of such party, or a successor in a change of control by way of merger, acquisition or otherwise, without the prior written consent of the other party, which consent shall not be unreasonably withheld. The foregoing notwithstanding, Organon's prior written consent shall be required during the period beginning with the Effective Date and ending on the date that is one year following the Research Term, with regard to assignment under this Agreement to a successor to Signal which is a direct competitor with Organon. If Organon withholds consent to an assignment to such a direct competitor, Signal shall have the right to terminate the Target Research and Organon shall retain all rights as if the Target Research Program had continued for the full term. This Agreement shall be binding on, and inure to the benefit of, the permitted successors and assigns of the parties. All permitted sublicenses and/or assignments by either party of any of its rights under this Agreement shall be subject to all of the terms and conditions of this Agreement, which shall be binding on the sublicensees and/or assignees. 10.2. The parties hereto are independent contractors. Nothing contained herein shall constitute either party the agent of the other party for any purpose whatsoever, or constitute the parties as partners or joint venturers. Employees of each party remain employees of said party and shall be considered at no time agents of or render a fiduciary duty to the other party. Neither party hereto shall have any implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any other contract, agreement or undertaking with any third party. 20. 21 10.3. No amendment, waiver of modification of this Agreement shall be valid or binding on either party unless made in writing and signed by both parties. The failure of either party to enforce any provision of this Agreement at any time shall not be construed as a present or future waiver of such or any other provision of this Agreement. The express waiver by either party of any provision or requirement hereunder shall not operate as a future waiver of such or any other provision or requirement. 10.4. In the event that any provision in this Agreement shall be held to be unlawful or invalid in any jurisdiction, the meaning of such provision shall be construed to the greatest extent possible so as to render it enforceable. If no such construction can render such provision enforceable, it shall be severed, and the remainder of the Agreement shall remain in full force and effect, only to the extent that such remainder is consistent with the intentions of the parties as evidenced by this Agreement as a whole. The parties shall use best efforts to negotiate in good faith a reasonable substitute, valid and enforceable provision effective in such jurisdiction. 10.5. Any notice required or permitted to be given by either party under this Agreement shall be in writing, addressed, in the case of Signal, to its Chief Executive Officer, with copy to its General Counsel, and in the case of Organon, to its President with copy to its General Counsel, at the respective addresses of the parties shown in the first paragraph of this Agreement, or such other address as may from time to time be indicated in a notice given under this Section 10.5. All notices shall be sent by certified or registered first class mail, telefax confirmed by certified or registered first class mail, or personal delivery, and shall be effective on receipt at the address referenced above. 10.6. Neither party will be deemed in breach of this Agreement as a result of default, delay or failure to perform by such party which is due to causes beyond the reasonable control of such party, including without limitation, fire, earthquake, act of God, severe weather, act of war, strikes, lockouts or other labor disputes, riots, civil disturbances, actions or inactions of governmental authorities (except in response to a breach by such party), or epidemics. In the event of any such force majeure, the party affected shall promptly notify the other party, shall use all reasonable efforts to overcome such force majeure, and shall keep the other party informed with respect thereto. 10.7. All headings and captions used in this Agreement are for convenience only, and are not intended to have substantive effect. 10.8. This Agreement may be executed by the parties in one or more identical counterparts, all of which together shall constitute this Agreement. 10.9. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 21. 22 10.10. DISPUTE RESOLUTION 10.10.1. All disputes of all types under this Agreement shall be referred to the Executive Committee for resolution. The Executive Committee shall use all reasonable efforts to resolve such matters within thirty (30) days after such referral, including referral of questions to outside independent experts where the Executive Committee deems appropriate. 10.10.2. If the Executive Committee is unable to resolve such dispute the dispute shall be referred to the Chief Executive Officers ("CEOs") of the parties for resolution. 10.10.3. In the event the CEOs are not able to resolve such dispute within thirty (30) days after the matter is referred to them, the following shall apply: (a) Prior to entering into binding arbitration in accordance with the provisions of Section 10.10.3(b) below, the parties shall enter into non-binding mediation. The mediation shall be conducted by an independent mediator acceptable to both parties. Either party may serve upon the other party a written demand for mediation. Such mediation shall commence within thirty (30) days of the other party's receipt of such demand, unless otherwise agreed in writing by the parties. Each party shall make available to the mediation an authorized representative with the capacity to bind such party, and the mediation shall be conducted as deemed appropriate by the mediator. (b) In the event that the dispute cannot be resolved by the mediation mechanism referenced in Section 10.10.3(a) the dispute shall be referred to arbitration in accordance with the rules then prevailing of the Center for Public Resources ("CPR") 680 Fifth Avenue, New York, New York 10019 unless otherwise mutually agreed. The arbitration shall be conducted in New York City, New York. Unless otherwise agreed by the parties the arbitration panel shall consist of arbitrator selected in accordance with the CFR rules. This section 10.10.3 shall not limit the rights of any party to seek in court of competent jurisdiction interim relief and only such interim relief, as may be needed to maintain the status quo or otherwise protect the subject matter of the dispute until the arbitrators have been appointed and shall have had an opportunity to act. 10.11. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all previous agreement, understandings and negotiations, whether oral or written, with respect to such subject matter. All information exchanged pursuant to the Confidentiality Agreement dated _________, 199_ shall be governed by Article 8. 22. 23 Executed and effective as of the date first set forth above. N.V. ORGANON SIGNAL PHARMACEUTICALS, INC. By:________________________ By:_________________________________ Title:_____________________ Title:______________________________ By:________________________ Title:_____________________ 23. 24 EXHIBIT A [***] ***Confidential Treatment Requested 24. 25 EXHIBIT B [***] ***Confidential Treatment Requested 25. 26 EXHIBIT C [***] ***Confidential Treatment Requested 26. 27 EXHIBIT D [***] ***Confidential Treatment Requested 27. EX-10.42 8 EXHIBIT 10.42 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.42 FIRST AMENDMENT TO AGREEMENT THIS FIRST AMENDMENT (the "First Amendment") to the Agreement by and between N.V. ORGANON, Molenstraat 110, P.O. Box 20, 5340 BH Oss, the Netherlands (hereinafter referred to as "Organon"), and SIGNAL PHARMACEUTICALS, INC., 5555 Oberlin Drive, San Diego, California 92121, USA (hereinafter referred to as "Signal"), dated as of July 30, 1996 (the "Agreement") is entered into as of March 17, 1998 (the "First Amendment Date"). Capitalized terms used but not otherwise defined in this First Amendment shall have the meanings given such terms in the Agreement. RECITALS WHEREAS, Organon and Signal entered into the Agreement to collaborate in the discovery and development of new assays for the targets selected as provided in the Agreement; and WHEREAS, Organon and Signal wish to amend the Agreement in the manner set forth in this First Amendment and otherwise to provide for certain agreements by the parties as set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. AMENDMENT AND RESTATEMENT OF SECTION 3. The first and second paragraphs of Section 3 of the Agreement are hereby amended and restated in their entirety as follows: "3. TARGET RESEARCH. The Target Research shall commence upon the Effective Date and shall continue for three years thereafter, extendible for up to two additional years under substantially the same FTE funding and other terms as are set forth herein, with mutual consent. If the milestone described in Exhibit B is not met within 9 months after the First Amendment Date, Organon at its sole discretion may forthwith terminate the Target Research by written notice effective as of the first anniversary of the Effective Date. If the milestone described in Exhibit C is not met within 12 months after the First Amendment Date, Organon at its sole discretion may terminate the Target Research effective as of the end of the 18th month following the First Amendment Date. For purposes of this Agreement, the "Research Term" shall be the period from the Effective Date until the Target Research expires or is terminated pursuant to this Article 3. Under the Target Research 1. ***Confidential Treatment Requested 2 Signal shall use reasonable efforts to deliver up to [***] Research Assays to Organon. If Organon elects to terminate the Target Research (a) as of the first anniversary of the First Amendment Date as provided above or (b) prior to receiving the First Research Assay from Signal and paying the first milestone under Section 3.2.1(a), whichever is earlier, then this Agreement and all licenses granted hereunder shall terminate, except that the provisions listed in Section 9.3(b) shall survive. Otherwise, this Agreement shall survive termination or expiration of the Target Research." 2. AMENDMENT AND RESTATEMENT OF SECTION 3.4. Section 3.4 of the Agreement is hereby amended and restated in its entirety as follows: "3.4. LICENSES AND OPTION RIGHTS 3.4.1. Subject to the terms and conditions of this Agreement, Signal hereby grants to Organon a worldwide, non-exclusive license, during the Research Term only, under the Signal Technology within the Target Research Field to conduct research in accordance with the Research Plan. 3.4.2. Subject to the terms and conditions of this Agreement, Signal hereby grants to Organon a worldwide, exclusive (except as to Signal) license to use any cell lines which are developed in the conduct of the Target Research (whether solely by Signal or jointly by the parties) for Organon's internal research purposes during the term of this Agreement. Notwithstanding any other provision of this Agreement, Organon shall not have the right to sublicense the rights granted under this Section 3.4.2 to any third party without the prior written consent of Signal, which consent may be given or withheld in Signal's sole discretion; provided, however, that Organon may, without Signal's prior written consent, sublicense such rights to an Affiliate of Organon that is controlled by Organon. The parties hereby acknowledge that Signal retains the right to use the cell lines licensed hereunder for any purpose. 3.4.3. Subject to the terms of this Agreement, Signal hereby grants to Organon a worldwide, exclusive license, for the period following the end of the Research Term until this Agreement expires or is terminated, to use the Signal Compounds and under the Research Assay Patents, Gene/gen product Patents and Compound Patents to research, develop, make, have made, use and sell Organon Products; provided, however, that any compound from any source that is useful for the [***] shall be specifically excluded from 2. ***Confidential Treatment Requested 3 the scope of the foregoing license. If, however, a compound has been selected in the Target Research Field that potentially is [***], the parties shall negotiate in good faith, together with any of Signal's licensee(s) in such field, a possible extension of the foregoing license with regard to such compound. 3.4.4. Subject to the terms of this Agreement, Signal hereby grants to Organon a worldwide, non-exclusive license, for the period following the end of the Research Term until this Agreement expires or is terminated, to use the Signal Technology and Signal Technology Patents for any purpose in the Target Research Field. 3.4.5. Except as set forth in Section 3.4.2 above, Organon shall have the right to grant sublicenses under its exclusive license rights, with the prior written consent of Signal, not to be unreasonably withheld; provided that such consent shall not be required for sublicenses to Organon's Affiliates." 3. AMENDMENT AND RESTATEMENT OF RESEARCH PLAN. The Research Plan is hereby amended and restated in its entirety as attached hereto. 4. AMENDMENT AND RESTATEMENT OF EXHIBIT B. Exhibit B of the Agreement is hereby amended and restated in its entirety as attached hereto. 5. FULL FORCE AND EFFECT. Except as specifically amended by this First Amendment, the terms and conditions of the Agreement shall remain in full force and effect. 6. GOVERNING LAW. This First Amendment shall be governed by and construed in accordance with the laws of the State of Delaware. 7. COUNTERPARTS. This First Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3. ***Confidential Treatment Requested 4 IN WITNESS WHEREOF, the parties have executed this First Amendment on the day and year first written above. N.V. ORGANON SIGNAL PHARMACEUTICALS, INC. By: [SIG] By: [SIG] -------------------------- -------------------------- Title: Managing Director R&D Title: E.V.P. ----------------------- ----------------------- By: [SIG] -------------------------- Title: Director Research ----------------------- 5 ORGANON-SIGNAL RESEARCH OUTLINE [***] ***Confidential Treatment Requested 6 ORGANON-SIGNAL RESEARCH OUTLINE CONFIDENTIAL ================================================================================ EXHIBIT B Project Goals [***] ***Confidential Treatment Requested EX-10.46 9 EXHIBIT 10.46 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.46 LICENSE AGREEMENT This Agreement, effective as of October 28, 1997 (the "Effective Date"), is between the University of Massachusetts ("University"), a public institution of higher education of the commonwealth of Massachusetts, and Signal Pharmaceuticals, Inc. ("Company"), a Delaware corporation. RECITALS WHEREAS, University is the joint owner, together with the Regents of the University of California ("UC"), of the inventions claimed in U.S. Patent Application Serial No. [***] and has filed with the U.S. Patent & Trademark Office the cases included under the U.S. Patent Applications listed on EXHIBIT A; WHEREAS, Company desires the University grant to Company a worldwide license in the field of drug discovery under the rights of University in Patent Rights and Related Technology (as defined below); and WHEREAS, University is willing to grant Company such license on the terms and conditions set forth in this Agreement. NOW, THEREFORE, University and Company hereby agree as follows: 1. DEFINITIONS. 1.1 "AFFILIATE" shall mean any legal entity (such as a corporation, partnership, or limited liability company) that is controlled by Company. For the purposes of this definition, the term "control" means any or both of the following: (i) beneficial ownership of at least fifty percent (50%) of the voting securities of a corporation or other business organization with voting securities or (ii) a fifty percent (50%) or greater interest in the net assets or profits of a partnership or other business organization without voting securities. 1.2 "CONFIDENTIAL INFORMATION" shall mean any confidential or proprietary information furnished by one party (the "Disclosing Party") to the other party (the "Receiving Party") in connection with this Agreement, provided that such information is specifically designated as confidential. Such Confidential Information shall include, without limitation, any ***Confidential Treatment Requested 2 diligence reports furnished to University under Section 3.1. and royalty reports furnished to University under Section 5.1. 1.3 "FDA" shall mean the United States Food and Drug Administration. 1.4 "FIELD" shall mean the field of drug discovery and shall not include reagents other than for drug discovery and shall not include the field of diagnostics. 1.5 "IND" (or "Investigational New Drug Application") shall mean an application to the FDA to commence human clinical testing of a drug, as defined by the FDA. 1.6 "JOINT PATENT RIGHTS" shall mean U.S. Patent Application Serial No. [***], and, to the extent of claims therein directed to subject matter specifically described in U.S. Patent Application Serial No. [***], any divisional, continuation, or continuation-in-part of such patent application, as well as any patent issued thereon and any reissue, reexamination or extension of such patent, and any foreign counterparts to such patent and patent application. 1.7 "LICENSED PRODUCT" shall mean any material either that is covered by the Patent Rights or the Related Technology, that is identified or produced by a Licensed Method, or that the manufacture, use or sale of which would constitute, but for the license granted to Company pursuant to this Agreement, an infringement of any pending or issued claim within the Patent Rights. 1.8 "LICENSED METHOD" shall mean any method that is covered by the Patent Rights or Related Technology, the use of which would constitute, but for the license granted to Company pursuant to this Agreement, an infringement of any pending or issued claim within the Patent Rights or a misuse of Related Technology. 1.9 "NDA" (or "New Drug Application") shall mean an application to the FDA to commence commercial sale of a drug, as defined by the FDA. 1.10 "NET SALES" shall mean the total of the gross invoice prices of Licensed Products and of Royalty-Bearing Products sold by Company, an Affiliate, or a Sublicensee, less the sum of the following actual deductions where applicable: cash, trade, or quantity discounts; sales, use, tariff, import/export duties, or other excise taxes; transportation charges and allowances or credits because of rejections, breakage, or returns. 2 ***Confidential Treatment Requested 3 In any transfers of Licensed Products or Royalty-Bearing Products between Company and an Affiliate or Sublicensee, Net Sales shall be calculated based on the final sale of the Licensed Product or Royalty-Bearing Product to an independent third party only, and the transfers between Company and an Affiliate or Sublicensee shall be excluded from the calculation of Net Sales. In the event that the Company or any Affiliate receives non-monetary consideration for any Licensed Products or Royalty-Bearing Products, Net Sales shall be calculated based on the fair market value of such consideration as determined by the parties. In the event that company or its Affiliates use or dispose of a Licensed Product or Royalty-Bearing Product in the provision of a commercial service, the Licensed Product or Royalty-Bearing Product shall be considered sold and the Net Sales shall be calculated based on the sales price of the Licensed Product or Royalty-Bearing Product under a hypothetical sale to an independent third party, during the same Royalty Period or, in the absence of such sales, on the fair market value of the Licensed Product or Royalty-Bearing Product as determined by the parties. 1.11 "PATENT RIGHTS" shall mean the Joint Patent Rights and the UMMC Cases. 1.12 "RELATED TECHNOLOGY" shall mean any know-how, technical information, research and development information, test results, and data necessary for the effective exercise of the Patent Rights which has been developed in the laboratory of [***] as of the first filing date of U.S. Patent Application No. [***] and which is owned by University, provided that data necessary for the effective exercise of the Patent Rights and developed in the laboratory of [***] as of the effective date will be made available to Company upon reasonable request by Company. 1.13 "ROYALTY-BEARING PRODUCTS" shall mean any material either that is covered by the Patent Rights, Related Technology, Licensed Method, UC Patent Rights or UC Technology Rights, or that the manufacture, use or sale of which would constitute, but for the licenses granted to the Company pursuant to this Agreement and the UC Agreement, an infringement of any issued claim within the Patent Rights or the UC Patent Rights. 1.14 "ROYALTY PERIOD" shall mean each of (a) the partial calendar quarter commencing on the date on which the first Royalty-Bearing Product is sold or used and (b) every complete or partial calendar quarter thereafter until the later of (i) the end of the Term, or (ii) the Company is 3 ***Confidential Treatment Requested 4 no longer obligated to make royalty payments to UC with respect to UC Patent Rights under that certain Exclusive License Agreement between UC and Company dated October 26, 1993 (UC Control Number 93-04-0786) (the "UC Agreement", a redacted copy of which is EXHIBIT B to this Agreement) or under any equivalent or replacement agreement between UC and Company. In addition, the term "Royalty Period" shall also include any calendar quarter subsequent to the last "Royalty Period" as defined in the preceding sentence during which Company has the right to complete and sell work-in-progress and inventory of Royalty-Bearing Products pursuant to Section 8.4. 1.15 "SUBLICENSEE" shall mean any permitted sublicensee of the rights granted Company under this Agreement, as further described in Section 2.2. 1.16 "TERM" shall mean the term of this Agreement as further defined in Section 8.1 below. 1.17 "UMMC CASES" shall mean the U.S. Patent Applications listed on EXHIBIT A and, to the extent of claims therein directed to subject matter specifically described in the patent applications listed on EXHIBIT A, any divisional, continuation, or continuation-in-part of such patent applications, as well as any patent issued thereon and any reissue, reexamination or extension of such patent, and any foreign counterparts to such patents and patent applications. 1.18 "UC PATENT RIGHTS" shall mean U.S. Patent No. [***]; U.S. Patent No. [***]; and U.S. Patent No. [***] and any divisional, continuation, or continuation-in-part of such patent or patent applications, as well as any patents issued thereon and any reissue or reexams or extension of such patents, and any foreign counterparts to such patents and patent applications. 1.19 "UC TECHNOLOGY RIGHTS" shall mean any know-how, technical information, research and development information, test results, and data relating to UC Case No. 93-173 (as identified in the UC Agreement) and necessary for the effective exercise of the UC Patent Rights which have been licensed to Company pursuant to the UC Agreement. 2. GRANT OF RIGHTS. 2.1 LICENSE GRANT. (a) PATENT RIGHTS. Subject to the terms of this Agreement, University hereby grants to Company and its Affiliates an exclusive, worldwide, royalty-bearing license (with the 4 ***Confidential Treatment Requested 5 right to sublicense) under the Patent Rights to develop, make, have made, use, offer for sale, sell, and import Licensed Products in the Field. (b) RELATED TECHNOLOGY AND LICENSED METHOD. Subject to the terms of this Agreement, University hereby grants to Company and its Affiliates a non-exclusive, worldwide, royalty-bearing license (with the right to sublicense) under the Related Technology and the Licensed Method to develop, make, have made, use, offer for sale, sell, and import Licensed Products in the Field. 2.2 SUBLICENSES. Company shall have the right to grant sublicenses of its rights under Section 2.1. All sublicense agreements executed by Company pursuant to this Article 2 shall be consistent with the terms of this Agreement and shall provide for the automatic assignment of such agreement to University if this Agreement is terminated. Company shall promptly furnish University with a fully executed copy of any such sublicense agreement. 2.3 RETAINED RIGHTS. (a) UNIVERSITY. University retains the right to make and use Licensed Products covered by Patent Rights for academic research and academic patient care, without payment of compensation to Company. University may license its retained rights under this Section to research collaborators of University faculty members, to post-doctoral fellows, and to students solely for academic research and academic patient care. Notwithstanding the above retention of rights, the University does not retain any right to make, use, or sublicense any third party the right to use the license or sublicense of its retained rights under this Section for commercial applications in the Field. (b) FEDERAL GOVERNMENT. To the extent that any invention claimed in the Patent Rights has been partially funded by the federal government, this Agreement and the grant of any rights in such Patent Rights are subject to and governed by federal law as set forth in 35 U.S.C. SectionSection201-211, and the regulations promulgated thereunder, as amended, or any successor statutes or regulations. Company acknowledges that these statutes and regulations reserve to the federal government a royalty-free, non-exclusive, non-transferable license to practice any government-funded invention claimed in any non-transferable license to practice any government-funded invention claimed in any Patent Rights. If any term of this Agreement fails to conform with such laws and regulations, the relevant term shall be deemed an invalid provision and modified in accordance with section 10.10. 5 6 At least some of the inventions claimed in the Patent Rights and the Related Technology were conceived or reduced to practice by [***], an employee of the [***] and a faculty member of University, and were assigned to University by [***] in accordance with the Collaboration Agreement, between [***] and University dated November 16, 1990, as amended (the "Collaboration Agreement"). Pursuant to the Collaboration Agreement, University is required to grant [***] a paid-up, non-exclusive, irrevocable license to use such Patent Rights and such Related Technology which correspond to such inventions for [***] non-commercial purposes (the "[***] License"), but notwithstanding any provision of this Agreement to the contrary, Company acknowledges that [***] shall have the [***] License. 2.4 EFFECT OF EXPIRATION OF ROYALTY PERIOD. Unless this Agreement is earlier terminated in accordance with Section 8 below, upon the expiration of the last Royalty Period, Company will have a fully paid, non-exclusive, irrevocable, worldwide, perpetual license (with the right to sublicense) under any Patent Rights that are then expired or are no longer enforceable, Related Technology, and Licensed Method to develop, make, have made, use, offer for sale, sell, and import Licensed Products, provided Company is then in substantial compliance with all provisions of this Agreement. 3. COMPANY OBLIGATIONS RELATING TO COMMERCIALIZATIONS. 3.1 DILIGENCE REQUIREMENTS. (a) Company, upon execution of this Agreement, shall diligently proceed with the development, manufacture, and sale of Licensed Products and/or Royalty-Bearing Products and shall earnestly and diligently endeavor to market the same within a reasonable time after execution of this Agreement. Company shall have the responsibility to obtain all necessary governmental approvals for the manufacture, use, and sale of Licensed Products and Royalty-Bearing Products. If Company is unable to perform any of the following: (i) [***]; (ii) [***]; 6 ***Confidential Treatment Requested 7 (iii) [***]; (iv) [***] (v) reasonably fill the market demand for Licensed Products or Royalty-Bearing Products following commencement of marketing at any time during the exclusive period of this Agreement; then, subject to subsection (b) of this Section 3.1, University shall have the right and option either to terminate this agreement or to reduce Company's exclusive license to a non-exclusive license. This right, if exercised, supersedes the rights granted in Section 2.1;. So long as at least one of the Company or its Affiliates or Sublicensees continues to meet the diligence requirements set forth above, the University shall not have any termination rights under this Section 3.1. (b) Subject to subsection (a) of this Section 3.1, if Company is unable to meet any of the dates set forth in subsection (a), the parties shall in good faith re-establish a date or dates that are reasonable under the then current circumstances. Provided Company is then in full compliance with all other material provisions of this Agreement, University shall not exercise its rights to terminate this Agreement or convert it to a non-exclusive agreement unless a reestablished date is not met. If a reestablished date is more than six (6) months from the original date, Company shall begin making an annual license maintenance fee for the delayed product of [***] per year, which fee shall begin to be payable in [***], on the anniversary date of the Effective Date, and shall continue until sales of the delayed product begin. The annual maintenance fee provided for in this Section 3.1 shall not exceed [***] per year. The re-established date shall not affect the date when any milestone payment would be due under Section 4.3. 3.2 INDEMNIFICATION. (a) INDEMNITY. Company shall indemnify, defend and hold harmless University and its trustees, officers, faculty, students, employees, and agents and their respective successors, heirs and assigns (the "Indemnitees"), against any liability, damage, loss, or expense 7 ***Confidential Treatment Requested 8 (including reasonable attorneys' fees and expenses of litigation) incurred by or imposed upon any of the Indemnitees in connection with any third-party claims, suits, actions, demands or judgments arising out of any theory of liability (including without limitation actions in the form of tort, warranty, or strict liability and regardless of whether such action has any factual basis) concerning any Licensed Product or Royalty-Bearing Product, process, or service that is made, used, or sold pursuant to any right or license granted under this Agreement; provided, however, that such right or license granted under this Agreement; provided, however, that such indemnification shall not apply to any liability, damage, loss, or expense to the extent directly attributable to (i) the negligent activities or intentional misconduct of the Indemnitees or (ii) the settlement of a claim, suit, action, or demand by Indemnities without the prior written approval of Company. Company also shall indemnify, defend, and hold harmless [***] and its trustees, officers, employees, and agents, and their respective successors, heirs and assigns (the "[***] Indemnitees"), from and against any claims, liability, cost, expense, damage deficiency, loss, or obligation (including, without limitation, reasonable attorney's fees and costs), based upon, arising out of, or otherwise relating to any actions taken or omissions made in connection with or pursuant to this License Agreement. The [***] Indemnitees agree to provide Company with prompt written notice of any claim, suit action, demand or judgment for which indemnification is sought under this Agreement. Company agrees that any Sublicensee shall agree to provide [***] with the same indemnity provided by Company herein. (b) PROCEDURES. The indemnities agree to provide Company with prompt written notice of any claim, suit, action, demand, or judgment for which indemnification is sought under this Agreement. Company agrees, at its own expense, to provide attorneys reasonably acceptable to University to defend against any such claim. The Indemnitees shall cooperate fully with Company in such defense and will permit Company to conduct and control such defense and the disposition of such claim, suit, or action (including all decisions relative to litigation, appeal, and settlement); provided, however, that any Indemnitee shall have the right to retain its own counsel, at the expense of Company, if representation of such Indemnitee by the counsel retained by Company would be inappropriate because of actual or potential differences in the interests of such Indemnitee and any other party represented by such counsel. Company agrees to keep University informed of the progress in the defense and disposition of such claim and to consult with University with regard to any proposed settlement. The failure to deliver a written notice to Company within a reasonable time after the commencement of such claim, suit, or action, if prejudicial to Company's ability to defend such action, shall correspondingly appropriately reduce Company's liability to the Indemnitees under Section 3.2, but the omission to deliver shall 8 ***Confidential Treatment Requested 9 not relieve Company of any liability that it may have to indemnitees other than under this Section 3.2. (c) INSURANCE. Effective as of such time as a Licensed Product or Royalty-Bearing Product enters human clinical trials, Company shall maintain insurance or self-insurance that is reasonable adequate to fulfill any potential obligation to the Indemnitees, but in any event not less than one million dollars ($1,000,000) for injuries to any one person arising out of a single occurrence and five million dollars ($5,000.000) for injuries to all persons arising out of a single occurrence. Company shall provide University, upon request, with rewritten evidence of such insurance or self-insurance. Company shall continue to maintain such insurance or self-insurance after the expiration or termination of this Agreement during any period in which Company or Affiliate or Sublicensee continues to make, use, or sell a product that was a Licensed Product or Royalty-Bearing Product under this Agreement and thereafter for a period of five (5) years. Until such time as a Licensed Product or Royalty-Bearing Product enters human clinical trials, Company shall maintain insurance or self-insurance in such amount as Company customarily maintains covering similar activities, and shall maintain such insurance so long as Company customarily carries such insurance coverage or until a Licensed Product or Royalty-Bearing Product enters human clinical trials. 3.3 USE OF UNIVERSITY NAME. In accordance with Section 7.3., Company and its Affiliates and Sublicensees shall not use the name "University of Massachusetts" or any variation of that name in connection with the marketing or sale of any Licensed Products. 3.4 MARKING OF LICENSED PRODUCTS. To the extent commercially feasible and consistent with prevailing business practices, Company shall mark, and shall cause its Affiliates and Sublicensees to mark, all Licensed Products that are manufactured or sold under this Agreement with the number of each issued patent under the Patent Rights that applies to such Licensed Product. 3.5 COMPLIANCE WITH LAW. Company shall comply with, and shall require its Affiliates and Sublicensees comply with, all local, state, federal, and international laws and regulations relating to the development, manufacture, use, and sale of Licensed Products. Company expressly agrees to comply with the following: (i) Company or its Affiliates or Sublicensees shall obtain all necessary approvals from the United States Food & Drug Administration and any similar governmental authorities of 9 10 any foreign jurisdiction in which Company or an Affiliate or Sublicensee intends to make, use, or sell Licensed Products. (ii) Company and its Affiliates and Sublicensees shall comply with all United States laws and regulations controlling the export of certain commodities and technical data, including without limitation all Export Administration Regulations of the United States Department of Commerce,. Among other things, these laws and regulations prohibit, or require a license for, the export of certain types of commodities and technical data to specified countries. Company hereby gives written assurance that it will comply with, and will require its Affiliates and Sublicensees to comply with, all United States export control laws and regulations, and that it will indemnify, defend, and hold University harmless (in accordance with Section 3.2) for the consequences of any such violation. (iii) To the extent that any invention claimed in the Patent Rights has been partially funded by the United States government, and only to the extent required by applicable laws and regulations, Company agrees that any Licensed Products used or sold in the United States will be manufactured substantially in the United States or its territories. Current law provides that if domestic manufacture is not commercially feasible under the circumstances, University may seek a waiver of this requirement from the relevant federal agency on behalf of Company. 4. CONSIDERATION FOR GRANT OF RIGHTS. 4.1 LICENSE FEE. In partial consideration of the rights granted Company under this Agreement, Company shall pay to University, within thirty (30) days after the Effective Date, a license fee of [***]. In addition, Company shall reimburse University for patent prosecution expenses in the aggregate amount of [***] incurred by University as of the Effective Date with respect to Patent Rights; provided, however, that Company's obligation to reimburse such patent prosecution expenses shall be conditioned upon University's delivery to Company of a reasonably detailed, written itemization of such expenses. Copies of University patent prosecution invoices which provide reasonable detail shall be sufficient written itemization of such expenses. These license fee payments and reimbursements are non refundable and are not creditable against any other payments due to University under this Agreement. 4.2 EQUITY. In partial consideration of the license granted Company under this Agreement, Company shall issue to University, within thirty (30) days after the Effective Date, a 10 ***Confidential Treatment Requested 11 total of [***] shares of Common Stock of Company (subject to adjustment upon changes in stock through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), under the terms of the Common Stock Purchase Agreement dated as of the Effective Date between Company and University (the "Common Stock Purchase Agreement"). 4.3 MILESTONE PAYMENTS. Company shall pay University the following milestone payments and make the following issuances of Company Common Stock (subject to adjustment upon changes in stock through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise ) to University within thirty (30) days after the occurrence of each event described below:
MILESTONE PAYMENT STOCK ISSUANCE [***]
In addition, in the event that Company makes any milestone payment(s) to UC with respect to subsequent compounds utilizing Patent Rights, Related Technology, Licensed Method, UC patent Rights, or UC Technology Rights, Company shall pay to University an amount equal to [***] of such milestone payment(s). 11 ***Confidential Treatment Requested 12 These milestone payments and stock issuances are nonrefundable and are not creditable against any other payments due to University under this Agreement. Company shall pay University such amounts and shall issue such stock regardless of who achieves the milestone, whether the Company or an Affiliate or Sublicensee. 4.4 ROYALTIES (a) BASE ROYALTY. In partial consideration of the rights granted Company under this Agreement, Company shall pay to University an earned royalty of [***] of Not Sales of Licensed Products and Royalty-Bearing Products by Company, an Affiliate or a Sublicensee (the "[***] Royalty"), provided that the earned royalty shall be [***] of Net Sales of a Licensed Product or Royalty-Bearing Product if Net Sales of the Licensed Product or Royalty-Bearing Product are less than [***] per year in any given calendar year of sales (the "[***]"). Company shall pay the [***] Royalty to University for any Royalty Period as to which it cannot be ascertained at the time royalty payments are due whether Net Sales for the calendar year of such Royalty Period will be less than [***]; provided, however, that Company shall be entitled to credit from University in accordance with section 5.4 in the event that the Year-End Report (as defined in Section 5.1) indicates that Company has made excessive royalty payments to University for a calendar year. Any earned royalty due under this Section 4.4 shall be reduced by fifty percent (50%) in the event that a Licensed Product or Royalty-Bearing Product is not covered by Patent Rights or UC Patent Rights but is covered by or developed from related Technology or UC Technology Rights. (b) NO MULTIPLE ROYALTIES. No multiple royalties shall be payable because a particular Licensed Product or its manufacture, use, or sale are or shall be covered by more than one patent application or patent included within the Patent Rights. 4.5 MINIMUM ROYALTY. In each calendar year after the Effective Date, Company shall pay and University shall receive the following minimum royalty payments: [***]
12 ***Confidential Treatment Requested 13 If the actual royalty payments to University in any calendar year are less than the minimum royalty payment required for that year, Company shall have the right to pay University the difference between the actual royalty payment and the minimum royalty payment in full satisfaction of its obligations under this Section, provided such minimum payment is made to University within sixty (60) days after the conclusion of the calendar year. Waiver of any minimum royalty payment by University shall not be construed as a waiver of any subsequent minimum royalty payment. 4.6 SUBLICENSE INCOME. In the event the Company pays to UC any portion of any payments the Company receives in consideration for the sublicense of the Patent Rights, Related Technology, Licensed Method, UC Patent Rights or UC Technology Rights, Company shall pay to University an amount equal to [***] of such payment(s). 5. ROYALTY REPORTS; PAYMENTS; RECORDS. 5.1 REPORTS AND PAYMENTS. Within sixty (60) days after the conclusion of each Royalty Period, Company shall deliver to University a report (each a "Report") containing the following information: (i) the number of Licensed Products and Royalty-Bearing Products sold to independent third parties in each country, and the number of Licensed Products and Royalty-Bearing Products used by Company and its Affiliates and Sublicensees to provide commercial services in each country; (ii) the gross sales price for each Licensed Product and Royalty-Bearing Product by Company and its Affiliates during the applicable Royalty Period in each country; (iii) calculation of Net Sales for the applicable Royalty Period in each country, including a listing of applicable deductions; (iv) total royalty payable on Net Sales in U.S. dollars together with the exchange rates used for conversion; and 13 ***Confidential Treatment Requested 14 (v) withholding taxes, if any, required by law to be deducted as a payment by University in respect of such Net Sales. In addition, the Report for the Royalty Period ending on December 31 of a given calendar year (the "Year-End Report") shall state whether Company is entitled to credit pursuant to Section 4.4(a) as a result of having paid the [***] Royalty during a calendar year in which Net Sales exceeded [***] and, if Company is entitled to such credit, shall also set forth the amount of the credit to which Company is entitled, as calculated in accordance with Section 5.4. If no royalties are due to University for any Royalty Period, the Report for such Royalty Period shall so state. Concurrent with the delivery of each Report, Company shall remit to University any payment due for the applicable Royalty Period. All such reports shall be considered Company Confidential Information. 5.2 PAYMENTS IN U.S. DOLLARS. All payments due under this Agreement shall be payable in U.S. dollars. Conversion of foreign currency to U.S. dollars shall be made at the conversion rate existing in the United States (as reported in the Wall Street Journal) on the last working day of the calendar quarter preceding the applicable Royalty Period. Such payments shall be without deduction of exchange, collection, or other charges. 5.3 PAYMENT IN OTHER CURRENCIES. If by law, regulation, or fiscal policy of a particular country, conversion into United States dollars or transfer of funds of a convertible currency to the United States is restricted or forbidden, Company shall give University prompt written notice of such restriction, which notice shall satisfy the sixty-day payment deadline described in Section 5.1. Company shall pay any amounts due University through whatever awful methods University reasonably designates; provided, however, that if University fails to designate such payment method within thirty (30) days after University is notified of the restriction, Company may deposit such payment in local currency to the credit of University in a recognized banking institution selected by Company and identified by written notice to University and such deposit shall fulfill all obligations of Company to University with respect to such payments. 5.4 CREDIT FOR OVERPAYMENTS. Within thirty (30) days of University's receipt of a Year-End Report disclosing overpayment of royalties by Company, University shall credit to Company an amount equal to the lesser of (a) the difference between the [***] royalty paid to University and the [***] Royalty to which University was actually entitled and (b) the difference 14 ***Confidential Treatment Requested 15 between the [***] Royalty and the applicable minimum royalty for such calendar year, as specified in Section 4.5. 5.5 RECORDS. Company shall maintain and shall require its Affiliates and Sublicensees to maintain, complete and accurate records of Licensed Products and Royalty-Bearing Products that are made, used, or sold under this Agreement and any amounts payable to University in relation to such Licensed Products and Royalty Bearing Products, which records shall contain sufficient information to permit University to confirm the accuracy of any Reports due to University under Section 5.1. The relevant party shall retain such records relating to a given Royalty Period for at least three (3) years after the conclusion of that Royalty Period during which time University shall have the right, at its expense, to cause its internal accountants or an independent, certified public accountant to inspect such records during normal business hours for the sole purpose of verifying any reports and payments due under this Agreement. Such accountant shall not disclose to University any information other than information relating to accuracy of reports and payments delivered under this Agreement. The parties shall reconcile any underpayment or overpayment within thirty (30) days after the accountant delivers the results of the audit. In the event that any audit performed under this Section reveals an underpayment in excess of ten percent (10%) in any Royalty Period, Company shall bear the full cost of such audit; however, Company shall have the right to review and verify the audit results for thirty (30) days after the accountant delivers the results of the audit, prior to being required to pay the cost of the audit. University may exercise its rights under this Section only once every year and only with reasonable prior notice to Company. 5.6 LATE PAYMENTS. Any payment by Company that are not paid on or before the date such payments are due under this Agreement shall bear interest, to the extent permitted by law, at two percentage points above the Prime Rate of interest as reported in the Wall Street Journal on the date payment is due, with interest calculated based on the number of days that payment is delinquent. 5.7 METHOD OF PAYMENT. All payments under this Agreement should be made in the name of the "University of Massachusetts" and sent to the address identified below. Each payment should reference this Agreement and identify the obligation under this Agreement that the payment satisfies. 15 ***Confidential Treatment Requested 16 5.8 WITHHOLDING AND SIMILAR TAXES. Royalty payments and other payments due to University under this Agreement shall not be reduced by reason of any withholding or similar taxes applicable to such payments to University. 6. PATENTS AND INFRINGEMENT. 6.1 RESPONSIBILITY FOR JOINT PATENT RIGHTS. Company shall have primary responsibility, at Company's expense, for the preparation, filing, prosecution, and maintenance of all Joint Patent Rights (except as otherwise agreed in writing by University and by UC), using patent counsel selected by Company. Company shall consult with University as to the preparation, filing, prosecution, and maintenance of all such Joint Patent Rights reasonably prior to any deadline or action with the U.S. Patent & Trademark Office or any foreign patent office (a "Patent Office") and shall furnish University with copies of all relevant documents reasonably in advance of such consultation. Responsibility for any patent rights covered by the UMMC Cases shall be determined in accordance with Section 6.2 below. 6.2 CONTROL OF UMMC CASES. From and after the Effective date, University shall have responsibility for and control over the prosecution and maintenance of the UMMC Cases and Company shall bear responsibility for the expenses of such prosecution and maintenance. For so long as University controls prosecution and maintenance of the UMMC Cases, University shall (a) not make any filings of any nature or type with a Patent Office in connection with the UMMC Cases (including, without limitation any initial filing, any amendments to such filing, any continuations-in-part or any response to any Patent Office action or communication) without the prior approval of Company, (b) keep Company fully informed of the status of the UMMC Cases, (c) furnish Company with copies of all relevant documents in connection with University's preparation, filing, prosecution, maintenance or abandonment of the UMMC Cases reasonably prior to any deadline or action with any Patent Office, and (d) consult with Company regarding such documents and endeavor in good faith to consider and incorporate any comments on such documents that Company may have (University to have final authority with respect to such prosecution and maintenance in the event of disagreement between it and Company). Notwithstanding the foregoing, University acknowledges and agrees that it will not prosecute any subject matter with respect to UMMC Cases which would interfere, as defined by 35 U.S.C. Section135, with subject matter in issued claims of the UC Patent Rights or the Joint Patent Rights, or take any other action to prompt a declaration of interference of the UMMC Cases with any such patent rights and, in the event that such an interference is declared, will immediately take steps 16 17 reasonably necessary to dissolve such interference including, if necessary, abandoning the claims. The University shall not abandon any of the UMMC Cases, fail to respond to any outstanding action from a Patent Office or fail to pay any applicable issue fee or maintenance fee without first offering to transfer to Company responsibility for control over prosecution and maintenance of the applicable rights under the UMMC Cases with a reasonable amount of time to allow Company to prevent the abandonment of the UMMC Cases, or respond to such Patent Office action or pay such issue fee or maintenance fee. Company shall reimburse University for the expenses of such preparation, filing, prosecution and maintenance with respect to UMMC Cases; provided, however, that Company's obligation to reimburse such expenses shall be conditioned upon University's delivery to Company of a reasonable written itemization of such expenses. The amount of such expenses incurred to date which Company shall be obligated to reimburse University is $51,500 (as of July 25, 1997). Copies of University's invoices with respect to such expenses shall be deemed to be sufficient written itemization of such expenses. 6.3 INFRINGEMENT. (a) NOTIFICATION OF INFRINGEMENT. Each party agrees to provide written notice to the other party promptly after becoming aware of any infringement of the Patent Rights. (b) COMPANY RIGHT TO PROSECUTE. So long as the license granted Company under Section 2.1(a) remains exclusive (subject to the retained rights under Section 2.3 and any applicable rights of UC with respect to Joint Patent Rights), Company shall have the right, under its own control and its own expense, to prosecute any third party infringement of the Patent Rights in the Field or, together with other licensees of the Patent Rights in other fields, to defend the Patent Rights in any declaratory judgment action brought by a third party which alleges invalidity, unenforceability, or non-infringement of the Patent Rights. Prior to commencing any action as aforesaid, Company shall consult with University and shall consider the views of University regarding the advisability of the proposed action and its effect on the public interest. Company shall not enter into any settlement, consent judgment, or other voluntary final disposition of any infringement action under this Subsection without the prior written consent of the University, which consent shall not be unreasonably withheld or delayed. Any recovery obtained in an action under this Subsection which relates solely to the Patent Rights shall be distributed as follows: (i) each party shall be reimbursed for any expenses incurred in the action 17 ***Confidential Treatment Requested 18 (including the amount of any royalty payments withheld from University as described below); (ii) as to ordinary damages, Company shall receive an amount equal to its lost profits or a reasonable royalty on the infringing sales (whichever measure of damages the court shall have applied), and shall remit to University a reasonable approximation of the royalties that Company would have paid to University if Company had sold the infringing products and services rather than the infringer, and (iii) as to special or punitive damages, the parties shall share any award in proportion to the share of expense paid by each party. Company may offset a total of [***] of any expenses incurred under this Subsection against any royalty payments due to University under this Agreement, provided that in no event shall the royalty payments under Section 4.4., when aggregated with any other offsets and credits allowed under this Agreement, be reduced by more than [***] in any Royalty Period. (c) UNIVERSITY AS INDISPENSABLE PARTY. University shall permit any action under this Section to be brought in its name if required by law, provided that Company shall hold University harmless from, and if necessary indemnify University against, any costs, expenses, or liability that University may incur in connection with such action. (d) UNIVERSITY RIGHT TO PROSECUTE. In the event that Company fails to initiate an infringement action with respect to Patent Rights within a reasonable time after it first becomes aware of the basis for such action, or to answer a declaratory judgment or other action within a reasonable time after such action is filed, University shall have the right to prosecute such infringement or answer such declaratory judgment action, under its sole control and its sole expense, and any recovery obtained shall be given to University. (e) COOPERATION. Each party agrees to cooperate fully in any action under this Section 6.3 which is controlled by the other party, provided that the controlling party reimburses the cooperating party promptly for reasonable costs and expenses incurred by the cooperating party in connection with providing such assistance. 7. CONFIDENTIAL INFORMATION; PUBLICATIONS; PUBLICITY. 7.1 CONFIDENTIAL INFORMATION (a) DESIGNATION. Confidential Information that is disclosed in writing shall be marked with a legend indicating its confidential status (such as "Confidential" or "Proprietary"). Confidential Information that is disclosed orally or visually shall be documented in a written 18 ***Confidential Treatment Requested 19 notice prepared by the Disclosing Party and delivered to the Receiving Party within thirty (30) days of the date of disclosure; such notice shall summarize the Confidential Information disclosed to the Receiving Party and reference the time and place of disclosure. (b) OBLIGATIONS. For a period of five (5) years after disclosure of any portion of Confidential Information, the Receiving Party shall (i) maintain such Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to its directors, officers, employees, consultants, and advisors who are obligated to maintain the confidential nature of such Confidential Information and who need to know such Confidential Information solely for the performance and administration of this Agreement; and (ii) allow its trustees or directors, officers, employees, consultants, and advisors to reproduce the Confidential Information only to the extent necessary for the purposes of this Agreement, with all such reproductions being considered Confidential Information. (c) EXCEPTIONS. The obligations of the Receiving Party under Subsection 7.1(b) above shall not apply to the extent that the receiving Party can demonstrate that certain Confidential Information (i) was in the public domain prior to the time of its disclosure under this Agreement; (ii) entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party; (iii) was independently developed or discovered by the Receiving Party without use of the Confidential Information; (iv) is or was disclosed to the Receiving Party at any time whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality with respect to such Confidential Information; or (v) is required to be disclosed to comply with applicable laws or regulations, or with a court or administrative order, provided that the Disclosing Party receives reasonable prior written notice of such obligation for disclosure. (d) OWNERSHIP AND RETURNS. The Receiving Party acknowledges that the Disclosing Party (or any third party entrusting its own information to the Disclosing Party) claims ownership of its Confidential Information in the possession of the Receiving Party. Upon the expiration or termination of this Agreement, and at the request of the Disclosing Party, the Receiving Party shall return to the Disclosing Party all originals, copies, and summaries of documents, materials and other tangible manifestations of Confidential Information in the possession or control of the Receiving Party, except that the Receiving Party may retain one copy 19 20 of the Confidential Information in the possession of its legal counsel solely for the purpose of monitoring its obligations under this Agreement. 7.2 PUBLICATIONS. University and its employees will be free to disclose publicly (through journals, lectures, or otherwise) the results of any research in the Field or relating to the subject matter of the Patent Rights, except as otherwise provided by written agreement between University and Company (e.g., a sponsored research agreement). 7.3 PUBLICITY RESTRICTIONS. Company shall not use the name of University or any of its trustees, officers, faculty, students, employees, or agents, or any adaptation of such names, or any terms of this Agreement in any promotional material or other public announcement or disclosure without the prior written consent of University. The foregoing notwithstanding, Company shall have the right to disclose such information without the consent of University in any prospectus, offering memorandum, or other document or filing required by applicable securities laws or other applicable law or regulation, provided that Company shall have given University at least ten (10) days prior written notice of the proposed text and of the requirement for the proposed disclosure for the purpose of giving University the opportunity to comment on such text. Company and its Affiliates and Sublicensees shall not use the name, likeness, or logos of the [***] in any press release, general publication, advertising, marketing, promotional or sales literature without prior written consent from an authorized official of the [***]. 8. TERM AND TERMINATION. 8.1 TERM. This Agreement shall commence on the Effective Date and shall remain in effect until (i) the expiration of all issued patents within the Patent Rights or (ii) for a period of ten (10) years after the Effective Date if no such patents have issued within that ten-year period, unless earlier terminated in accordance with the provisions of this Agreement (the "Term"). 8.2 TERMINATION FOR DEFAULT. In the event that either party commits a material breach of its obligations under this Agreement and fails to cure that breach within sixty (60) days after receiving written notice thereof, the other party may terminate this Agreement immediately upon written notice to the party in breach. If the alleged breach involves nonpayment of any amounts due University under this Agreement, Company shall be entitled to the sixty-day cure period only with respect to the first such breach, with the cure period for each subsequent breach shortened as follows: thirty (30) days for the second breach; fifteen (15) days for the third 20 ***Confidential Treatment Requested 21 breach; and termination immediately upon written notice to Company, without any cure period for any subsequent breach. 8.3 FORCE MAJEURE. Neither party will be responsible for delays resulting from causes beyond the reasonable control of such party, including without limitation fire, explosion, flood, war, strike, or riot, provided that the nonperforming party uses commercially reasonable efforts to avoid or remove such causes of nonperformance and continues performance under this Agreement with reasonable dispatch whenever such causes are removed. 8.4 EFFECT OF TERMINATION. The following provisions shall survive the expiration or termination of this Agreement: Articles 1, 5 (except that Section 5.1 shall only survive as to the obligation to provide final report and payment), 7 and 9; Sections 3.2, 3.5, 8.4, 10.8 and 10.9. In addition, Sections 4.3, 4.4 and 4.5 shall survive the expiration (but not the termination) of this Agreement until the end of the last Royalty Period. Upon the early termination of this Agreement, Company and its Affiliates and Sublicensees may complete and sell any work-in-progress and inventory of licensed products that exist as of the effective date of termination, provided that (i) Company is current in payment of all amounts due University under this Agreement, (ii) Company pays University the applicable royalty on such sales of Licensed Products and Royalty-Bearing Products in accordance with the terms and conditions of this Agreement, and (iii) Company and its Affiliates and Sublicensees shall complete and sell all work-in-progress and inventory of Licensed Products within six (6) months after the effective date of termination. 9. DISPUTE RESOLUTION. 9.1 PROCEDURES MANDATORY. The parties agree that any dispute arising out of or relating to this Agreement shall be resolved solely by means of the procedures set forth in this Article, and that such procedures constitute legally binding obligations that are an essential provision of this Agreement; provided, however, that all procedures and deadlines specified in this Article may be modified by written agreement of the parties. If either party fails to observe the procedures of this Article, as modified by their written agreement, the other party may bring an action for the specific performance in any court of compentent jurisdiction. 9.2 DISPUTE RESOLUTION PROCEDURES. 21 22 (a) NEGOTIATION. In the event of any dispute arising out of or relating to this Agreement, the affected party shall notify the other party, and the parties shall attempt in good faith or resolve the matter within ten (10) days after the date of such notice (the "Notice Date"). Any disputes not resolved by good faith discussions shall be referred to senior executives of each party, who shall meet at a mutually acceptable time and location within thirty (30) days after the Notice Date and attempt to negotiate a settlement. (b) MEDIATION. If the matter remains unresolved within sixty (60) days after the notice Date, or if the senior executives fail to meet within thirty (30) days after the Notice Date, either party may initiate mediation upon written notice to the other party, whereupon both parties shall be obligated to engage in a mediation proceeding under then current Center for Public Resources ("CPR") Model Procedure for Mediation of Business Disputes, except that specific provisions of this Section shall override inconsistent provisions of the CPR Model Procedure. The mediator will be selected from the CPR Panels of Neutrals. If the parties cannot agree upon the selection of a mediator within ninety (90) days after the Notice Date, then upon the request of either party, the CPR shall appoint the mediator. The parties shall attempt to resolve the dispute through mediation until one of the following occurs: (i) the parties reach a written settlement; (ii) the mediator notifies the parties in writing that they have reached an impasse; (iii) the parties agree in writing that they have reached an impasse; or (iv) the parties have not reached a settlement within one hundred and twenty (120) days after the Notice Date. (c) TRIAL WITHOUT JURY. If the parties fail or resolve the dispute through mediation, or if neither party elects to initiate mediation, each party shall have the right to pursue any other remedies legally available to resolve the dispute, provided, however, that the parties expressly waive any right to a jury trial in any legal proceeding under this Section. 9.3 PRESERVATION OF RIGHTS PENDING RESOLUTION. (a) PERFORMANCE TO CONTINUE. Each party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out or relating to this Agreement; provided, however, that a party may suspend performance of its obligations during any period in which the other party fails or refuses to perform its obligations. (b) PROVISIONAL REMEDIES. Although the procedures specified in this Article are the sole and exclusive procedures for the resolution of disputes arising out of relating to this Agreement, either party may seek a preliminary injunction or other provisional equitable relief if, 22 23 in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement. (c) STATUTE OF LIMITATIONS. The parties agree that all applicable statutes of limitation and time-based defenses (such as estoppel and laches) shall be tolled while the procedures set forth in Subsections (9.2.(a) and 9.2(b) are pending. The parties shall take any actions necessary to effectuate this result. 10. MISCELLANEOUS. 10.1 REPRESENTATIONS AND WARRANTIES. University represents and warrants that its employees have assigned to University their entire right, title, and interest in the Patent Rights and that it has authority to grant the rights and licenses set forth in this Agreement. UNIVERSITY MAKES NO OTHER WARRANTIES CONCERNING THE PATENT RIGHTS AND RELATED TECHNOLOGY, INCLUDING WITHOUT LIMITATION ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Specifically, University makes no warranty or representation (i) regarding the validity or scope of the Patent Rights (ii) that the exploitation of Patent Rights or any Licensed Product will not infringe any patents or other intellectual property rights of a third party, and (iii) that any third party is not currently infringing or will not infringe the Patent Rights. 10.2 TAX-EXEMPT STATUS. Company acknowledges that University, as a public institution of the Commonwealth of Massachsuetts, holds the status of an exempt organization under the United States Internal Revenue Code. Company also acknowledges that ascertain facilities in which the licensed inventions were developed may have been financed through offerings of tax-exempt bonds. If the Internal Revenue Service determines, or if counsel to University reasonably determines, that any term of this Agreement jeopardizes the tax-exempt status of University or the bonds used to finance University facilities, the relevant term shall be deemed in invalid provisions and modified in accordance with Section 10.10. 10.3 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. 10.4 HEADINGS. All headings are for convenience only and shall not affect the meaning of any provision of this Agreement. 23 24 10.5 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties and their respective permitted successors and assigns. 10.6 ASSIGNMENT. This Agreement may not be assigned by either party without the prior written consent of the other party, except that Company may assign this Agreement to an affiliate or to a successor in connection with the merger, consolidation, or sale of all or substantially all of its assets or that portion of its business to which this Agreement relates. 10.7 AMENDMENT AND WAIVER. This Agreement may be amended, supplemented, or otherwise modified only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 10.8. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts irrespective of any conflicts of law principles. 10.9 NOTICE. Any notices required or permitted under this Agreement shall be in writing, shall specifically refer to this Agreement, and shall be sent by hand, recognized national overnight courier, confirmed facsimile transmission, confirmed electronic mail, or registered or certified mail, postage prepaid, return receive requested, to the following addresses or facsimile numbers of the parties. 24 25 If to University: Office of Commercial Ventures and Intellectual Property University of Massachsuetts 55 Lake Avenue North Worcester, MA 01605 Attention: Joseph F. X. McGuirl Executive Director Tel: (508) 856-1626 Fax: (508) 856-5004 If to Company: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 Attention: Alan J. Lewis, Ph.D. President and Chief Executive Officer Tel: (619) 558-7500 Fax: (619) 558-7513 All notices under this Agreement shall be deemed effective upon receipt. A party may change its contact information immediately upon written notice to the other party in the manner provided in this Section. 10.10 SEVERABILITY. In the event that any provision of this Agreement shall be held invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect any other provision of this Agreement, and the parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent. If the parties fail to reach a modified agreement within sixty (60) days after the relevant provision is held invalid or unenforceable, then the dispute shall be resolved in accordance with the procedures set forth in Article 9. While the dispute is pending resolution, this Agreement shall be construed as if such provision were deleted by agreement of the parties. 10.11 ENTIRE AGREEMENT. Except for the Common Stock Purchase Agreement, this Agreement constitutes the entire agreement between the parties with respect to its subject 25 26 and supersedes all prior agreement or understandings between the parties relating to its subject matter. IN WITNESS WHEREOF, The parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above. UNIVERSITY OF MASSACHUSETTS SIGNAL PHARMACEUTICALS, INC. By: /s/ JOSEPH F.X. McGUIRL By: /s/ CARL BOBKOSKI -------------------------------- ------------------------------ Joseph F.X. McGuirl Carl Bobkoski Executive Director, CVIP Executive Vice President 26 27 EXHIBIT A LIST OF UMMC CASES U.S. PATENT APPLICATION SERIAL NO. [***] U.S. PATENT APPLICATION SERIAL NO. [***] 27 ***Confidential Treatment Requested EX-10.48 10 EXHIBIT 10.48 1 * Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.48 RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT Dated November 25, 1997 by and between SIGNAL PHARMACEUTICALS, INC. and ARES TRADING S.A. 2 RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT ------------------------------------------- TABLE OF CONTENTS -----------------
PAGE ARTICLE I DEFINITIONS ............................................................. 1 ----------- 1.01 Affiliate ....................................................... 2 1.02 ARES Know-How ................................................... 2 1.03 ARES Patents .................................................... 2 1.04 Business Day .................................................... 2 1.05 Effective Date .................................................. 2 1.06 Facilities ...................................................... 3 1.07 FDA ............................................................. 3 1.08 Field ........................................................... 3 1.09 Initial Term .................................................... 3 1.10 Joint Know-How .................................................. 3 1.11 Joint Patents ................................................... 3 1.12 Joint Research Committee ........................................ 3 1.13 Licensed Product ................................................ 4 1.14 Net Sales ....................................................... 4 1.15 NF-kB ........................................................... 4 1.16 Protocol ........................................................ 5 1.17 Research ........................................................ 5 1.18 SIGNAL Know-How ................................................. 5 1.19 SIGNAL Patents .................................................. 5 1.20 SIGNAL Technology ............................................... 5 1.21 Subsequent Term ................................................. 6 1.22 Tanabe .......................................................... 6 1.23 Term ............................................................ 6 1.24 Territory ....................................................... 6 1.25 Valid Claim ..................................................... 6 ARTICLE II RESEARCH ................................................................ 6 -------- 2.01 Joint Research Committee ........................................ 6 2.01.01 Purpose ................................................. 6 2.01.02 Membership .............................................. 7 2.01.03 Schedule ................................................ 7 2.01.04 Procedures .............................................. 7 2.02 Performance of the Research ..................................... 7 2.03 Performance Standard ............................................ 8 2.03.01 SIGNAL .................................................. 8 2.03.02 ARES .................................................... 8
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PAGE 2.04 Commitment of Research Personnel ................................ 8 2.05 Exclusive Relationship .......................................... 8 2.05.01 SIGNAL .................................................. 8 2.05.02 Tanabe Agreement ........................................ 9 2.06 Facilities ...................................................... 9 2.07 Records ......................................................... 10 2.08 Audit ........................................................... 10 2.09 Research by ARES ................................................ 10 2.10 Term of the Research ............................................ 10 2.11 Research Funding ................................................ 11 2.12 Materials ....................................................... 12 2.12.01 ARES Materials .......................................... 12 2.12.02 SIGNAL Materials ........................................ 12 2.13 Ownership of SIGNAL Technology .................................. 13 2.13.01 No Ownership by SIGNAL Employees ........................ 13 2.13.02 SIGNAL Know-How and SIGNAL Patents ...................... 13 2.13.03 Joint Know-How and Joint Patents........................ 13 2.14 License of ARES Know-How and ARES Patents ....................... 14 ARTICLE III LICENSE ................................................................. 14 ------- 3.01 Grant of License ................................................ 14 3.02 Disclosure of SIGNAL Know-How and Joint Know-How ................ 15 3.03 License Fees .................................................... 15 3.03.01 New Target or Indication ................................ 15 3.03.02 Other Licensed Products ................................. 16 3.03.03 New Dosage or Formulation of Licensed Product ........... 17 3.04 Equity Investment ............................................... 17 3.05 Ongoing Royalty ................................................. 17 3.06 Deduction for ARES Discovery .................................... 18 3.07 Adverse Patents ................................................. 18 3.08 Reimbursement to SIGNAL ......................................... 18 3.09 Single Royalty .................................................. 19 3.10 Taxes Withheld .................................................. 19 3.11 Report of Royalties ............................................. 19 3.12 Payment of Royalties ............................................ 19 3.13 Interest on Payments ............................................ 20 3.14 Records ......................................................... 20 3.15 Reversion of Rights to Signal ................................... 20 3.15.01 Exercise of Reversion Option ............................ 20 3.15.02 SIGNAL Obligation to Make Payment ....................... 21 3.15.03 ARES Grant of License ................................... 22
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PAGE ARTICLE IV ADDITIONAL RIGHTS ....................................................... 22 ----------------- 4.01 Co-Promotion .................................................... 22 4.01.01 Exercise of Option ...................................... 22 4.01.02 Royalty Calculations .................................... 24 4.02 Supply of Licensed Products and/or 4.03 Combination Products ............................................ 24 ARTICLE V PATENT PROSECUTION AND ENFORCEMENT ...................................... 25 ---------------------------------- 5.01 Prosecution and Maintenance by SIGNAL ........................... 25 5.02 Prosecution and Maintenance by ARES ............................. 25 5.03 Prosecution of Infringement or Patent Defense by SIGNAL ....................................................... 26 5.04 Participation in Prosecution of Infringement or Patent Defense by ARES ....................................... 26 5.05 Prosecution of Infringement or Patent Defense by ARES ......................................................... 27 ARTICLE VI TERM AND TERMINATION .................................................... 28 -------------------- 6.01 Term ............................................................ 28 6.02 Termination by ARES ............................................. 28 6.03 Termination for Breach .......................................... 28 6.04 Termination upon ARES' Bankruptcy ............................... 29 6.05 No Termination upon SIGNAL's Bankruptcy ......................... 29 6.06 Effect of Termination ........................................... 29 6.07 Cumulative Rights and Remedies .................................. 30 ARTICLE VII REPRESENTATIONS, WARRANTIES AND ------------------------------ INDEMNIFICATION ......................................................... 30 --------------- 7.01 SIGNAL Representations .......................................... 30 7.02 ARES Representations ............................................ 32 7.03 SIGNAL Indemnification .......................................... 32 7.04 ARES Indemnification ............................................ 33 7.05 Disclaimer of Warranties ........................................ 34 ARTICLE VIII GENERAL PROVISIONS ...................................................... 35 ------------------ 8.01 No Waiver ....................................................... 35 8.02 Force Majeure ................................................... 35 8.03 Notices ......................................................... 35
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PAGE 8.04 Independent Contractors ......................................... 36 8.05 Assignment ...................................................... 37 8.05.01 General ................................................. 37 8.05.02 Acquisition or Merger ................................... 37 8.06 No Sale or Other Disposal of SIGNAL Technology .................. 38 8.07 Reference to Patents ............................................ 38 8.08 No Third-Party Beneficiary ...................................... 38 8.09 Publicity ....................................................... 38 8.10 Confidential Information ........................................ 39 8.11 Publication ..................................................... 40 8.12 Counterparts .................................................... 41 8.13 No Strict Construction .......................................... 41 8.14 Governing Law ................................................... 41 8.15 Dispute Resolution .............................................. 41 8.15.01 Negotiation ............................................. 41 8.15.02 Arbitration ............................................. 42 8.16 Cooperation ..................................................... 43 8.17 Integration ..................................................... 43 EXHIBIT A ARES Know-How ........................................................... 45 EXHIBIT B ARES Patents ........................................................... 46 EXHIBIT C Protocol ................................................................ 47 EXHIBIT D SIGNAL Know-How ......................................................... 48 EXHIBIT E SIGNAL Patents .......................................................... 49 EXHIBIT F SIGNAL Third-Party Agreements ........................................... 50 EXHIBIT G Third-Party Rights in SIGNAL Know-How and SIGNAL Patents .......................................................... 51
iv 6 RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT THIS RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT (the "Agreement") effective as of the ___ day of November 1997 by and between ARES TRADING S.A., a Swiss company with its principal place of business at Chateau de Vaumarcus, 2028 Vaumarcus, Switzerland (hereinafter "ARES"), and SIGNAL PHARMACEUTICALS, INC. a California corporation with a principal place of business at 5555 Oberlin Drive, San Diego, California 92121, U.S.A. (hereinafter "SIGNAL") (ARES and SIGNAL are sometimes hereinafter referred to collectively as the "Parties" or individually as a "Party"); WITNESSETH: WHEREAS, ARES in conjunction with its affiliates and/or agents desires to perform and have performed research within the field of the modulation of nuclear factor kappa B; and WHEREAS, SIGNAL in conjunction with its agents, consultants and/or academic collaborators is willing to perform and to collaborate with ARES in the performance of such research; and WHEREAS, in connection with such research collaboration, ARES wishes to obtain an exclusive license within the Territory (as defined herein) to develop, make, have made, import, use, and sell Licensed Products (as also defined herein); and WHEREAS, SIGNAL is willing to grant such a license to ARES; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Parties hereto have agreed as follows: ARTICLE I DEFINITIONS As used in this Agreement, each term listed below shall have the meaning that is given after it: 7 Section 1.01. Affiliate. Any corporation, firm, partnership or other entity that controls, is controlled by or is under common control with the Party in question. For this purpose, "control" shall mean the ownership, whether direct or indirect, of fifty percent (50%) or more of the equity having the power to vote on or otherwise direct the affairs of the entity. Section 1.02. ARES Know-How. Any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or any improvement thereof, whether patentable or not, in which ARES or its Affiliates have any right, title or interest that is necessary or useful for the research, discovery, development, manufacture, use, import or sale of products within the Field, including without limitation any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or any improvement thereof, whether patentable or not, set forth on Exhibit A hereto or obtained, developed, made, conceived or first reduced to practice in connection with the Research solely by ARES, its Affiliates and/or agents, but excluding any Joint Know-How. Section 1.03. ARES Patents. (i) Patents (including the inventor's certificates) that include one or more Valid Claims, including without limitation any substitution, extension (including supplemental protection certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, reexamination, renewal or the like thereof or thereto, (ii) pending applications for patents, including without limitation any continuation, divisional or continuation-in-part thereof, and any provisional applications with respect thereto, that, in each case, are listed in Exhibit B to this Agreement or claim any ARES Know-How, and (iii) any foreign counterparts of any of the foregoing. Section 1.04. Business Day. Any day other than a Saturday, Sunday or other day on which the principal commercial banks located in Vaumarcus, Switzerland or San Diego, California are not open for business during normal banking hours. Section 1.05. Effective Date. November ___, 1997. - 2 - 8 Section 1.06. Facilities. A Party's research facilities and the research facilities of any of such Party's agents, Affiliates, consultants and/or academic collaborators who collaborate in the performance of the Research. Section 1.07. FDA. The United States Food and Drug Administration. Section 1.08. Field. The modulation of NF-(kappa)B, [***] Section 1.09. Initial Term. The period beginning on the Effective Date and ending three (3) years thereafter, unless sooner terminated in accordance with the terms and conditions of Article VI. Section 1.10. Joint Know-How. Any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or any improvement thereof, whether patentable or not, obtained, developed, made, conceived or first reduced to practice in connection with the Research jointly by ARES, its Affiliates and/or agents and SIGNAL, its agents, consultants and/or academic collaborators. Section 1.11. Joint Patents. (i) Patents (including the inventor's certificates) that include one or more Valid Claims, including without limitation any substitution, extension (including supplemental protection certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, reexamination, renewal or the like thereof or thereto, (ii) pending applications for patents, including without limitation any continuation, divisional or continuation-in-part thereof, and any provisional applications with respect thereto, that, in each case, claim any Joint Know-How, and (iii) any foreign counterparts of any of the foregoing. Section 1.12. Joint Research Committee. A committee established by the Parties for the purpose of defining and overseeing the implementation of the Research. - 3 - ***Confidential Treatment Requested 9 Section 1.13. Licensed Product. A product, the development, manufacture, import, use, or sale of which (i) but for the license granted in this Agreement, would infringe one or more Valid Claims of a SIGNAL Patent or Joint Patent licensed hereunder, or (ii) utilizes the SIGNAL Know-How or Joint Know-How licensed hereunder. Section 1.14. Net Sales. The amount received for a sale of the Licensed Product or Combination Product (as defined below), as applicable, to third parties by ARES, its Affiliates or sublicensees, less: (i) trade, cash and quantity discounts, rebates or reimbursements, if any, actually allowed or paid; (ii) returns, allowances and adjustments actually granted to customers; (iii) freight, insurance and other transportation charges actually accrued or paid; and (iv) taxes (other than taxes on ARES' income), duties or other governmental charges on sales or use actually absorbed by ARES or its Affiliates or sublicensees with respect to the sale of such Licensed Product or Combination Product. If the Licensed Product is sold in combination with other ingredients, products, devices, equipment or components (a "Combination Product"), Net Sales for any such Combination Product shall be computed by multiplying what would otherwise be the Net Sales of such Combination Product by the Combination Allocation Fraction (as defined below) attributable to such Combination Product. The "Combination Allocation Fraction" as used herein shall be a fraction, the numerator of which shall be the fair market value of the Licensed Product included in the Combination Product and the denominator of which shall be the fair market value of such Licensed Product plus the fair market value of the ingredients, products, equipment or components of such Combination Product that are not Licensed Product. If no market price exists, fair market value shall be determined in good faith by ARES and SIGNAL. Sales among ARES and its Affiliates or sublicensees shall be disregarded and only final sales to unrelated third parties shall be included in Net Sales. Section 1.15. NF-(kappa)B. Nuclear factor kappa B. - 4 - 10 Section 1.16. Protocol. A protocol for a research project established from time to time by the Joint Research Committee in accordance with Section 2.01 hereof and the sample protocol set forth as Exhibit C to this Agreement. Section 1.17. Research. Research performed pursuant to the Protocols by SIGNAL, its agents, consultants and/or academic collaborators, either alone or in collaboration with ARES, its Affiliates and/or agents, relating to the Field. Section 1.18. SIGNAL Know-How. Any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or any improvement thereof, whether patentable or not, in which SIGNAL has any right, title or interest that is necessary or useful for the research, discovery, development, manufacture, use, import or sale of products within the Field, including without limitation any invention, discovery, formula, design, process, know-how, data, composition, matter, device or any improvement thereof, whether patentable or not, set forth on Exhibit D hereto or obtained, developed, made, conceived or first reduced to practice in connection with the Research solely by SIGNAL, its agents, consultants and/or academic collaborators, but excluding any Joint Know-How. Section 1.19. SIGNAL Patents. (i) Patents (including the inventor's certificates) that include one or more Valid Claims, including without limitation any substitution, extension (including supplemental protection certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, reexamination, renewal or the like thereof or thereto, (ii) pending applications for patents, including without limitation any continuation, divisional or continuation-in-part thereof, and any provisional applications with respect thereto, that, in each case, are listed in Exhibit E to this Agreement or claim any SIGNAL Know-How, and (iii) any foreign counterparts of any of the foregoing. Section 1.20. SIGNAL Technology. SIGNAL Patents and SIGNAL Know-How and SIGNAL's right, title and interest in, to and under Joint Patents and Joint Know-How, collectively. - 5 - 11 Section 1.21. Subsequent Term. The period beginning upon the expiration of the Initial Term and continuing until the expiration of the Term. Section 1.22. Tanabe. Tanabe Seiyaku Co., Ltd. Section 1.23. Term. As defined in Section 6.01 hereof. Section 1.24. Territory. All countries of the world, with the exception of Japan, China, South Korea, Taiwan, Thailand, Cambodia, Laos, Vietnam, Indonesia, Nepal, the Philippines, Singapore, Malaysia, Hong Kong, Myanmar and Brunei. Section 1.25. Valid Claim. 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 that has not been admitted to be invalid or unenforceable through reissue or disclaimer. ARTICLE II RESEARCH Section 2.01. Joint Research Committee. 2.01.01. Purpose. The Joint Research Committee shall establish written Protocols for the performance of the Research, including schedules therefor and interim and final reporting obligations with respect thereto, and allocate responsibility for performance of the Research between the Parties, with the expectation that the Research shall principally be performed by SIGNAL, its agents, consultants and/or academic collaborators. The Joint Research Committee shall review the performance of the Research pursuant to the Protocols and, if necessary, approve amendments to a Protocol or terminate the Research being performed pursuant to a Protocol. Upon the completion or earlier termination of the Research being performed pursuant to a Protocol, the Joint Research Committee shall analyze the results of such Research. - 6 - 12 2.01.02. Membership. The Joint Research Committee shall initially comprise three (3) representatives appointed by ARES and three (3) representatives appointed by SIGNAL but the composition of the Joint Research Committee may be modified from time to time upon the mutual written agreement of the Parties. One representative of each Party shall be designated as the contact person for that Party. Each Party shall have the right to change its representatives to the Joint Research Committee or its contact person at any time upon notice to the other Party. 2.01.03. Schedule. The Joint Research Committee shall meet within thirty (30) days of the Effective Date, and thereafter at least quarterly or more frequently as requested by either Party. The contact person for each Party shall agree upon the time and place of each meeting. 2.01.04. Procedures. A meeting of the Joint Research Committee may be held only if a quorum of at least two (2) representatives of each Party is present. All decisions of the Joint Research Committee must be made by the unanimous consent of the representatives of both Parties present at a meeting. The proceedings of the meetings of the Joint Research Committee shall be summarized in minutes signed by the contact person of each Party or his/her designee. Section 2.02. Performance of the Research. SIGNAL agrees to use its commercially reasonable and diligent efforts consistent with prevailing practices within the pharmaceutical and biotechnology industries to perform, and as necessary to cause its agents, consultants and/or academic collaborators to perform, the Research. SIGNAL shall accord the Research at least as high a priority as it accords its other active research programs for which it receives comparable funding. SIGNAL shall cooperate with ARES in the performance of the Research as required by the relevant Protocols. - 7 - 13 Section 2.03. Performance Standard. 2.03.01. SIGNAL. SIGNAL represents and warrants that it has the experience, capability and resources, including but not limited to sufficient qualified personnel, including its agents, consultants and/or academic collaborators, to perform the Research in accordance with the terms and conditions of this Agreement. SIGNAL agrees to perform and to have performed the Research in accordance with such terms and conditions and in conformity with generally accepted standards of good laboratory practice and with all applicable federal, state and local laws, guidelines, rules and regulations including without limitation the United States Food, Drug and Cosmetic Act and guidelines, rules and regulations promulgated by the FDA. 2.03.02. ARES. ARES represents and warrants that it and its Affiliates have the experience, capability and resources, including but not limited to sufficient qualified personnel, to perform the preclinical, clinical and regulatory activities contemplated by this Agreement. ARES agrees to perform and to have performed such activities in conformity with generally accepted standards of good laboratory practice and good clinical practice and with all applicable federal, state and local laws, guidelines, rules and regulations including without limitation the United States Food, Drug and Cosmetic Act and guidelines, rules and regulations promulgated by the FDA. Section 2.04. Commitment of Research Personnel. SIGNAL shall allocate to the Research a total of [***] research personnel (measured as full-time equivalents) and post-doctoral fellows combined. SIGNAL shall also allocate any additional research personnel to the Research as SIGNAL believes in good faith are required from time to time to comply with Sections 2.02 and 2.03 hereof. Section 2.05. Exclusive Relationship. 2.05.01. SIGNAL. ARES acknowledges and agrees that SIGNAL and Tanabe have entered into a Collaborative Development and Licensing Agreement dated March - 8 - ***Confidential Treatment Requested 14 31, 1996, as amended to date (the "Tanabe Agreement"), pursuant to which SIGNAL has granted certain exclusive rights to Tanabe within the Field, as set forth in the Tanabe Agreement, for those countries specifically excluded from the definition of the Territory in Section 1.24 hereof. Except for its obligations under the Tanabe Agreement, SIGNAL represents and warrants that it shall not perform any research relating to the Field other than the Research. 2.05.02. Tanabe Agreement. ARES acknowledges and agrees that, in accordance with the terms of the Tanabe Agreement, once each of Tanabe and ARES has agreed to accept reciprocity on exchanges of Signal Technical Information and Tanabe Technical Information (as defined in the Tanabe Agreement), then during the term of the Tanabe Agreement, SIGNAL, Tanabe and ARES shall make available to each other such Signal Compound Information, Tanabe Compound Information, Signal Product Information and Tanabe Product Information (as defined in the Tanabe Agreement) as the three parties may mutually agree for any Compound (as defined in the Tanabe Agreement) that is under development by Tanabe and ARES in whatever form is best suited fully to deliver such information. Unless and until Tanabe and ARES have so agreed to accept reciprocity on exchanges of information, SIGNAL shall not disclose to Tanabe any ARES Know-How or ARES Patents. In addition ARES hereby agrees to be bound by the provisions of Section 9.1 of the Tanabe Agreement, and SIGNAL hereby agrees to immediately notify ARES of, and consult with ARES regarding, any information it receives from, or provides to, Tanabe pursuant to Section 9.1 of the Tanabe Agreement. Section 2.06. Facilities. SIGNAL shall perform the Research and shall cause the Research to be performed at the Facilities of SIGNAL, its agents, consultants and/or academic collaborators, that SIGNAL represents and warrants are adequate to perform the Research. SIGNAL has taken, or shall take, all standard precautions consistent with pharmaceutical and biotechnology industry practices to ensure that such Facilities are protected by security systems - 9 - 15 that will maintain the confidentiality and prevent the loss of records and information obtained or developed pursuant to this Agreement. Section 2.07. Records. In conformity with standard pharmaceutical and biotechnology industry practices and the terms and conditions of this Agreement, SIGNAL shall prepare and maintain, and shall cause to be prepared and maintained, complete and accurate written records, accounts, notes, reports and data with respect to all laboratory work conducted in the performance of the Research, and upon ARES' request shall send legible copies of the aforesaid to ARES. Section 2.08. Audit. SIGNAL shall notify ARES of any request for an audit of the Facilities or records pertaining to the Research sufficiently in advance of such audit to allow a representative of ARES to be present during such audit. Section 2.09. Research by ARES. To the extent that the Joint Research Committee or the Parties agree, whether in connection with one or more Protocols or otherwise, that any of the Research is to be performed by ARES, its Affiliates and/or agents or at the Facilities of ARES, its Affiliates and/or agents, ARES shall be obligated to fulfill the same requirements and meet the same standards as are required of SIGNAL in Sections 2.02, 2.06, 2.07 and 2.08 hereof. Section 2.10. Term of the Research. Unless at least six (6) months prior to the expiration of the Initial Term, or at least six (6) months prior to the expiration of any subsequent three-year period during the Subsequent Term, ARES gives SIGNAL notice of its decision to terminate the Research, the Research shall continue for an additional three-year period, subject to termination of the Agreement pursuant to Article VI. Upon termination of the Research, ARES shall have no right, title and interest in, to and under any invention, discovery, formula, design, process, know-how, data, composition, matter, device, or product, or any improvement thereof, whether patentable or not, obtained, developed, made, conceived or first reduced to practice by SIGNAL, its agents, consultants and/or collaborators (including Tanabe) following termination of the Research, and the only rights of ARES hereunder shall be rights to (i) ARES Know-How and - 10 - 16 ARES Patents and (ii) SIGNAL Technology obtained, developed, made, conceived or first reduced to practice prior to such termination. Section 2.11. Research Funding. As full compensation for SIGNAL's, its agents', consultants' and academic collaborators' performance of the Research during the Initial Term, ARES shall pay, or cause to be paid, to SIGNAL Nine Million United States Dollars (U.S. $9,000,000) which shall be due and payable in accordance with the following schedule: (i) One Million United States Dollars (U.S. $1,000,000) upon execution and delivery of this Agreement; (ii) One Million United States Dollars (U.S. $1,000,000) four months after the Effective Date; (iii) One Million United States Dollars (U.S. $1,000,000) eight (8) months after the Effective Date; (iv) One Million United States Dollars (U.S. $1,000,000) one (1) year after the Effective Date; (v) One Million United States Dollars (U.S. $1,000,000) sixteen (16) months after the Effective Date; (vi) One Million United States Dollars (U.S. $1,000,000) twenty (20) months after the Effective Date; (vii) One Million United States Dollars (U.S. $1,000,000) two (2) years after the Effective Date; (viii) One Million United States Dollars (U.S. $1,000,000) twenty-eight (28) months after the Effective Date; (ix) One Million United States Dollars (U.S. $1,000,000) thirty-two (32) months after the Effective Date. In the event the Research continues for any three-year period during the Subsequent Term, then as full compensation for SIGNAL's, its agents', consultants' and academic collaborators' - 11 - 17 performance of the Research during such three-year period, ARES shall pay, or cause to be paid, to SIGNAL the amount paid during the prior three-year period adjusted to reflect the percentage increase for the prior three-year period in the Consumer Price Index of the Bureau of Labor Statistics of the United States Department of Labor. [***] of such adjusted amount shall be due and payable at the start of such three-year period and thereafter at [***] intervals. Section 2.12. Materials. 2.12.01. ARES Materials. To the extent required to do so pursuant to any Protocol, ARES shall make available to SIGNAL quantities of proprietary ARES materials sufficient to carry out the applicable Research, which materials shall be used for no other purpose, it being understood that SIGNAL shall take reasonable care to handle, store and use these materials so as to avoid loss, contamination and waste. All materials so furnished shall be deemed to be ARES "Confidential Information" subject to the obligations set forth in Section 8.10 hereof and SIGNAL shall return any unused ARES materials at the conclusion of the relevant Research or the earlier termination of this Agreement, unless written authorization to destroy such materials is given by ARES. SIGNAL shall account for all materials not returned. 2.12.02. SIGNAL Materials. To the extent required to do so pursuant to any Protocol, SIGNAL shall make available to ARES quantities of proprietary SIGNAL materials sufficient to carry out the applicable Research, which materials shall be used for no other purpose, it being understood that ARES shall take reasonable care to handle, store and use these materials so as to avoid loss, contamination and waste. All materials so furnished shall be deemed to be SIGNAL "Confidential Information" subject to the obligations set forth in Section 8.10 hereof and ARES shall return any unused SIGNAL materials at the conclusion of the relevant Research or the earlier termination of this Agreement, unless written authorization to destroy such materials is given by SIGNAL. ARES shall account for all materials not returned. - 12 - ***Confidential Treatment Requested 18 Section 2.13. Ownership of SIGNAL Technology. 2.13.01. No Ownership by SIGNAL Employees. All employees of SIGNAL who are expected to perform the Research have signed agreements regarding proprietary information and inventions with SIGNAL in a form reasonably considered by SIGNAL and its counsel to assure SIGNAL's right, title and interest in, to and under the SIGNAL Technology in accordance with Subsections 2.13.02 and 2.13.03 below. 2.13.02. SIGNAL Know-How and SIGNAL Patents. All right, title and interest in, to and under all SIGNAL Know-How and SIGNAL Patents obtained, developed, made, conceived or first reduced to practice in connection with the Research shall be owned by or licensed to SIGNAL. SIGNAL shall enter into customary agreements with its agents, consultants and/or academic collaborators that provide that all of such agents', consultants' and/or academic collaborators' right, title and interest in, to and under such SIGNAL Know-How and SIGNAL Patents shall be assigned or licensed exclusively to SIGNAL, unless SIGNAL and ARES agree in writing (including as reflected in the signed minutes of meetings of the Joint Research Committee) that such exclusivity is not required to protect SIGNAL's competitive position with respect to the performance of the Research and ARES' competitive position with respect to the development, manufacture, import, use, and sale of Licensed Products and Combination Products. SIGNAL's right, title and interest in, to and under such SIGNAL Know-How and SIGNAL Patents shall be licensed to ARES pursuant to Section 3.01 hereof. 2.13.03. Joint Know-How and Joint Patents. All right, title and interest in, to and under all Joint Know-How and Joint Patents shall be owned jointly and equally by SIGNAL and ARES, each with an undivided one-half interest. SIGNAL shall enter into customary agreements with its agents, consultants and academic collaborators that provide that all of such agents', consultants' and academic collaborators' right, title and interest in, to and under such Joint Know-How and Joint Patents shall be assigned or licensed exclusively to SIGNAL, unless SIGNAL and ARES agree in writing (including as reflected in the signed - 13 - 19 minutes of meetings of the Joint Research Committee) that such exclusivity is not required to protect SIGNAL's competitive position with respect to the performance of the Research and ARES' competitive position with respect to the development, manufacture, import, use, and sale of Licensed Products and Combination Products. SIGNAL's right, title and interest in, to and under such Joint Know-How and Joint Patents shall be licensed to ARES pursuant to Section 3.01 hereof. Section 2.14. License of ARES Know-How and ARES Patents. ARES hereby grants to SIGNAL, and SIGNAL hereby accepts, [ *** ] solely for the purpose of conducting the Research pursuant to this Agreement. Such license shall be valid for the term of the Research as set forth in Section 2.10 hereof. ARTICLE III LICENSE Section 3.01. Grant of License. SIGNAL hereby grants to ARES, and ARES hereby accepts, an exclusive license under the SIGNAL Technology, valid for the Term and with the right to grant sublicenses, to develop, make, have made, import, use, and sell Licensed Products and Combination Products within the Territory. ARES shall notify any sublicensee of the SIGNAL Technology of all rights and obligations of ARES hereunder licensed to such sublicensee. For the avoidance of doubt, except in connection with Sections 2.09 and 6.05 and Subsection 8.05.02 hereof, and other than with respect to inventions, discoveries, formulas, designs, processes, know-how, data, compositions, matter, devices, or any improvements thereof, whether patentable or not, obtained, developed, made, conceived or first reduced to practice in connection with the Research, the foregoing is not intended to grant ARES a license to the SIGNAL Technology for research purposes. - 14 - ***Confidential Treatment Requested 20 Section 3.02. Disclosure of SIGNAL Know-How and Joint Know-How. Following the execution and delivery of this Agreement and as appropriate from time to time thereafter during the Term, SIGNAL shall disclose to ARES the SIGNAL Know-How and the Joint Know-How pursuant to a program and in a form (e.g. writings, visual representations, computer software, models or instruction) as shall best facilitate the use of such SIGNAL Know-How and Joint Know-How by ARES. Section 3.03. License Fees. In addition to the royalties that shall be payable under Sections 3.05 and 4.01 hereof, the purchase of SIGNAL Series F Preferred Stock by ARES' Affiliate pursuant to Section 3.04 hereof, and in consideration of the grant of the exclusive license set forth in Section 3.01 hereof, ARES shall pay SIGNAL the following license fees on a Licensed Product by Licensed Product basis. 3.03.01 New Target or Indication. For each Licensed Product for which no license fee has yet been paid and that is either (A) [***] or (B) [***], its Affiliates or sublicensees then within thirty (30) days of the corresponding event, ARES shall pay, or cause to be paid, to SIGNAL the following nonrefundable license fees: (i) [***] (ii) [***] (iii) [***] - 15 - ***Confidential Treatment Requested 21 (iv) [***] (v) [***] ARES shall promptly notify SIGNAL of the occurrence of any event described above. 3.03.02 Other Licensed Products. For each Licensed Product being developed by ARES, its Affiliates or sublicensees for which no license fee has yet been paid and that is not subject to Subsection 3.03.01 above, ARES shall pay, or cause to be paid, to SIGNAL the following nonrefundable license fees: (i) [***] (ii) [***] (iii) [***] - 16 - ***Confidential Treatment Requested 22 ARES shall promptly notify SIGNAL of the occurrence of any event described above. 3.03.03. New Dosage or Formulation of Licensed Products. For the avoidance of doubt, if a license fee has been paid pursuant to this Section 3.03 with respect to any Licensed Product, then no additional license fee shall be payable hereunder with respect to any new dosage, presentation or formulation of such Licensed Product (including any inclusion of such Licensed Product in a Combination Product). Section 3.04. Equity Investment. On or before December 1, 1997, ARES' Affiliate, Ares-Serono S.A., shall purchase 2,722,513 shares of the Series F Preferred Stock of SIGNAL for total consideration of Eight Million Two Hundred Thousand United States Dollars and Seventy-Two United States Cents (U.S. $8,200,000.72) pursuant to a stock purchase agreement that shall be executed and delivered simultaneously herewith. Section 3.05. Ongoing Royalty. Subject to the provisions of this Article III, ARES shall during the Term pay or cause to be paid to SIGNAL royalties on Net Sales of Licensed Products or Combination Products at the following rates: (i) [***] of total annual Net Sales of Licensed Products and Combination Products at or below [***]; (ii) [***] of total annual Net Sales of Licensed Products and Combination Products above [***]; (iii) [***] of total annual Net Sales of Licensed Products and Combination Products above [***]; and (iv) [***] of total annual Net Sales of Licensed Products and Combination Products above [***]; - 17 - ***Confidential Treatment Requested 23 provided, however, that upon the expiration or invalidation of the last remaining Valid Claim of a SIGNAL Patent or Joint Patent in effect in a country that covers such Licensed Product or Combination Product, royalties payable for such country with respect to such Licensed Product or Combination Product shall be reduced by [***] Section 3.06. [***] ARES may [***] hereof, [***] of total annual Net Sales for any Licensed Product or Combination Product whose primary pharmacological activity is the modulation of an intracellular molecule [***]. Section 3.07. Adverse Patents. ARES may deduct from up to [***] of the royalties due SIGNAL for any Licensed Product or Combination Product under Sections 3.05 and 4.01 hereof (following any deduction made pursuant to Section 3.06 hereof) an amount equal to [***] royalties paid to third parties by ARES, its Affiliates and/or sublicensees in order to develop, manufacture, import, use or sell such Licensed Product or Combination Product pursuant to agreements that may be entered into in good faith after the Effective Date with parties owning or controlling a patent that, but for such agreements, would bar the development, manufacture, import, use or sale of such Licensed Product or Combination Product. Section 3.08. Reimbursement to SIGNAL. In addition to the royalties due SIGNAL under Sections 3.05 and 4.01 hereof, ARES shall during the Term reimburse, or cause to be reimbursed, SIGNAL for royalties paid to third parties by SIGNAL pursuant to agreements in existence on the Effective Date with respect to the development, manufacture, import, use or sale of a Licensed Product or Combination Product, as set forth on Exhibit F hereto, or agreements subsequently approved in writing by the Parties; provided, however, in no event shall such reimbursement exceed [***] of the total annual Net Sales of such Licensed Product or Combination Product. - 18 - ***Confidential Treatment Requested 24 Section 3.09. Single Royalty. Nothing herein contained shall obligate ARES, its Affiliates and/or sublicensees to pay or cause to be paid to SIGNAL more than one royalty on any unit of Licensed Product or Combination Product. Section 3.10. Taxes Withheld. Any and all taxes that are levied on royalties accruing under this Agreement in a country in which provision is made in the law or by regulation for withholding may be deducted by the payor from such royalties and paid to the proper taxing authority and evidence of such payment shall be secured and sent to SIGNAL within one (1) month of such payment. The Parties shall do all such lawful acts and things and sign all such lawful deeds and documents as either Party may reasonably request from the other Party to enable ARES, its Affiliates and/or sublicensees to take advantage of any applicable legal provision or any double taxation treaties with the object of paying the sums due to SIGNAL hereunder without withholding any tax. Section 3.11. Report of Royalties. Within sixty (60) days of the end of each calendar quarter during the Term (including the sixty (60) day period following the end of the calendar quarter in which the Term terminates), ARES shall deliver to SIGNAL a written report showing its computation of royalties due under this Agreement on Net Sales during such calendar quarter. All such Net Sales shall be segmented by each report according to sales by ARES, its Affiliates and/or sublicensees as well as on a country by country basis, including the rates of exchange used to convert such royalties into United States dollars from the currency in which the sales were made. The rate of exchange to be used in any such conversion shall be the rate reported in the Wall Street Journal for the purchase of United States dollars with such currency on the last Business Day of the quarter for which the report is being prepared. Section 3.12. Payment of Royalties. Royalties shall be payable hereunder by ARES on behalf of itself, its Affiliates and/or sublicensees, whichever shall have effected the sales on which a royalty is due. Simultaneous with the delivery of the report described in Section 3.11 - 19 - 25 hereof ARES shall pay or cause to be paid to SIGNAL at such place as SIGNAL may from time to time designate all royalties earned in the preceding calendar quarter. Section 3.13. Interest on Payments. In the event that any payment due pursuant to this Agreement, including research payments, license fees and royalties, is not made when due, the payment shall accrue interest from the date due until paid at the rate of one percent (1%) per month; provided, however, that in no event shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit SIGNAL's right to exercise any other rights it may have as a consequence of the lateness of any payment. Section 3.14. Records. ARES shall keep or cause to be kept accurate records in sufficient detail to enable the royalties payable hereunder to be determined. During the Term and for a period of two years following the termination of this Agreement, upon the request of SIGNAL (but not more frequently than once in each calendar year) an independent public accountant selected by SIGNAL and approved by ARES shall be allowed access, during ordinary business hours, to such records pertaining to the preceding two (2) calendar years solely to verify the accuracy of royalty payments made or payable hereunder. SIGNAL and ARES shall mutually determine a general strategy for such audit in advance of its conduct. Said accountant shall not disclose to SIGNAL any information except that which should properly be contained in a royalty report required under this Agreement. SIGNAL shall bear the full cost of such audit unless such audit reveals an under-reporting of royalties in excess of five percent (5%) of the amount due under this Agreement, in which case the full cost of the audit shall be borne by ARES. Section 3.15. Reversion of Rights to SIGNAL. 3.15.01. Exercise of Reversion Option. In the event ARES, its Affiliates and/or sublicensees cease to pursue development or commercialization of at least one Licensed Product or Combination Product at any time when ARES is no longer providing research funding to SIGNAL pursuant to Section 2.11 hereof, ARES shall immediately notify SIGNAL and, - 20 - 26 SIGNAL may exercise an option, on a product by product basis, to obtain a reversion of all right, title and interest granted to ARES hereunder with respect to any potential Licensed Product or Combination Product. SIGNAL shall exercise such option by providing ARES ninety (90) days prior notice of such intended reversion of rights, specifying the potential Licensed Product or Combination Product that is the subject of such reversion. Such reversion of rights shall become effective at the end of such notice period, unless during such notice period (i) ARES can demonstrate that ARES, its Affiliates and/or sublicensees are diligently pursuing the development or commercialization of at least one Licensed Product or Combination Product or (ii) ARES provides to SIGNAL a reasonably detailed written plan for commercially reasonable development and commercialization of such Licensed Product or Combination Product and takes affirmative steps to begin implementation of such plan. 3.15.02. SIGNAL Obligation to Make Payments. For each Licensed Product or Combination Product for which rights have reverted to SIGNAL pursuant to Subsection 3.15.01 hereof, SIGNAL shall pay to ARES [***] of the amount or fair market value, as applicable, of any and all consideration received by SIGNAL with respect to such Licensed Product or Combination Product (other than payments received for equity at fair market value or payments received to support further research and development of such Licensed Product or Combination Product so long as such payments do not exceed SIGNAL's cost of conducting such further research and development), whether such consideration is in cash, payment in kind, exchange or other form, until the total amount of such payments to ARES equals [***] of the following amount: [***] - 21 - ***Confidential Treatment Requested 27 3.15.03. ARES Patents ARES Grant of License. To the extent necessary to permit SIGNAL to develop, make, have made, import, use, and sell Licensed Products or Combination Products within the Territory following a reversion of rights pursuant to Subsection 3.15.01 hereof, ARES shall grant SIGNAL a nonexclusive royalty-free license valid for the Term under the ARES Know-How and ARES Patents pursuant to an agreement to be negotiated in good faith between the Parties; provided, however, that in addition to the payments due ARES under Subsection 3.15.02 hereof, SIGNAL shall reimburse ARES for royalties paid to third parties by ARES or its Affiliates with respect to the development, manufacture, import, use or sale of such Licensed Products or Combination Products. ARTICLE IV ADDITIONAL RIGHTS Section 4.01. Co-Promotion. 4.01.01. Exercise of Option. Within thirty (30) days following notice from ARES to SIGNAL of submission by ARES or its Affiliates of a New Drug Application (NDA) or equivalent for a Licensed Product or Combination Product in the United States, SIGNAL shall have the right by notice to ARES to exercise its option to participate with ARES or its Affiliates in promoting such Licensed Product or Combination Product in the United States; provided, however, that SIGNAL can demonstrate concurrently with such option exercise that it can commit to making a material investment in, and contribution to, promotion of such Licensed Product or Combination Product. Upon SIGNAL's exercise of such option on these terms and conditions, ARES in its sole discretion shall within sixty (60) days of such option exercise select one of the following two alternatives: (i) [***] - 22 - ***Confidential Treatment Requested 28 [***] (ii) ARES may agree to negotiate in good faith with SIGNAL a co-promotion agreement for such Licensed Product or Combination Product in the United States containing customary terms and conditions. The period for such negotiation shall begin upon SIGNAL's exercise of its option and end six months thereafter. , [***] such co-promotion agreement shall also provide for defined standards for promotional diligence sufficient to ensure that SIGNAL makes a material investment in, and contribution to, promotion of such Licensed Product or Combination Product. In addition the co-promotion agreement shall, to the extent necessary, [***] to permit SIGNAL to fulfill its co-promotion obligations with respect to Licensed Products or Combination Products and shall, in any event, reflect the following terms and conditions with respect to royalties and allocation of Net Sales for each such Licensed Product or Combination Product: (A) SIGNAL shall receive a royalty of [***] of such Net Sales; (B) [***] of such Net Sales shall then be allocated to ARES; (C) a portion of the remainder of such Net Sales shall then be allocated to the Party that has manufactured, or contracted to have manufactured (including pursuant to Section 4.02 hereof), such Licensed Product or Combination Product, the amount of such allocation to equal such Party's direct costs associated with the manufacture of the Licensed Product or Combination Product; (D) [***] of Net Sales remaining after the allocations set forth in Subsections 4.01.01(ii)(A), (B) and (C) above shall be divided by the - 23 - ***Confidential Treatment Requested 29 Parties in proportion to their respective direct costs associated with the co-promotion of such Licensed Product or Combination Product; and (E) [***] of Net Sales remaining after the allocations set forth in Subsections 4.01.01(ii)(A), (B) and (C) above shall be allocated to ARES until an amount has been recouped equal to the total of [***] and thereafter any remaining amount shall be allocated in accordance with the terms and conditions of Subsection 4.01.01(ii)(D) above. 4.01.02. Royalty Calculations. The royalties and allocation of Net Sales set forth in Subsection 4.01.01 above shall be in lieu of the royalties set forth in Section 3.05 hereof with respect to Net Sales of Licensed Products or Combination Products for the United States. Net Sales for the United States subject to royalty calculations pursuant to Subsection 4.01.01 shall also not be used in computing total annual Net Sales of Licensed Products and Combination Products pursuant to Section 3.05. Upon the expiration or invalidation of the last Valid Claim of a Patent in effect in the United States that covers a Licensed Product or Combination Product, royalties payable for the United States pursuant to Subsection 4.01.01 (i) and (ii)(A) above shall be [***] Section 4.02. Supply of Licensed Products and/or Combination Products. At the request and option of [***] the Parties agree to negotiate in good faith a supply agreement pursuant to which [***] for sale upon such reasonable terms and conditions as the Parties shall mutually agree; provided, however, if the Parties have entered into a co-promotion agreement pursuant to Subsection 4.01.01 (ii) hereof, then such supply agreement shall provide for [***] - 24 - ***Confidential Treatment Requested 30 [***] ARTICLE V PATENT PROSECUTION AND ENFORCEMENT Section 5.01. Prosecution and Maintenance by SIGNAL. SIGNAL shall prosecute and maintain the SIGNAL Patents and Joint Patents in the Territory in accordance with reasonable commercial standards and reasonable principles of intellectual property protection. All applications for SIGNAL Patents shall be filed in the name of SIGNAL and all applications for Joint Patents shall be filed in the name of ARES or its Affiliates and SIGNAL. SIGNAL shall keep ARES currently advised of all steps that will be taken in the prosecution of the SIGNAL Patents and Joint Patents. SIGNAL shall furnish ARES with copies of all substantive communications between SIGNAL and applicable patent offices regarding the SIGNAL Patents and Joint Patents. SIGNAL shall provide draft applications for SIGNAL Patents and Joint Patents to ARES sufficiently in advance of filing for ARES to have the opportunity to comment thereon. ARES shall provide all reasonable cooperation to SIGNAL at SIGNAL's cost and expense in connection with SIGNAL's prosecution and maintenance of the SIGNAL Patents and Joint Patents including without limitation signing all documents necessary to prosecute and maintain the SIGNAL Patents and Joint Patents. SIGNAL shall bear the cost of prosecuting and maintaining the SIGNAL Patents and Joint Patents in force and of filing all applications for SIGNAL Patents and Joint Patents. Section 5.02. Prosecution and Maintenance by ARES. If SIGNAL does not fulfill its obligations to prosecute and maintain the SIGNAL Patents and Joint Patents in the Territory pursuant to Section 5.01 above, then SIGNAL shall so advise ARES in time to enable ARES to fulfill these obligations. ARES shall deduct all reasonable cost and expense it incurs in so doing from the royalties due SIGNAL pursuant to Sections 3.05 and 4.01 hereof. SIGNAL shall provide all reasonable cooperation to ARES at SIGNAL's cost and expense in connection with - 25 - ***Confidential Treatment Requested 31 ARES' prosecution and maintenance of the SIGNAL Patents and Joint Patents, including without limitation signing and delivering to ARES, within ten (10) days of ARES' request therefor, all documents necessary for ARES to prosecute and maintain the SIGNAL Patents and Joint Patents in the name of SIGNAL. Section 5.03. Prosecution of Infringement or Patent Defense by SIGNAL. If either Party learns of (i) any infringement or potential infringement of a SIGNAL Patents or Joint Patent by a third party in the Territory and/or (ii) any claim by a third party that a SIGNAL Patent or Joint Patent is invalid in the Territory, it shall promptly notify the other Party. SIGNAL shall have the right to prosecute such infringement or to defend against such claim (an "Action"). SIGNAL shall keep ARES informed of, and shall from time to time consult with ARES regarding, the status of any such Action and shall provide ARES with copies of all documents filed in, and all written communications relating to, such Action. ARES shall provide all reasonable cooperation to SIGNAL in connection with such Action, and SIGNAL shall reimburse ARES for its out-of-pocket expenses incurred in rendering such cooperation. In the event SIGNAL obtains any recovery from such Action or the compromise or settlement thereof, the total amount of such recovery shall first be used to reimburse SIGNAL for its reasonable expenses incurred in connection with such Action and the balance of such recovery shall be allocated [***] to SIGNAL and [***] to ARES. Section 5.04. Participation in Prosecution of Infringement or Patent Defense by ARES. In the event ARES wishes do so, ARES shall have the right to participate and be represented in an Action by its own counsel at its own expense, but may not take any steps to direct such Action nor to compromise or settle such Action, as SIGNAL shall have the primary responsibility for directing such Action. SIGNAL agrees that it shall not compromise or settle any Action in which ARES has exercised its right to participate without ARES' prior written consent, which consent shall not unreasonably be withheld. In the event SIGNAL and ARES obtain any recovery from such Action or the compromise or settlement thereof, the total amount of such - 26 - ***Confidential Treatment Requested 32 recovery shall first be used to reimburse the Parties pro-rata, based on costs incurred, for their reasonable expenses incurred in connection with such Action and the balance of such recovery shall be shared equally between the Parties. Section 5.05. Prosecution of Infringement or Patent Defense by ARES. If within ninety (90) days from the date on which SIGNAL is notified or otherwise becomes aware of an infringement or potential infringement of a SIGNAL Patent or Joint Patent in the Territory or a claim that a SIGNAL Patent or Joint Patent is invalid in the Territory, either (i) the infringement has not been terminated or the claim has not been withdrawn or (ii) SIGNAL has not initiated an Action against such third party, SIGNAL shall, upon request of ARES, grant ARES the right to initiate an Action against such third party at its own cost and expense, provided, however, that ARES shall be entitled to deduct such cost and expense from up to [***] of the royalties due SIGNAL thereafter pursuant to Sections 3.05 and 4.01 hereof. Notwithstanding the ninety (90) day period established in the previous sentence, in the event that SIGNAL has not instituted a summary proceeding with respect to an infringement or potential infringement of a SIGNAL Patent or Joint Patent and the right to institute such a summary proceeding shall lapse within two weeks, ARES may institute such a summary proceeding. ARES shall keep SIGNAL informed of, and shall from time to time consult with SIGNAL regarding, the status of any such Action or summary proceeding and shall provide SIGNAL with copies of all documents filed in, and all written communications relating to, such Action or summary proceeding. SIGNAL agrees, in the event that ARES cannot prosecute such Action or summary proceeding in its own name, to sign and deliver to ARES, within ten (10) days of ARES' request therefor, all documents necessary for ARES to prosecute such Action or summary proceeding in the name of SIGNAL, but ARES shall control the prosecution of any such Action or summary proceeding. SIGNAL shall have the right to participate and be represented in such Action or summary proceeding by its own counsel at its own expense. SIGNAL shall provide all reasonable cooperation to ARES in connection with such Action or summary proceeding, and ARES shall - 27 - ***Confidential Treatment Requested 33 reimburse SIGNAL for its out-of-pocket expenses incurred in rendering such cooperation. ARES may not compromise or settle such Action or summary proceeding without SIGNAL's prior written consent, which consent shall not unreasonably be withheld. In the event ARES obtains any recovery from such Action or the compromise or settlement thereof, the total amount of such recovery shall first be used to reimburse ARES for any costs and expense not deducted from royalty payments due hereunder, then to reimburse SIGNAL for any cost and expense so deducted, [***] ARTICLE VI TERM AND TERMINATION Section 6.01. Term. The license granted under Article III hereof shall continue in force in each country from the Effective Date until (i) the expiration or invalidation of the last Valid Claim of a SIGNAL Patent or Joint Patent in effect in such country covering a Licensed Product or Combination Product, or (ii) ten years from the first commercial sale of a Licensed Product or Combination Product by ARES, its Affiliates or sublicensees in such country following the receipt of marketing approval therein, whichever shall last occur, and this Agreement shall terminate upon the expiration or invalidation of the last of such Valid Claims or the termination of the last of such ten-year periods, unless the Agreement is terminated at an earlier date pursuant to Sections 6.02, 6.03 or 6.04 hereof. Section 6.02. Termination by ARES: ARES may terminate this Agreement effective at any time after the end of the Initial Term by giving six (6) months prior notice to SIGNAL. Section 6.03. Termination for Breach. Either Party may terminate this Agreement sixty (60) days after giving the other Party notice of breach of any material provision of this Agreement (including without limitation the representations and warranties set forth in Article VII hereof) by the other Party, unless such breach is cured within the period of such notice. - 28 - ***Confidential Treatment Requested 34 Section 6.04. Termination upon ARES' Bankruptcy. SIGNAL may terminate this Agreement if an insolvency proceeding is instituted by or against ARES, ARES makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, commences a proceeding for the appointment of a receiver, trustee, liquidator or conservator of itself or of the whole or any substantial part of its property, or files a petition seeking reorganization, composition, liquidation, dissolution or similar arrangement under any present or future statute, law or regulation. Section 6.05. No Termination upon SIGNAL's Bankruptcy. All rights and licenses granted under or pursuant to this Agreement by SIGNAL to ARES are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code (the "Bankruptcy Code"), licenses of rights to "intellectual property" as defined under Section 101(56) of the Bankruptcy Code. The Parties agree that ARES, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against SIGNAL under the Bankruptcy Code, ARES shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiment of such intellectual property, and the same, if not already in its possession, shall be promptly delivered to ARES (i) upon any such commencement of a bankruptcy proceeding upon written request therefor by ARES, unless SIGNAL elects to continue to perform all of its obligations under this Agreement, or (ii) if not delivered under (i) above, upon the rejection of this Agreement by or on behalf of SIGNAL, upon written request therefor by ARES. Section. 6.06. Effect of Termination. If this Agreement is not terminated at an earlier date by ARES pursuant to Sections 6.02 or 6.03 hereof or by SIGNAL pursuant to Sections 6.03 or 6.04 hereof, then upon its termination in accordance with Section 6.01 hereof ARES shall have an irrevocable, fully paid-up license within the Territory under the SIGNAL Technology to - 29 - 35 develop, make, have made, import, use, and sell any Licensed Products or Combination Products to which ARES had any right, title or interest prior to the termination of this Agreement. If this Agreement is terminated by ARES pursuant to Sections 6.02 or 6.03 hereof or by SIGNAL pursuant to Sections 6.03 or 6.04 hereof, then upon its termination all rights and obligations of the Parties hereunder, including without limitation the rights and obligations with respect to the licenses granted under Article III hereof, shall terminate. Notwithstanding the foregoing, termination of this Agreement shall not release either Party from its obligations accrued prior to the effective date of termination nor deprive either Party from any rights that this Agreement provides shall survive termination. Section 6.07. Cumulative Rights and Remedies. Any right to terminate this Agreement shall be in addition to and not in lieu of all other rights or remedies that the Party giving notice of termination may have at law or in equity or otherwise, including without limitation rights under the United States Bankruptcy Code. ARTICLE VII REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION Section 7.01. SIGNAL Representations. SIGNAL represents and warrants to ARES as follows: (i) SIGNAL has the right, power and authority to enter into this Agreement and to perform the Research and grant ARES a license under the SIGNAL Technology in accordance with the terms and conditions of this Agreement; (ii) all requisite corporate action has been taken to authorize SIGNAL's execution, delivery and performance of this Agreement; (iii) SIGNAL has all right, title and interest in, to and under the SIGNAL Technology, which, with the exception of rights granted to Tanabe, is free and clear of any liens, charges, encumbrances or rights of others to possession or use; - 30 - 36 (iv) with the exception of rights granted to Tanabe, SIGNAL has not previously licensed, assigned, transferred, or otherwise conveyed any right, title or interest in, to or under the SIGNAL Technology to any third party; (v) all third parties who have or had any right, title and interest in, to and under the SIGNAL Know-How and SIGNAL Patents, as identified on Exhibit G, have assigned or licensed such right, title and interest to SIGNAL under the terms and conditions set forth on Exhibit G; (vi) to the best of SIGNAL's knowledge after due inquiry, the practice and use of the SIGNAL Technology pursuant to the terms and conditions of this Agreement shall not infringe any patent, copyright, trademark, or other proprietary or property rights of any third parties; (vii) to the best of SIGNAL's knowledge after due inquiry, no third party has filed, pursued or maintained or threatened to file, pursue or maintain any claim, lawsuit, charge, complaint or other action alleging that the SIGNAL Technology infringes any patent, copyright or trademark or other proprietary or property rights of any third parties; (viii) there are no suits, proceedings, arbitrations, claims or counterclaims or governmental investigations pending or asserted in writing to SIGNAL, and to the best of SIGNAL's knowledge, there are no suits, proceedings, arbitrations, claims or counterclaims or governmental investigations threatened against SIGNAL that would give any third party the right to enjoin or rescind the transactions contemplated by this Agreement or would otherwise prevent SIGNAL from complying with the terms and conditions of this Agreement; (ix) execution and delivery of this Agreement and performance hereunder does not breach, violate, contravene or constitute a default under any contracts, arrangements or commitments to which SIGNAL is a party or by which it is bound; and (x) no warranty or representation by SIGNAL in this Agreement and no other agreement, exhibit, or instrument required to be delivered by SIGNAL to ARES pursuant - 31 - 37 to this Agreement contains or will contain any untrue statement of material fact or omit to state a material fact required in order to make such warranty, representation, other agreement, exhibit or instrument not misleading. Section 7.02. ARES Representations. ARES represents and warrants to SIGNAL as follows: (i) ARES has the right, power and authority to enter into this Agreement; (ii) all requisite corporate action has been taken to authorize ARES' execution, delivery and performance of this Agreement; (iii) there are no suits, proceedings, arbitrations, claims or counterclaims or governmental investigations pending or asserted in writing to ARES, and to the best of ARES' knowledge, there are no suits, proceedings, arbitrations, claims or counterclaims or governmental investigations threatened against ARES that would give any third party the right to enjoin or rescind the transactions contemplated by this Agreement or would otherwise prevent ARES from complying with the terms and conditions of this Agreement; (iv) execution and delivery of this Agreement and performance hereunder does not breach, violate, contravene or constitute a default under any contracts, arrangements or commitments to which ARES is a party or by which it is bound; and (v) no warranty or representation by ARES in this Agreement and no other agreement, exhibit or instrument required to be delivered by ARES to SIGNAL pursuant to this Agreement contains or will contain any untrue statement of material fact or omit to state a material fact required in order to make such warranty, representation, other agreement, exhibit or instrument not misleading. Section. 7.03. SIGNAL Indemnification. SIGNAL shall defend, indemnify and hold harmless ARES, its Affiliates and sublicensees, their officers, agents and employees (each individually a "SIGNAL Indemnified Party," and collectively the "SIGNAL Indemnified Parties"), from and against any and all liabilities, losses, damages, actions, claims, costs or - 32 - 38 expenses suffered or incurred by the SIGNAL Indemnified Parties (including reasonable attorneys' fees) (individually a "SIGNAL Liability," and collectively the "SIGNAL Liabilities") that arise from (i) personal injury or property damage to third parties resulting from a breach of this Agreement by SIGNAL (including without limitation a breach of SIGNAL's representations and warranties in Section 7.01 hereof); or (ii) the enforcement by a SIGNAL Indemnified Party of its rights under this Section 7.03; provided, however, that SIGNAL shall have no obligation to defend, indemnify, and hold harmless hereunder to the extent a SIGNAL Liability arises from the negligence or willful misconduct of a SIGNAL Indemnified Party or from the negligence, failure to comply with instructions regarding use of a Licensed Product or Combination Product or other wrongdoing of any user of the Licensed Product or Combination Product. ARES shall promptly notify SIGNAL of any claim or action giving rise to SIGNAL Liabilities subject to the provisions of this Section 7.03. SIGNAL shall have the right to defend any such claim or action, at its cost and expense, and shall keep ARES informed of developments in any such claim or action. ARES shall cause the SIGNAL Indemnified Parties to cooperate with SIGNAL in the defense of any such claim or action. SIGNAL shall not settle or compromise any such claim or action in a manner that imposes any restrictions or obligations on a SIGNAL Indemnified Party or grants any rights to Licensed Products or Combination Products, or to SIGNAL Technology necessary or useful to develop, make, have made, import, use, and sell Licensed Products or Combination Products, without ARES' prior written consent. The indemnification rights of any SIGNAL Indemnified Party contained herein are in addition to and not in lieu of all other rights that such SIGNAL Indemnified Party may have at law or in equity or otherwise and shall survive the termination of this Agreement. Section 7.04. ARES Indemnification. ARES shall defend, indemnify and hold harmless SIGNAL, its officers, agents and employees (each individually a "ARES Indemnified Party," and collectively the "ARES Indemnified Parties"), from and against any and all liabilities, losses, damages, actions, claims, costs or expenses suffered or incurred by the ARES Indemnified - 33 - 39 Parties (including reasonable attorneys' fees) (individually a "ARES Liability," and collectively the "ARES Liabilities") that arise from (i) personal injury or property damage to third parties resulting from (A) a breach of this Agreement by ARES (including without limitation a breach of ARES' representations and warranties in Section 7.02 hereof) or (B) ARES', its Affiliates' or sublicensees' development, manufacture, import, use or sale of Licensed Products or Combination Products pursuant to this Agreement; or (ii) the enforcement by an ARES Indemnified Party of its rights under this Section 7.04; provided, however, that ARES shall have no obligation to defend, indemnify, and hold harmless hereunder to the extent an ARES Liability arises from the negligence or willful misconduct of an ARES Indemnified Party or from the negligence, failure to comply with instructions regarding use of a Licensed Product or Combination Product or other wrongdoing of any user of the Licensed Product or Combination Product. SIGNAL shall promptly notify ARES of any claim or action giving rise to ARES Liabilities subject to the provisions of this Section 7.04. ARES shall have the right to defend any such claim or action, at its cost and expense, and shall keep SIGNAL informed of developments in any such claim or action. SIGNAL shall cause the ARES Indemnified Parties to cooperate with ARES in the defense of any such claim or action. ARES shall not settle or compromise any such claim or action in a manner that imposes any restrictions or obligations on an ARES Indemnified Party. The indemnification rights of any ARES Indemnified Party contained herein are in addition to and not in lieu of all other rights that such ARES Indemnified Party may have at law or in equity or otherwise and shall survive the termination of this Agreement. Section 7.05. Disclaimer of Warranties. Neither Party guarantees the safety or usefulness of any Licensed Product or Combination Product. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHER PARTY OF ANY NATURE, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. - 34 - 40 ARTICLE VIII GENERAL PROVISIONS Section 8.01. No Waiver. No failure on the part of either Party to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise by either Party of any right preclude any other future exercise thereof or the exercise of any other right. Section 8.02. Force Majeure. Neither Party shall lose any rights hereunder or be liable to the other Party for damages or losses on account of failure of performance by the defaulting Party to the extent the failure is occasioned by government action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or any other similar cause beyond the reasonable control of the defaulting Party; provided, however, the Party claiming force majeure shall promptly notify the other Party of the existence of such force majeure, shall use its best efforts to avoid or remedy such force majeure and shall continue performance hereunder with the utmost dispatch whenever such force majeure is avoided or remedied. Section 8.03. Notices. All notices, reports, requests or demands required or permitted under this Agreement shall be sent by air courier or by facsimile, with confirmed transmission, properly addressed to the respective Parties as follows: If to SIGNAL: SIGNAL PHARMACEUTICALS, INC. 5555 Oberlin Drive San Diego, California 92121 U.S.A. Attention: President and Chief Executive Officer Telephone: 619-558-7500 Facsimile: 619-558-7513 - 35 - 41 With a copy to: COOLEY GODWARD LLP 4365 Executive Drive Suite 1100 San Diego, California 92121 U.S.A. Attention: Frederick T. Muto Telephone: 619-550-6000 Facsimile: 619-453-3555 If to ARES: ARES TRADING S.A. Chateau de Vaumarcus 2028 Vaumarcus Switzerland Attn.: General Manager Telephone: 41-38-55-3231 Facsimile: 41-38-55-3208 With a copy to: ARES-SERONO INTERNATIONAL S.A. 15 bis, chemin des Mines 1202 Geneva Switzerland Attention: General Counsel Telephone: 41-22-738-8000 Facsimile: 41-22-739-3070 or to such addresses or addresses as the Parties hereto may designate for such purposes during the Term. Notices shall be deemed to have been sufficiently given or made: (i) if by facsimile with confirmed transmission, when performed, and (ii) if by air courier, three (3) days after delivery to the air courier company. Section 8.04. Independent Contractors. No agency, partnership or joint venture is hereby established; each Party shall act hereunder as an independent contractor. Neither SIGNAL nor ARES shall enter into, or incur, or hold itself out to third parties as having authority to enter into or incur on behalf of the other Party any contractual obligations, expenses or liabilities whatsoever. - 36 - 42 Section 8.05. Assignment. 8.05.01. General. This Agreement shall be binding upon the Parties and their respective permitted successors and assigns. This Agreement may be assigned by either Party in whole or in part to its Affiliates. Except as otherwise set forth in Subsection 8.05.02 hereof, this Agreement may be otherwise assigned by either Party in whole or in part only with the prior written consent of the other Party. 8.05.02. Acquisition or Merger. If either Party (or substantially all its assets) is acquired by or merged with a third party or if either Party acquires a third party (or substantially all its assets), the entity that results from that transaction (the "Combined Entity") shall succeed to all of the rights and obligations of the affected Party under this Agreement with the same effect as if the Combined Entity had originally been a Party hereunder. Notwithstanding the foregoing, upon such succession of the Combined Entity to the rights and obligations hereunder, the Parties may agree to terminate this Agreement or the other Party may elect to terminate this Agreement (including upon commission by the Combined Entity of a material breach of the Agreement following such succession), with the following result: (i) if the terminating Party is SIGNAL, then to the extent necessary to develop, manufacture, import, use or sell Licensed Products or Combination Products in existence prior to such termination, SIGNAL shall be granted an irrevocable, fully paid-up, nonexclusive license within the Territory under the ARES Know-How and ARES Patents; provided, however, that SIGNAL shall reimburse ARES for royalties paid to third parties by ARES or its Affiliates with respect to the development, manufacture, import, use or sale of such Licensed Products or Combination Products; and (ii) if the terminating Party is ARES, ARES shall be granted an irrevocable, fully paid-up, exclusive license, with the right to grant sublicenses, within the Territory under the SIGNAL Technology to develop, make, have made, import, use, and sell any Licensed Products or Combination Products to which ARES had any right, title or interest prior - 37 - 43 to such termination. ARES shall also be entitled to a complete duplicate of (A) all records, notes, reports and data with respect to all laboratory work performed in the conduct of the Research and (B) all biological and chemical materials used in connection with the Research prior to such termination and the same, if not already in its possession, shall be promptly delivered to ARES upon such termination. Notwithstanding the foregoing, termination of this Agreement shall not release either Party, or the Combined Entity of which it is a part, from any obligations accrued prior to the effective date of termination nor deprive either Party, or such Combined Entity, from any rights that this Agreement provides shall survive termination. Section 8.06. No Sale or Other Disposal of SIGNAL Technology. Without ARES' prior written consent, SIGNAL shall not sell, transfer, assign, or otherwise dispose of, or purport to sell, transfer, assign or otherwise dispose of, any right, title or interest in, to and under SIGNAL Technology that is necessary or useful to develop, make, have made, import, use, and sell Licensed Products or Combination Products; provided, however, that ARES acknowledges that, prior to the date hereof, SIGNAL has granted certain rights in the SIGNAL Technology to Tanabe. Section 8.07. Reference to Patents. ARES shall mark or cause to be marked the Licensed Products and Combination Products developed, made, imported, used or sold pursuant to this Agreement with such references to the SIGNAL Patents or Joint Patents as are required by the applicable laws of the territories in which such Licensed Products or Combination Products are developed, made, imported used and sold. Section 8.08. No Third-Party Beneficiary. Nothing in this Agreement, express or implied, is intended to confer on any person other than the Parties hereto, or their respective permitted successors and assigns, any benefits, rights or remedies. Section 8.09. Publicity. Neither Party may use in any manner the other Party's name or insignia, or any contraction, abbreviation or adaptation thereof, without the express written - 38 - 44 consent of the other Party. Neither Party may publicly disclose or issue press releases concerning the existence of this Agreement or the terms and conditions hereof except with the express written consent of the other Party, which consent shall not unreasonably be withheld. Notwithstanding the foregoing, either Party shall have the right to disclose information concerning this Agreement in any prospectus, offering memorandum or other document or filing to the extent required by applicable securities laws but only after providing the other Party reasonable notice of such intended disclosure and consulting with the other Party to determine the reasonable nature and scope of such intended disclosure. Section 8.10. Confidential Information. For the purpose of this Agreement, the term "Confidential Information" shall mean any information disclosed by either Party to the other pursuant to this Agreement in tangible form clearly marked "secret," "confidential" or "proprietary" or, if disclosed otherwise, summarized or described in tangible form and clearly marked as above within thirty (30) days of the initial disclosure. Each Party shall hold Confidential Information it has received in confidence during the Term and for a period of five (5) years thereafter and shall not disclose such Confidential Information to third parties without the consent of the disclosing Party, other than Confidential Information that: (i) was known to the receiving Party prior to disclosure by the disclosing Party as evidenced by the receiving Party's prior written records; (ii) is disclosed to the receiving Party by a third party, except if such disclosure is made on a confidential basis or in violation of a confidentiality obligation to the disclosing Party or its Affiliates; (iii) is or becomes public knowledge other than by the receiving Party's breach of this confidentiality obligation; (iv) the receiving Party must disclose to government authorities for the purpose of seeking marketing approval of Licensed Products or Combination Products pursuant to this Agreement; - 39 - 45 (v) the receiving Party must disclose to individuals who have a need to know to effectuate the development and commercialization of Licensed Products or Combination Products pursuant to this Agreement, provided each such individual is bound by a confidentiality obligation comparable to the obligation set forth in this Section 8.10; (vi) the receiving Party independently develops or discovers without use of or reference to the Confidential Information; or (vii) the receiving Party must disclose, pursuant to a requirement of law, provided the receiving Party has given the disclosing Party prompt notice of such fact, so the disclosing Party may obtain a protective order or other appropriate remedy concerning any such disclosure and/or waive compliance with the confidentiality obligations of this Section 8.10. The receiving Party shall fully cooperate with the disclosing Party in connection with the disclosing Party's efforts to obtain any such order or other remedy. If any such order or other remedy does not fully preclude disclosure, or the disclosing Party waives such compliance, the receiving Party shall make such disclosure, but only to the extent such disclosure is legally required, and shall use its best efforts to have confidential treatment accorded to the disclosed Confidential Information. Each Party may disclose Confidential Information only to those of its employees, agents, Affiliates, consultants and academic collaborators who are bound by confidentiality obligations comparable to the obligation set forth in this Section 8.10. All Confidential Information shall be returned to the disclosing Party by the receiving Party upon request by the disclosing Party upon the termination of this Agreement, with the exception of a single copy to be retained by the receiving Party in a confidential file for the purpose of determining compliance with this confidentiality obligation. This obligation shall survive termination of this Agreement. Section 8.11. Publication. Any manuscript, abstract or other publication or presentation prepared by or on behalf of either Party and relating to the SIGNAL Technology must be submitted to the other Party for review and approval at least thirty (30) Business Days prior to - 40 - 46 submission for publication or public release, which approval shall not unreasonably be withheld. Publication or public release of any such manuscript, abstract or other publication or presentation is subject to the confidentiality and nondisclosure obligations set forth in Section 8.10 hereof. Section 8.12. Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signatures to each counterpart were upon a single instrument, and all such counterparts together shall be deemed an original of this Agreement. Section 8.13. No Strict Construction. This Agreement has been prepared jointly and shall not be strictly construed against either Party. Section 8.14. Governing Law. The form, execution, validity, construction and effect of this Agreement shall be determined in accordance with the laws of the Commonwealth of Massachusetts and the United States of America, regardless of the choice of law principles of those or any other jurisdictions. Section 8.15. Dispute Resolution. Any disputes, questions or claims raised by a Party and arising out of or in connection with this Agreement that cannot be settled by negotiation between the Parties within fifteen (15) days after notice thereof shall be resolved in accordance with the terms and conditions set forth in this Section 8.15. The Parties agree that any such dispute, question or claim shall be resolved solely by application of the procedures set forth in this Section 8.15. These procedures, however, may be modified by written agreement of the Parties with respect to any particular dispute, question or claim that may arise under this Agreement. 8.15.01. Negotiation. The procedures of this Section 8.15 shall be initiated by a notice (the "Dispute Notice") given by one Party (for purposes of this Section 8.15, the "Claimant") to the other Party. The Dispute Notice shall be accompanied by (i) a statement of the Claimant describing the dispute, question or claim in reasonable detail, and (ii) documentation supporting the Claimant's position with respect to the dispute, question or claim, if applicable. Within twenty (20) days after receipt by the other Party (for purposes of this - 41 - 47 Section 8.15, the "Respondent") of the Dispute Notice and accompanying materials, if any, the chief executive officers of the Parties in question, or other members of senior management of such Parties, each with full authority from the chief executive officer to settle the dispute, shall meet (the "Management Meeting") in a mutually agreeable location to resolve the dispute. If the Parties cannot agree on a time or location for the Management Meeting, (i) the Meeting shall be held at 10:00 A.M., local time, on the twentieth (20th) day after the Respondent's receipt of the Dispute Notice, (ii) the location of such Meeting shall be in a first-class hotel suite identified and paid for by the Claimant in Boston, Massachusetts. If the senior management representative of either Party intends to be accompanied at the Management Meeting by counsel, the other Party shall be given at least four (4) days notice of such intention and may also be accompanied by counsel. All negotiations pursuant to this Subsection 8.15.1 shall be confidential and treated as compromise and settlement negotiations and shall not be admissible in any arbitration or other proceeding. 8.15.02. Arbitration. If the Parties are unable to resolve the dispute, question or claim within thirty (30) days following the day of the Management Meeting, the dispute, question or claim shall be finally settled by arbitration in accordance with the Center for Public Resources Rules for Non-Administered Arbitration of International Disputes (and the Center for Public Resources shall serve, if necessary, as the "Neutral Organization") by three arbitrators appointed in accordance with such Rules who shall be impartial and disinterested individuals who do not have a direct or indirect interest in either Party or the subject matter of the arbitration. The Parties agree that notices served in the manner provided herein shall be valid for such arbitration. Any such arbitration shall be conducted in English and shall be held in Boston, Massachusetts. The arbitrators shall apply the substantive law that the Parties have chosen as the governing law pursuant to Section 8.14 hereof. Pending the issuance of the arbitrators' decision, the Parties shall continue to operate under the Agreement as it existed on the date the Dispute Notice was given; provided, however, that the arbitrators' decision shall be retroactive to such - 42 - 48 date. The costs of the arbitration (including without limitation the fees and expenses of the arbitrators, attorneys and experts, the travel and other expenses of witnesses, as well as the fees and expenses in any collateral actions, such as actions for enforcement) shall be borne in their entirety by the nonprevailing Party in the arbitration. The Parties hereby exclude any right of appeal to any court on the merits of the dispute, question or claim. Judgment on the award may be entered in any court having jurisdiction over the award or any of the Parties or their assets The award may grant any relief appropriate under the applicable law, including without limitation declaratory relief and/or specific performance. Section 8.16. Cooperation. Both Parties shall cooperate in good faith and take all necessary steps at the request of either Party to ensure that this Agreement is enforceable in accordance with its terms. Section 8.17. Integration. This Agreement, together with the Exhibits hereto, constitutes the entire agreement between the Parties hereto relating to the subject matter hereof and supersedes all prior and contemporaneous negotiations, agreements, representations, understandings and commitments with respect thereto, including without limitation the Letter between the Parties dated September 9, 1997. No terms or provisions of this Agreement shall be varied, extended or modified by any prior or subsequent statement, conduct or act of either of the Parties, except by a written instrument specifically referring to and executed in the same manner as this Agreement. - 43 - 49 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written. "SIGNAL" "ARES" SIGNAL PHARMACEUTICALS, INC. ARES TRADING S.A. By: By: /s/ ERNESTO BERTARELLI ---------------------------- --------------------------------- Name: Name: ERNESTO BERTARELLI ---------------------------- --------------------------------- Title: Title: DIRECTOR ---------------------------- --------------------------------- - 44 - 50 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written. "SIGNAL" "ARES" SIGNAL PHARMACEUTICALS, INC. ARES TRADING S.A. By: /s/ ALAN J. LEWIS By: ---------------------------- --------------------------------- Name: ALAN J. LEWIS Name: ---------------------------- --------------------------------- Title: PRESIDENT / CEO Title: ---------------------------- --------------------------------- - 44 - 51 EXHIBIT A ARES Know-How - 45 - 52 EXHIBIT B ARES Patents [***] * World Intellectual Property Organization country codes - 46 - ***Confidential Treatment Requested 53 EXHIBIT C Protocol Description of Research Project: Responsible Party (SIGNAL, ARES, or Joint): Methodology (including milestones): Personnel (including Consultants and Academic Collaborators): Materials: Reports (Interim and Final): Schedule (including Completion Date): Budget: - 47 - 54 EXHIBIT D SIGNAL Know-How [***] - 48 - ***Confidential Treatment Requested 55 EXHIBIT E SIGNAL Patents [***] - 49 - ***Confidential Treatment Requested 56 EXHIBIT F SIGNAL Third-Party Agreements [***] - 50 - ***Confidential Treatment Requested 57 EXHIBIT G Third-Party Rights in SIGNAL Know-How and SIGNAL Patents [***] - 51 - ***Confidential Treatment Requested EX-10.49 11 EXHIBIT 10.49 1 ***Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406 EXHIBIT 10.49 ================================================================================ COLLABORATIVE RESEARCH AND LICENSE AGREEMENT between SIGNAL PHARMACEUTICAL, INC. and THE DUPONT MERCK PHARMACEUTICAL COMPANY ================================================================================ 2 -2- COLLABORATIVE RESEARCH AND LICENSE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the "Agreement") is made as of ___________, 1997 (the "Effective Date") by and between SIGNAL PHARMACEUTICALS, INC., a Delaware corporation with its principal office at 5555 Oberlin Drive, San Diego, California 92121 ("SIGNAL") and THE DUPONT MERCK PHARMACEUTICAL COMPANY, a general partnership organized and existing under the laws of the State of Delaware and having its principal offices at 974 Centre Road, Wilmington, Delaware 19807 ("DPM"). RECITALS WHEREAS, SIGNAL is a biotechnology company engaged in identifying new classes of small molecule drugs that regulate genes and the production of disease-causing proteins; WHEREAS, DPM is a pharmaceutical company dedicated to the research, development, manufacture and commercialization of pharmaceutical products; WHEREAS, SIGNAL and DPM wish to establish a collaborative relationship to develop and commercialize novel products for the treatment and prevention of human immunodeficiency virus ("HIV") and hepatitis C virus ("HCV"); WHEREAS, DPM desires to obtain, and SIGNAL is willing to grant, an option to expand the collaborative relationship to include the development and commercialization of novel products for the treatment and prevention of [***]; WHEREAS, it is recognized and acknowledged by SIGNAL that DPM has carried out and will continue to carry out programs to discover, develop and commercialize products for the treatment and prevention of HIV and HCV which are outside of this collaboration; and WHEREAS, SIGNAL and DPM wish to enter into this Agreement to establish the collaboration on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows. ***Confidential Treatment Requested 3 -3- ARTICLE 1 DEFINITIONS The terms in this Agreement with initial letters capitalized, whether used in the singular or plural, shall have the meaning designated below or, if not designated below, the meaning as designated in places throughout this Agreement. 1.1 "Affiliate" means an individual, trust, business trust, joint venture, partnership, corporation, association or any other entity which owns, is owned by or is under common ownership with a party. For the purposes of this definition, the term "owns" (including, with correlative meanings, the terms "owned by" and "under common ownership with") as used with respect to any party, shall mean the possession (directly or indirectly) of more than 50% of the outstanding voting securities of a corporation or comparable equity interest in any other type of entity. 1.2 "Annual Research Plan" means the plan for conducting the research activities under the Collaboration as described in Article 3 hereof. 1.3 "Assay" means one or more of the following assays which are described in Appendix 1 attached hereto, which have been developed or are to be developed in HTS format under this Agreement in accordance with the Research Plan: [***] 1.4 "Assay Technology" means SIGNAL Technology necessary or useful for performing the Assays. 1.5 "Calendar Quarter" means the respective periods of three (3) consecutive calendar months ending on March 31, June 30, September 30 and December 31. 1.6 "Calendar Year" means each successive period of twelve (12) months commencing on January 1 and ending on December 31. 1.7 "Collaboration" means the activities of SIGNAL and DPM carried out in performance of the Research Project under this Agreement. 1.8 "Collaboration Know-How" means Know-How (i) arising from or in connection with the conduct of the Collaboration under this Agreement in accordance with the Research Plan and (ii) which is jointly developed by or under the common Control of SIGNAL or one of its Affiliates, on the ***Confidential Treatment Requested 4 -4- one hand, and DPM or one of its Affiliates, on the other hand. 1.9 "Collaboration Patent Rights" means all Patent Rights that claim or cover inventions (i) conceived of and reduced to practice jointly (as determined in accordance with the rules of inventorship under United States patent law) by employees or others acting on behalf of SIGNAL or one of its Affiliates, on the one hand, and employees or others acting on behalf of DPM or one of its Affiliates, on the other hand, in connection with activities conducted pursuant to the Research Plan or (ii) which come under the common Control of SIGNAL or one of its Affiliates, on the one hand, and DPM or one of its Affiliates, on the other hand, during the Research Term and any Extended Research Term and are necessary or appropriate for the full commercial exploitation of the Field. 1.10 "Collaboration Technology" means Collaboration Know-How and Collaboration Patent Rights. 1.11 "Combination Product" means a Product containing a Compound which includes one or more additional active ingredients other than a Compound. 1.12 "Compound" means any compound or any analog or derivative thereof identified or selected for development by DPM or SIGNAL based upon use of the Assays during, or otherwise in the course of and as a result of the Collaboration during the Research Term and any Extended Research Term or by DPM during the period of up to [***] thereafter and subject to Section 4.1. It is to be understood that this definition of Compound excludes molecules or compounds that are acquired or discovered by DPM other than by the use of Assays (or target scopes) of this Agreement, but are subjected to an Assay for further knowledge or characterization as a standard. A derivative Compound is a molecule derived from and related to a screened compound identified or synthesized during the Research Term and any Extended Research Term in the course of and as a result of the Collaboration. 1.13 "Confidential Information" means all information and materials received by either party from the other party pursuant to this Agreement and all information and materials developed in the course of the Collaboration, including, without limitation, Know-How of each party and Collaboration Know-How. 1.14 "Control" means possession of the ability to grant a license or sublicense as provided for herein without violating the terms of any agreement with or other arrangement with any Third Party. ***Confidential Treatment Requested 5 -5- 1.15 "Distributor" shall mean a Third Party distributor engaged by DPM to market and distribute Product in any Distributor Market. 1.16 "Distributor Markets" means the markets in which DPM does not have a field selling organization for direct sales and marketing, where DPM markets Products through distributors. For purposes of this definition, "Distributor Markets" shall not include [***] 1.17 "Effective Date" means the date appearing in the first paragraph of the Agreement. 1.18 "FDA" means the United States Food and Drug Administration. 1.19 "Field" means the use of the Assays for the discovery, identification and development of Compounds and Products for the treatment or prevention of HIV and HCV and the use, manufacture, distribution, marketing and sale of Compounds and Products for the treatment or prevention of HIV and HCV. If DPM exercises the option set forth in Section 4.3, the definition of the Field shall be expanded to include the discovery, identification and development of Compounds and Products for the treatment or prevention of [***] and the use, manufacture, distribution, marketing and sale of Compounds and Products for the treatment or prevention of [***]. 1.20 "First Commercial Sale" of a Product means 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. 1.21 "FTE" means a full time equivalent researcher employed by SIGNAL or DPM and assigned to work on the Research Project with such time and effort to constitute one researcher working on the Research Project on a full time basis consistent with normal business and scientific practice (at least 40 hours per week of dedicated effort; on an annual basis, at least 40 hours per week of dedicated effort for at least 48 weeks (excluding official SIGNAL holidays) per year). 1.22 "HCV Constructs" mean collectively or individually polynucleotide constructs, which are owned or Controlled by SIGNAL, and which SIGNAL may now possess or acquire during the Research Term and any Extended Research Term, containing HCV polynucleotide sequences, including but not limited to those polynucleotide constructs listed in ***Confidential Treatment Requested 6 -6- Appendix 2 hereto. 1.23 "Hit" means any compound that demonstrates reproducible significant activity in an Assay. The level of activity required to be designated a Hit will be set by the RMC. 1.24 "HTS" means high throughput screening. 1.25 "IND" means an Investigational New Drug Application filed with the FDA to commence human clinical testing of a Product, or the equivalent in any other country or jurisdiction. 1.26 "Know-How" means technical information and materials, including without limitation, technology, data, cell lines, constructs, chemicals, inventions (patentable or otherwise), practices, methods, knowledge, skill, and experience relating to Compounds, Hits, Lead Compounds, Assays, and Products. 1.27 "Lead Compound" means any Hit or any analog or derivative of a Hit showing potential therapeutic activity in cellular or animal models in follow-up testing after testing in an Assay and which is selected for pre-clinical safety assessment testing. Lead Compounds will be selected by the RMC as set forth in Section 2.1. 1.28 "NDA" means a New Drug Application filed in the FDA to obtain marketing approval for a Product, or the equivalent in any other country or jurisdiction. 1.29 "Net Sales" means the gross amounts invoiced for sales of Compound or Product by DPM and its Affiliates to non-Affiliated Third Parties, including but not limited to Distributors and Sublicensees, in bona fide, arms-length transactions, less (to the extent actually incurred or reasonably estimated and accrued in accordance with GAAP and to the extent not already deducted in the amount invoiced): (a) trade and quantity discounts, (b) credits or allowances upon claims, damaged goods, rejections or returns, including recalls, (c) freight, postage, shipping and insurance charges for delivery of Product, (d) custom duties, surcharges, sales or excise taxes and other governmental charges (other than income taxes) incurred directly related to the sale, (e) rebates, chargebacks and other amounts paid, credited or accrued, (f) retroactive price reductions, (g) bad debt expense, and (h) amounts incurred resulting from governmental mandated rebate programs. Sales of Products for use in clinical trials (including expanded access 7 -7- programs) prior to receipt of regulatory approval to market such Product shall not be included in Net Sales. With respect to the sales of Combination Product, Net Sales shall be calculated on the basis of the invoice price of a Product containing the same weight of Compound sold without other active ingredients. In the event such Compound is not sold without other active ingredients, Net Sales shall be calculated by multiplying the amounts received by DPM or its Affiliates attributable to Combination Products by the Combination Allocation Portion (as defined below) attributable to such Combination Product. The "Combination Allocation Portion," as used herein, shall mean that portion of any amounts received by DPM or its Affiliates from the sale of any Combination Product that results from multiplying the total amount received by DPM or its Affiliates from such sale by a fraction, the numerator of which is the fair market value of the Compound included in the Combination Product and the denominator of which is the fair market value of such Compound and the fair market value of the products or parts of such Combination Product which are not Compounds. Fair market value shall be determined in good faith by DPM and SIGNAL either together or with a mutually agreeable third party in the event that no market price is available. In the event that the parties shall disagree regarding the fair market value denomination, the parties shall resolve such dispute in accordance with Article 12 hereof. 1.30 "Pass-Through Net Sales" means the gross amounts invoiced for sales of Product by Distributors and Sublicensees to non-Affiliated Third Parties, in bona fide, arms-length transactions, less deductions listed in the [***] or other SIGNAL License Agreement. SIGNAL shall include in each SIGNAL License Agreement entered into after the Effective Date a definition of Net Sales and/or Pass-Through Net Sales that is consistent with the definition of Net Sales in Section 1.29 above or as provided in the SIGNAL License Agreement with [***] The purpose for such consistency being to prevent any obligation to keep a multiplicity of books and records. 1.31 "Patent Rights" means all rights under (a) patents (including the inventor's certificates) that include one or more Valid Claims, including without limitation any substitution, extension (including supplemental protection certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, re-examination, renewal or the like, and (b) pending applications for patents, including, without limitation, any continuation, division or continuation-in-part thereof, and any provisional ***Confidential Treatment Requested 8 -8- applications, which applications are listed and will be listed during the Term of this Agreement in attached Schedule A and which are considered to be either Collaboration Patent Rights or Signal Patent Rights. 1.32 "Phase IIb" means such studies in humans of the safety, dose ranging and efficacy of a Product designed to generate sufficient data to make a decision about whether to commence a Pivotal Trial, as more specifically defined by the rules and regulations of the FDA and corresponding rules and regulations in other countries or jurisdictions. 1.33 "Pivotal Trial" means a controlled study in humans on sufficient numbers of patients designed to establish the efficacy and safety of a Product which is prospectively designed to demonstrate statistically whether the Product is safe and effective for use in a particular indication in a manner sufficient to obtain full Regulatory Approval to market that Product. 1.34 "Product" means any marketed product (a) containing a formulation or dosage of a Compound; or (b) the manufacture, use or sale of which is covered by one or more of SIGNAL Patent Rights, Collaboration Know-How or Collaboration Patent Rights. 1.35 "Regulatory Approval" means any approvals (including pricing and reimbursement approvals), licenses, registrations or authorizations of any national, supra-national, regional, state or local regulatory agency, department or other governmental entity necessary for the manufacture, distribution, use and sale of a Product in a regulatory jurisdiction. "Regulatory Approval" in the U.S. means NDA approval. 1.36 "Research Project" means the research activities under the Collaboration carried out in accordance with the Research Plan as described in Article 3 hereof. 1.37 "Research Term" means the period beginning on the Effective Date and ending on the third anniversary of the Effective Date; provided, however, that the Research Term may be extended for up to three (3) additional one-year periods ("Extended Research Term") at DPM's option upon written notice to SIGNAL given no less than ninety (90) days prior to the expiration of the Research Term or any extension thereof, as the case may be. 1.38 "Research Year" means each twelve month period during the Research Term and any Extended Research Term, with the first Research Year beginning on the Effective Date. 9 -9- 1.39 "RMC" means the Research Management Committee established pursuant to Section 2.1 hereof. 1.40 "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) 10 years from the date of First Commercial Sale in such country, or (b) the expiration of the last to expire of the SIGNAL Patent Rights and the Collaboration Patent Rights containing a Valid Claim covering such Product in such country. 1.41 "Signal Compound" means a compound contained in the Signal Compound Library. 1.42 "Signal Compound Library" means all compounds owned or Controlled by SIGNAL which are available for screening in the Assays in accordance with the terms and conditions of this Agreement, including but not limited to the compounds and compound libraries identified in Appendix 3 hereto (but excluding, for purposes of HIV and the [***] drug target, any compounds licensed by SIGNAL from [***]). 1.43 "SIGNAL Know-How" means all Know-How, which are owned or Controlled by SIGNAL, which SIGNAL may now possess or acquire during the Research Term and any Extended Research Term, which are necessary or useful for DPM to utilize the Assays or in the discovery, development, manufacture, marketing, use or sale of Compounds or Products. 1.44 "Signal License Agreements" shall mean any license agreement which SIGNAL has entered into as of the Effective Date pursuant to which SIGNAL Controls Assay Technology, any part of the Signal Compound Library or any Signal Compound or any such subsequent license agreement which SIGNAL has entered into which is approved as a Signal License Agreement by the RMC after review and approval by the Finance Division of DPM with respect to the definition of Net Sales and for any payments which may be assumed by DPM for milestone and royalty payments. These are listed in Appendix 5 and any subsequent such Agreements, if any, will be added during the Research Term and any Extended Research Term. 1.45 "SIGNAL Patent Rights" means the Patent Rights owned or Controlled by SIGNAL, either solely or jointly with another party, which SIGNAL may now possess or acquire in the future, which (i) are necessary or useful for DPM to utilize the Assays or in the discovery, development, manufacture, marketing, use or sale of Compounds or Products or (ii) which contains a claim which would be infringed by a third party's ***Confidential Treatment Requested 10 -10- manufacture, use, import or sale of any Compound or Product. These are listed in Appendix 6 and will be added during the Research Term and any Extended Research Term. 1.46 "SIGNAL Technology" means the SIGNAL Patent Rights and the SIGNAL Know-How. 1.47 "Sublicense Territory" means all countries in which a license has been granted to a Sublicensee, but shall specifically exclude the [***] except with the prior approval of SIGNAL. 1.48 "Sublicensee" means a Third Party to whom DPM has granted a license or sublicense to develop, make, have made, use, offer for sale, sell and import Products in the Field. 1.49 "Sublicensing Revenue" means the amount actually paid to DPM by a Sublicensee arising from the license or sublicense of the right to develop, make, have made, use, offer for sale, sell and import Products in the Field. Sublicensing Revenue shall include license fees, royalties, and any other payments with respect to the SIGNAL Technology or the Collaboration Technology but shall not include any payments tied to the provision of goods and services by DPM to such Sublicensee to compensate DPM for the provision of such goods and services. 1.50 "Term" means the period commencing on the Effective Date and ending on the Termination Date. 1.51 "Termination Date" means the last date on which DPM is obligated to make any payments to SIGNAL pursuant to Section 5. 1.52 "Third Party" means any entity other than SIGNAL or DPM or an Affiliate of SIGNAL or DPM. 1.53 "Valid Claim" means a claim of an issued patent or pending patent application 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. 1.54 "Viral Target" means the viral target of an Assay, HIV, HCV [***] as the case may be, as specified in Appendix 1 hereto. ***Confidential Treatment Requested 11 -11- ARTICLE 2 RESEARCH MANAGEMENT COMMITTEE 2.1 Research Management Committee. The Collaboration will be managed by the RMC, which will be comprised of three representatives appointed by SIGNAL and three representatives appointed by DPM. The RMC shall be co-chaired jointly by a representative of each party. Either party may appoint substitute or replacement members of the RMC to serve as their representatives upon notice to the other party. The initial members of the RMC shall be appointed by the parties within thirty (30) days following the Effective Date. The RMC shall oversee the principal research aspects of the Collaboration; and DPM shall be solely responsible for development, manufacturing and marketing activities. The RMC shall have the responsibility and authority to (a) set and modify research goals including recommendations to pursue different assays, (b) assign tasks and responsibilities under the Research Plan to the parties, (c) set criteria for identification of Lead Compounds and Hits, (d) recommend Hits to be developed as Lead Compounds and/or to be chemically modified for development as Lead Compounds, (e) monitor the progress of the Collaboration and (f) review and modify the Research Plan, as it shall deem appropriate to achieve the parties' objectives under this Agreement. 2.2 Meetings. The RMC shall meet in-person or by teleconference on a Calendar Quarter basis or more frequently as may be agreed upon, to review the progress of the parties in performing the Research Project, with each party to bear all travel and related costs for its representatives. 2.3 Decision-Making Process. Each member of the RMC shall have one vote, and decisions by the RMC shall be made by a majority vote. Any disagreement among members of the RMC will be resolved within the RMC based on the efficient achievement of the objectives of this Agreement. Any disagreement which cannot be resolved by a majority vote of the RMC shall be referred to the appropriate officers of SIGNAL and DPM for resolution under Article 12. It is the intent of the parties to resolve issues through the RMC whenever possible and to refer issues to the officers of SIGNAL and DPM only when resolution through the RMC cannot be achieved. ARTICLE 3 CONDUCT OF COLLABORATION 3.1 Exclusivity. All Compounds discovered or licensed by either DPM or Signal shall be developed and commercialized for use in the Field pursuant to and subject to the provisions of this Agreement. During the 12 -12- Research Term and any Extended Research Term, and for a period of two (2) years following the Research Term or any Extended Research Term, DPM and its Affiliates, shall not work independently of SIGNAL, either alone or with any Third Party, and shall not enter into any negotiations or agreements with any Third Party, with respect to the use of the Assays. During the Research Term and any Extended Research Term and for a period of two (2) years following the Research Term or any Extended Research Term, SIGNAL and its Affiliates, shall not work independently of DPM, either alone or with any Third Party, and shall not enter into any negotiations or agreements with any Third Party, with respect to the Field. This Section 3.1 shall not in any way limit or modify the licenses granted to DPM by SIGNAL under this Agreement. 3.2 Objectives of Collaboration. The objective of the Collaboration is to identify Hits and Lead Compounds that are suitable for development by DPM as Products for commercialization in the Field. DPM shall be responsible for the development of Products, including all preclinical and clinical testing, obtaining Regulatory Approval for Products, manufacturing of Compounds and Products, and the commercialization of Products in the Field. The parties agree that the Collaboration shall be conducted in accordance with the initial research plan attached hereto as Appendix 2, its modifications, and each Annual Research Plan. The parties expect that: (i) initially, SIGNAL will be primarily responsible for screening the compound libraries of each party using Assays developed or to be developed primarily by SIGNAL, which responsibility may thereafter be shifted in whole or in part to DPM in the RMC's discretion; (ii) SIGNAL will initially have primary responsibility for follow-up and confirmation of any Hits in HCV Assays; (iii) DPM will have primary responsibility for follow-up and confirmation of any Hits in HIV Assays; (iv) the parties will share responsibility for assessment of antiviral activity of Hits; and (v) DPM will have primary responsibility for in vivo testing of Compounds and any follow-up medicinal chemistry. 3.3 Annual Research Plan. The Research Project will be conducted under an Annual Research Plan which describes the work to be pursued by SIGNAL and DPM during the Research Year. The first Annual Research Plan shall be prepared by the RMC within forty-five (45) days after the Effective Date. Subsequent Annual Research Plans shall be prepared by the RMC, not later than sixty (60) days prior to the start of each Research Year. The Annual Research Plan shall outline the work on the Research Project proposed to be carried out during the subsequent Research Year and the number of FTEs to be assigned to such work. 13 -13- 3.4 Research Efforts. Each party shall use good faith commercially reasonable and diligent efforts (as defined below) to perform its responsibilities under the Annual Research Plan. In particular, DPM will provide funding to SIGNAL pursuant to Section 5.3 in each Research Year during the Research Term and any Extended Research Term to support [***] qualified FTEs at SIGNAL specified in the Annual Research Plan, unless modified by the RMC during the Research Term and any Extended Research Term which funding by DPM shall be contingent upon SIGNAL providing and retaining such qualified FTEs. In addition, DPM will commit the number(s) of appropriately qualified FTEs to the performance of DPM's responsibilities as specified in the Annual Research Plan. Any modification in such FTE commitments by the parties shall be made by the RMC in accordance with Article 2. As used herein, the term "commercially reasonable and diligent efforts" will mean, unless the parties agree in writing otherwise, those efforts consistent with the exercise of prudent scientific and business judgment in accordance with industry standards, as applied to other products of similar scientific and commercial potential. The Research Project will be conducted in good scientific manner, and in compliance with all applicable good laboratory practices, and applicable legal requirements, to attempt to achieve efficiently and expeditiously the objectives of the Collaboration. Throughout the Research Term and any Extended Research Term, SIGNAL shall assign a balanced number of FTE Ph.D. or equivalent scientists and other technical support personnel as specified in the Annual Research Plan to perform the work set forth in each Annual Research Plan. The name, curriculum vitae, and percentage of time devoted to working on the Research Project for each scientist comprising [***] potential FTE scientists shall be provided to DPM within sixty (60) days of the Effective Date and not later than sixty (60) days prior to the start of each subsequent Research Year. The mixture of skills and levels of such FTEs shall be appropriate to the scientific objectives of the Research Project. The scientists comprising such [***] FTEs and their percentage of time devoted to working on the Research Project shall be identified in each Annual Research Plan. The selection of such scientists shall be communicated to DPM at the same time offers of employment are made. 3.5 Availability of Resources. Each party will maintain laboratories, offices and all other facilities at its own expense and risk necessary to carry out its responsibilities under the Collaboration pursuant to the Annual Research Plan. In particular, within ninety (90) days following the Effective Date, SIGNAL will have established, and will thereafter during the Research Term and any Extended Research Term ***Confidential Treatment Requested 14 -14- maintain, a non-shared BSL-2 laboratory space for conducting antiviral work. Each party agrees to make its employees and non-employee consultants reasonably available at their respective places of employment to consult with the other party on issues arising during the Collaboration and in connection with any request from any regulatory agency, including, without limitation, regulatory, scientific, technical and clinical testing issues. 3.6 Transfer of Technical Information, Know-How and Materials. As the Assays are established and as improvements to the Assays are made, SIGNAL shall provide DPM with all technical information, Know-How and materials necessary to enable DPM to utilize such Assays. Within thirty (30) days following the Effective Date, SIGNAL shall provide DPM with access to all HCV Constructs owned or Controlled by SIGNAL as of the Effective Date, including those listed in Appendix 2 hereof. 3.7 Screening of Signal Compounds in the Assays. As the Assays are developed and validated, SIGNAL shall promptly proceed to diligently screen in the Assays such Signal Compounds which exist prior to the Effective Date or are synthesized or acquired by SIGNAL during the Research Term and any Extended Research Term as determined by the RMC. The results of such testing and the structure of any Hits shall be promptly disclosed to DPM as such results are obtained. Likewise, DPM shall promptly disclose to SIGNAL the results of its biologic screening activities during the Research Term and any Extended Research Term. 3.8 Disclosure; Reports. SIGNAL will make available and disclose to DPM promptly after the Effective Date all Signal Know-How known as of the Effective Date. Each party will make available and disclose to the other party all SIGNAL Know-How or Collaboration Know-How, as applicable, learned, acquired or discovered by such party at any time on or before the end of the Research Term and any Extended Research Term, as promptly as is reasonably practicable after such Know-How is learned. In addition, each party shall inform the other promptly upon identifying any Hits in its performance of screening activities pursuant to the Research Plan and shall provide such additional information with respect thereto as the other party or the RMC shall reasonably request. The parties will exchange at a minimum quarterly written reports (with copies to the RMC) presenting a meaningful summary of the work performed on the Research Project. In addition, on reasonable request by a party, the other party will make presentations of its activities under this Agreement to inform such party of the details of the work done under this Agreement. Know-How and other information regarding the Research Project disclosed by one party to the 15 -15- other party pursuant hereto may be used only in accordance with the rights granted under this Agreement. Within thirty (30) days following the end of each Calendar Quarter, SIGNAL and DPM shall each provide to the RMC a written report summarizing in reasonable detail the work performed by it under the Research Project during the preceding Calendar Quarter. Subsequent to the termination or expiration of the Research Term and any Extended Research Term, DPM shall provide SIGNAL with quarterly reports concerning the status of its development activities concerning the commercialization of Products, including but not limited to the results of preclinical and clinical studies. 3.9 Records. SIGNAL and DPM shall each maintain records in sufficient detail and in good scientific manner appropriate for patent purposes and as will properly reflect all work done and results achieved in the performance of the Research Project (including all data in the form required to be maintained under any applicable governmental regulations). Such records shall include books, records, reports, research notes, charts, graphs, comments, computations, analyses, recordings, photographs, computer programs and documentation thereof, computer information storage means, samples of materials and other graphic or written data generated in connection with the Research Project. SIGNAL and DPM shall each provide the other the right to inspect such records, and shall provide copies of all requested records, to the extent reasonably required for the performance of the requesting party's obligations under this Agreement; provided, however, that each party shall maintain such records and the information of the other contained therein in confidence in accordance with Article 8 below and shall not use such records or information except to the extent otherwise permitted by this Agreement. 3.10 DPM Compounds. To further the objectives of the Collaboration, DPM shall transfer to SIGNAL certain DPM compounds for testing by SIGNAL in the Assays in accordance with the applicable Annual Research Plan. Such compounds provided or otherwise disclosed by DPM to SIGNAL under this Agreement are referred to herein as "DPM Compounds". Such DPM Compounds and all information relating to such DPM Compounds and information and materials derived from the use of such DPM Compounds will be used by SIGNAL solely for the testing of the DPM Compounds in the Assays as specified in the Annual Research Plan and shall be used for no other purpose. SIGNAL will promptly provide to DPM all data from such testing of DPM Compounds as such data is developed. Upon expiration or termination of the Research Project, SIGNAL shall, upon the request of 16 -16- DPM, return or destroy all compounds and other materials provided to SIGNAL by DPM in the performance of the Research Project. DPM shall at all times own all rights to the DPM Compounds it provides or discloses to SIGNAL hereunder, including without limitation, all rights with respect to the manufacture, use or sale of such DPM Compounds. Accordingly, SIGNAL agrees to: (i) disclose to DPM any inventions it conceives or makes covering the manufacture, use, or sale of DPM Compounds; (ii) assign to DPM all patent rights of SIGNAL covering the manufacture, use, or sale of DPM Compounds; (iii) execute any necessary papers and otherwise reasonably cooperate with DPM in securing such patent rights. Anything to the contrary not withstanding, any such patent rights conveyed by SIGNAL to DPM under this Section 3.10 shall be included in Collaboration Patent Rights as set forth in (ii) of Section 1.9. 3.11 Subcontracts. Notwithstanding Section 3.1, subject to the provisions of Article 8 and subject to the prior written approval of the RMC, SIGNAL and DPM may subcontract portions of the Research Project to be performed by them in the normal course of their business to a Third Party upon prior written notice to the other; provided, however, that such Third Party has entered into an appropriate confidentiality agreement with SIGNAL and/or DPM obligating such Third Party to be bound by the obligations contained in this Agreement. ARTICLE 4 GRANT OF LICENSES 4.1 License Under Assay Technology. Subject to the terms and conditions of this Agreement and during the Research Term and Extended Research Term, and for a period of two (2) years following the Research Term and any Extended Research Term, Signal grants to DPM a worldwide, exclusive (except as to SIGNAL, as described below) license under the Assay Technology to conduct screening of compounds in the Assays in the Field, including the right to grant sublicenses solely to its Affiliates for such purposes. Notwithstanding the preceding sentence, SIGNAL retains the right under the Assay Technology solely to perform its obligations under this Agreement, including but not limited to conducting screening of DPM Compounds and Signal Compound Libraries as contemplated by and in accordance with the Research Plan, including the right to grant sublicenses solely to its Affiliates for such purposes. Subject to the terms and conditions of this Agreement, during the [***] period after the Research Term and any Extended Research Term ("Post Research Term"), SIGNAL shall have the right to conduct screening of Signal Compound Libraries in the Assays. Any compound 17 -17- identified by DPM or by SIGNAL with the acceptance of DPM based upon use of the Assays during such Post Research Term shall be a Compound subject to all of the terms and conditions of this Agreement. Any such Compound identified by SIGNAL or DPM during such Post Research Term shall be disclosed to the other party at the time such Compound is identified. For up to a [***] period after the Post Research Term referred to in the preceding paragraph DPM will continue to pay for Compounds first identified, continued or selected for development by DPM based upon use of the Assays during or otherwise in the course of and as a result of the Collaboration as long as the Assays are not in the public domain to be used by independent Third Parties. During this additional extended period, the milestone and royalty payments set forth in Sections 5.4.3, 5.4.4, 5.4.5 and 5.5 shall be equal to the amounts set forth therein multiplied by: [***] if such Compound is identified within the [***] after expiration of the Post Research Term; [***] if such Compound is identified between [***] after the expiration of the Post Research Term. After expiration of the Post Research Term, DPM has a non-exclusive, fully paid-up license under the Assay Technology. 4.2 License Under Signal Technology and Collaboration Technology. Subject to the terms and conditions of this Agreement, particularly Section 5.8, SIGNAL hereby grants to DPM a worldwide, exclusive, royalty-bearing license during the Royalty Term, with right to sublicense, under the SIGNAL Technology and the Collaboration Technology to develop, make, have made, use, offer for sale, sell, and import Compounds and Products in the Field, including the right to grant sublicenses to Affiliates and Sublicensees. DPM shall diligently pursue development of Products. If DPM ceases to pursue diligently development and commercialization of at least one Product during or subsequent to the Research Term, SIGNAL shall have the right to terminate the license granted to DPM hereunder on a Product by Product basis in the event SIGNAL disagrees with DPM on the reasons for ceasing development of such Product. Upon termination of such license for any such terminated Product, SIGNAL shall receive an exclusive license, with the right to grant sublicenses, to all Collaboration Technology for such terminated Product and to ***Confidential Treatment Requested 18 -18- make, have made, use, offer for sale, sell or import all Lead Compounds selected from DPM's compound library relating thereto in the Field on terms and conditions to be negotiated. In addition, if a compound is selected as a Lead Compound from the SIGNAL Compound Library and DPM ceases to pursue diligently development and commercialization of such compound, all rights to such Lead Compound shall revert to SIGNAL. 4.3 [***] Option. During the period of eight (8) months following the Effective Date [***], DPM shall have the option, upon commitment by DPM to fund [***] additional SIGNAL FTEs for the duration of the Research Term and any Extended Research Term, to expand the Collaboration, the definition of the Field to include [***], and the definition of Assays to the [***] as set forth in Appendix 1 hereto. In the event that DPM has not exercised such option by providing notice to SIGNAL of its desire to exercise such option prior to the expiration of the [***], then SIGNAL shall thereafter be free to license such assays to a Third Party. If DPM exercises such option, DPM shall be responsible for all milestone, royalty and other payments due under any SIGNAL License Agreement with respect to any [***] 4.4 Sublicenses. DPM shall notify any permitted Sublicensee hereunder of all rights and obligations of such party under this Agreement licensed to such Sublicensee and require such Sublicensee to be bound by all of the terms and conditions of this Agreement. Upon termination of this Agreement by DPM pursuant to Section 10.2, no existing sublicenses shall be affected by such termination as long as such sublicense is in compliance with all of the terms and conditions of this Agreement, and all such sublicenses shall remain in effect according to their terms shall be either (a) assigned to SIGNAL, if acceptable to SIGNAL, or (b) continue as Sublicensees of DPM following such termination. 4.5 No Other License. No right or license under any patent or patent application is granted by DPM or SIGNAL under this Agreement, except as specifically and expressly set forth herein. 4.6 Limitation on Right to Sublicense. DPM agrees not to sublicense rights granted hereunder to either Merck & Company or E.I. duPont deNemours & Company ("Parents," which term shall include any entity in which either Parent has a controlling interest as defined below) without the written consent of SIGNAL, such consent not to be unreasonably withheld. In the event DPM decides to ***Confidential Treatment Requested 19 -19- sublicense rights granted hereunder to a Parent, then DPM agrees it will do so only under terms and conditions substantially the same as those it receives through arms length negotiation with an independent third party. DPM agrees not to sublicense rights granted hereunder to non-Affiliates in which DPM has a controlling interest without the written consent of SIGNAL, such consent not to be unreasonably withheld. For the purposes of this Section 4.6, an entity shall be regarded as in DPM's control or a Parent's control if DPM or such Parent owns or directly or indirectly controls more than twenty percent (20%) of the voting stock or other ownership interest of the entity, or has the power to elect or appoint more than twenty percent (20%) of the members of the governing body of the entity. There shall be no other limitation on DPM's right to sublicense except as expressed in this Section 4.6. DPM may sublicense its Affiliates without SIGNAL's consent. ARTICLE 5 PAYMENT OBLIGATIONS 5.1 License Fee. In partial consideration of the grant of the licenses set forth in Article 4 above, DPM agrees to pay to SIGNAL within ten (10) days of the Effective Date a one-time, non-refundable fee of $1.0 million. In addition, DPM shall pay SIGNAL the amount of [***] within ten (10) days of its receipt of the HCV Constructs as set forth under Section 3.6 hereof. 5.2 Equity Investment. In the event that, at any time during the Research Term, SIGNAL completes an initial public offering of its Common Stock ("IPO"), DPM shall, as part of the IPO, purchase $2.0 million of shares of Common Stock of SIGNAL in a private placement completed simultaneously with the IPO and subject to Rule 144 of the Securities Act at a price per share equal to the share price to the public in the IPO. Such equity investment shall be made pursuant to a Stock Purchase Agreement substantially in the form attached hereto as Appendix 7 (the "Stock Purchase Agreement"). 5.3 Research Funding. DPM agrees to fund the Research Project at SIGNAL, during the Research Term and any Extended Research Term on a fully allocated FTE basis in an amount equal to [***] per FTE per year in accordance with the FTE requirements set forth in the Annual Research Plan. Such amount shall be payable in advance in four quarterly installments during each Calendar Year on or before the end of the Calendar Quarter. Any payment for a portion of a quarterly period shall ***Confidential Treatment Requested 20 -20- be made on a pro rata basis. The first such payment shall be made within ten (10) days the Effective Date. Such annual funding shall be reevaluated annually and adjusted in proportion to the percentage increase in the Consumer Price Index. Except as provided in this Section 5.3, or as may be agreed from time to time by the parties in writing, each of SIGNAL and DPM will bear all of its own expenses incurred in connection with the Collaboration. Research funding by DPM shall be contingent upon SIGNAL providing and retaining the number of qualified FTEs set forth in Section 3.3 and 3.4 (or adjusted for any shortfall on a prorata basis), the applicable Annual Research Plan and SIGNAL using good faith commercially reasonable and diligent efforts to achieve the goals of the Annual Research Plan. 5.4 Milestone Payments. Within thirty (30) days after achievement of each of the milestone events set forth below, subject to the terms and conditions of this Agreement, DPM shall pay to SIGNAL the indicated nonrefundable milestone payment, in cash or as an equity investment, as the case may be, set forth below. 5.4.1 [***] 5.4.2 [***] ***Confidential Treatment Requested 21 -21- 5.4.3 Milestone Payments for HIV. (a) For a Compound in each Viral Target developed for the treatment or prevention of HIV, DPM shall pay to SIGNAL: [***] For such Compounds developed for the prevention or treatment of HIV infection, the milestone payments above shall be paid only [***] (b) For each subsequent new Compound for which Regulatory Approval is obtained for the prevention or treatment of HIV infection, DPM will pay milestone payments not to exceed [***] as follows: (i) [***] (ii) [***] 5.4.4 Milestone Payments for HCV. (a) For a Compound in each Viral Target developed for the treatment or prevention of HCV, DPM shall pay to SIGNAL: (i) [***] ***Confidential Treatment Requested 22 -22- (ii) [***] (iii) [***] (iv) [***] For such Compounds developed for the prevention or treatment of HCV infection, the milestone payments above shall be paid only once upon the first occurrence of such milestone event. (b) For each subsequent new Compound for which Regulatory Approval is obtained for the prevention or treatment of HCV infection, DPM will pay milestone payments not to exceed [***] as follows: (i) [***] (ii) [***] 5.4.5 Milestone Payments for [***]. In the event that DPM exercises its option with respect to [***] and the [***] are included in the definition of Assays hereunder, DPM shall pay the following milestone payments. (a) For a Compound in each Viral Target developed for the treatment or prevention of [***], DPM shall pay to SIGNAL: (i) [***] (ii) [***] ***Confidential Treatment Requested 23 -23- (iii) [***] (iv) [***] For such Compounds developed for the prevention or treatment of [***], the milestone payments above shall be paid only once upon the first occurrence of such milestone event. (b) For each subsequent new Compound for which Regulatory Approval is obtained for the prevention or treatment of [***], DPM will pay milestone payments not to exceed [***] as follows: [***] 5.5 Royalty Payments. Subject to the terms and conditions of this Agreement, particularly Section 5.5.4, DPM shall pay to SIGNAL a royalty on Net Sales of Product as set forth below. 5.5.1 Royalty on Products for HIV. (a) DPM shall pay to SIGNAL the following royalty on Net Sales of Products for the treatment or prevention of HIV as follows: (i) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product less than [***]; (ii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***] ***Confidential Treatment Requested 24 -24- (iii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***]; and (iv) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product which exceed [***]. 5.5.2 Royalty on Products for HCV. (a) DPM shall pay to SIGNAL the following royalty on Net Sales of Products for the treatment or prevention of HCV as follows: (i) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product less than [***]; (ii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***]; (iii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***]; and (iv) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product which exceed [***]. 5.5.3 Royalty on Products for [***]. (a) In the event that DPM exercises its option with respect to [***] and the [***] Assays are included in the definition of Assays hereunder, DPM shall pay to SIGNAL the following royalty on Net Sales of Products for the treatment or prevention of [***] as follows: (i) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product less than [***]; (ii) [***] of the aggregate annual Net Sales of such ***Confidential Treatment Requested 25 -25- Product for aggregate annual Net Sales of such Product between [***] and [***]; (iii) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product between [***] and [***]; and (iv) [***] of the aggregate annual Net Sales of such Product for aggregate annual Net Sales of such Product which exceed [***]. 5.5.4 With respect to each Product such royalty payments shall be payable on a country-by-country basis during the Royalty Term for such Product in such country. 5.5.5 The royalties payable hereunder shall be subject to the following conditions: (i) subject to 5.5.6 and 5.5.7, only one royalty shall be due with respect to the same unit of Product; (ii) that no royalties shall be due upon the sale or other transfer among DPM and its Affiliates, but in such cases the royalty shall be due and calculated upon DPM's or its Affiliate's Net Sales of Product to the first independent third party; (iii) no royalties shall accrue on the disposition of Product in reasonable quantities by DPM or its Affiliates as bona fide samples or as donations to non-profit institutions or government agencies for non-commercial purposes; (iv) if a compulsory license is granted with respect to Product in any country with a royalty rate lower than the royalty rate provided above, then the royalty rate to be paid by DPM shall be [***]; and (v) notwithstanding the above royalty rates, upon DPM's request, the parties agree to discuss in good faith a reduction (without any obligation to agree to such a reduction) of such royalty rate in any ***Confidential Treatment Requested 26 -26- given country in the event the level of development, patent protection or general commercial environment affects the commercial viability of the Product under such royalty rate. 5.5.6 Sales by Distributors in Distributor Markets. In the case of sales of Product by any Distributor in any Distributor Market, to the extent that SIGNAL is obligated under any Signal License Agreement to pay royalty payments on such sales of Product by Distributors in Distributor Markets, then, in addition to any royalty amounts payable to SIGNAL under Section 5.5.1, 5.5.2 or 5.5.3, DPM shall pay to SIGNAL an amount equal to the amount SIGNAL is obligated to pay and actually pays to its licensors with respect to such Distributor sales under such Signal License Agreement, provided however, that such amount payable by DPM to SIGNAL under this Section 5.5.6 shall in no event exceed [***] of the applicable annual Pass-Through Net Sales of Product by such Distributor. In no event, however, shall the total royalties paid to SIGNAL under this Section 5.5.6 be higher than what they would have been if calculated on sales to the ultimate third party as set forth in Sections 5.5.1, 5.5.2, and 5.5.3 as if DPM marketed the Product to the ultimate third party itself rather than through a Distributor. See Appendix 4 for example calculations. 5.5.7 Sales by Sublicensees. (a) In the event that DPM licenses or sublicenses the right to sell Product to a Sublicensee and DPM does not supply and sell Compound or Product to such Sublicensee, then DPM shall pay to SIGNAL [***] of all Sublicensing Revenue that DPM receives from such Sublicensee. (b) In the event that DPM licenses or sublicenses the right to sell Product to a Sublicensee and DPM supplies and sells Compound or Product to such Sublicensee, then the term "Net Sales" in Section 5.5.1, 5.5.2 and 5.5.3 with respect to such Compound or Product sold by DPM to such Sublicensee shall include any payments received by DPM from such Sublicensee based on sales of Product by such Sublicensee. (c) To the extent that SIGNAL is obligated under any Signal License Agreement to pay royalty payments on sales of Product by any Sublicensee, then, in addition to any royalty amounts payable to SIGNAL under Section 5.5.1, 5.5.2, 5.5.3, 5.5.7(a) or 5.5.7(b), DPM shall pay to SIGNAL an amount equal to the amount SIGNAL is obligated to pay and actually pays to its licensors with respect to such Sublicensee ***Confidential Treatment Requested 27 -27- sales under such Signal License Agreement, provided however, that such amount payable by DPM to SIGNAL under this Section 5.5.7 shall in no event exceed [***] based on sales of Product by such Sublicensee. In no event, however, shall the total royalties paid to SIGNAL under this Section 5.5.7 be higher than what they would have been if calculated on sales to the ultimate third party as set forth in Sections 5.5.1, 5.5.2, and 5.5.3 as if DPM marketed the Product to the ultimate third party itself rather than through a Sublicensee. See Appendix 4 for example calculations. 5.6 Signal License Agreements. Unless otherwise specified in this Agreement SIGNAL shall be responsible for all payment obligations, costs and expenses with respect to the Signal License Agreements, including but not limited to, any upfront payments, license maintenance fees, milestone payments, royalty payments and legal fees and disbursements. 5.7 Third Party Patents. If DPM in its reasonable judgment and after consultation with SIGNAL is required to obtain a license from a non-Affiliated third party under a valid claim of a dominating patent in order to import, manufacture, use or sell a Product or Compound, and to pay a royalty under such license, and the infringement of such patent cannot reasonably be avoided by DPM, the reasonableness of which shall be determined mutually by DPM and SIGNAL, DPM's obligation to pay royalties under Section 5.5 shall be reduced by [***] the amount of the royalty actually paid to such third party, provided, however, that the royalties payable under Section 5.5 shall not be reduced in any event below [***] of the amounts paid according to Section 5.5. In addition, if DPM is required to pay up-front payments and/or milestone payments in consideration for such license, then the milestone payments under Section 5.4 shall be reduced by [***] the amount of the up-front payments and milestone payments paid to such third party, provided, however, that the amount of such up-front payments and milestone payments paid to such third party shall not be reduced in any event below [***] of the amounts set forth in Section 5.4. 5.8 Paid-up License. For each country, upon expiration of DPM's obligation to pay royalties hereunder with respect to a Product, DPM shall have a fully paid-up, non-exclusive license under any Signal Know-How or Signal Patent Rights, to make, have made, use, sell, offer for sale and import the applicable Product in that country. ***Confidential Treatment Requested 28 -28- ARTICLE 6 PAYMENTS; RECORDS; AUDITS 6.1 Payment; Reports. Royalty payments and reports for the sale of Products shall be calculated and reported for each Calendar Quarter. All royalty payments due to SIGNAL under this Agreement shall be paid within sixty (60) days 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 of Products in sufficient detail to permit confirmation of the accuracy of the royalty payment made, including, without limitation, the number of Products sold, the gross sales and Net Sales of Products, the royalties, in U.S. dollars, payable, the method used to calculate the royalty and the exchange rates used. 6.2 Exchange Rate; Manner and Place of Payment. All payments hereunder shall be payable in U.S. dollars. With respect to each quarter, for countries other than the United States, whenever conversion of payments from any foreign currency shall be required, such conversion shall be made at the rate of exchange reported in The Wall Street Journal on the last business day of the applicable reporting period. All payments owed under this Agreement shall be made by wire transfer, unless otherwise specified by SIGNAL. 6.3 Late Payments. In the event that any payment, including royalty, milestone and research payments, due hereunder is not made when due, the payment shall accrue interest from the date due at the rate of 1.5% per month; provided, however, that in no event shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit SIGNAL from exercising any other rights it may have as a consequence of the lateness of any payment. 6.4 Records and Audits. During the Term and for a period of two (2) years thereafter, DPM shall be obligated to keep complete and accurate records pertaining to the development and sale or other disposition of Products in sufficient detail to permit SIGNAL to confirm the accuracy of all payments due hereunder. SIGNAL shall have the right to cause an independent, certified public accountant of nationally recognized standing reasonably acceptable to DPM to audit such records to confirm Net Sales and royalty and other payments for the preceding year. Such audits may be exercised during normal business hours once a year upon at least thirty (30) working days' prior written notice to DPM. SIGNAL shall bear the full cost of such audit unless such audit correctly discloses a variance of more than 10% from the amount of the Net Sales or royalties or other payments 29 -29- due under this Agreement. In such case, DPM shall bear the full cost of such audit. DPM's obligation to retain such records shall expire two (2) years after a payment has been made. DPM shall include in each sublicense granted by it pursuant to this Agreement and in each distribution agreement with a Distributor in a Distributor Market, a provision requiring the Sublicensee and the Distributor to make reports to DPM, to keep and maintain books and records of sales made pursuant to such sublicense and distribution agreement, and to grant access to such books and records by DPM's independent accountant to the same extent and under the same obligations as required by DPM under this Agreement. SIGNAL shall treat all financial information subject to review under this Section in accordance with the confidentiality provisions of this Agreement, and shall cause its accounting firm to enter into an acceptable confidentiality agreement with DPM obligating it to retain all such financial information in confidence pursuant to such confidentiality agreement. 6.5 Taxes. All turnover and other taxes levied on account of the royalties and other payments accruing to SIGNAL under this Agreement shall be paid by SIGNAL for its own account, including taxes levied thereon as income to SIGNAL. If provision is made in law or regulation for withholding, such tax shall be deducted from the royalty or other payment made by DPM to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to SIGNAL. 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. 6.6 Prohibited Payments. Notwithstanding any other provision of this Agreement, if DPM is prevented from paying any such royalty by virtue of the statutes, laws, codes or governmental regulations of the country from which the payment is to be made, then such royalty may be paid by depositing funds in the currency in which accrued to SIGNAL's account in a bank acceptable to Signal in the country whose currency is involved. ARTICLE 7 PATENT RIGHTS AND INFRINGEMENT 7.1 Ownership of Patent Rights. SIGNAL shall own all inventions invented solely by employees or agents of SIGNAL or its Affiliates in connection with the Collaboration and all Patent Rights claiming such inventions. DPM shall own all inventions invented solely by employees or agents of DPM or its Affiliates in connection with the Collaboration and all 30 -30- Patent Rights claiming such inventions. All inventions invented jointly by employees or agents of SIGNAL and DPM or their respective Affiliates in connection with the Collaboration, and all Patent Rights claiming such inventions shall be owned jointly by DPM and SIGNAL as Collaboration Patents Rights. Inventorship shall be determined under U.S. patent law. 7.2 Prosecution and Maintenance of Patent Rights. (a) It is the intention of the parties to secure broad patent protection for discoveries and inventions made in connection with the Collaboration. SIGNAL shall be responsible for the filing, prosecution and maintenance of all SIGNAL Patent Rights and all patent applications and patents covering any inventions owned solely by SIGNAL under Section 7.1. DPM shall be responsible for the filing, prosecution and maintenance of all patent applications and patents covering any inventions owned solely by DPM under Section 7.1. Each party shall consider in good faith the requests and suggestions of the other party with respect to strategies for filing and prosecuting such patent applications. The inventing party shall keep the other party informed of progress with regard to the filing, prosecution, maintenance, enforcement and defense of patents applications and patents subject to this Section 7.2(a). (b) In the case of Collaboration Patent Rights, the parties shall agree on the allocation of responsibility for the preparation, filing, prosecution, and maintenance of any such Collaboration Patent Rights. The party controlling a Collaboration Patent Right shall consult with the other party as to the preparation, filing, prosecution, and maintenance of such Collaboration Patent Right reasonably prior to any deadline or action with the U.S. Patent & Trademark Office or any foreign patent office, and shall furnish to the other party copies of all relevant documents reasonably in advance of such consultation. In the event that the party controlling a Collaboration Patent Right desires to abandon such Collaboration Patent Right, or if the party assuming control of a Collaboration Patent Right later declines responsibility for such Collaboration Patent Right, the controlling party shall provide reasonable prior written notice to the other party of such intention to abandon or decline responsibility, and such other party shall have the right, at its expense, to prepare, file, prosecute, and maintain any Collaboration Patent Rights. The costs for the preparation, filing, prosecution and maintenance of Collaboration Patent Rights shall be shared on a 50/50 basis; however, neither party shall be subject to any internal costs for work done in-house by the other party. (c) Each party will promptly disclose to the other party such inventions arising from or made in the performance of the Research Project and any patent or patent applications claiming such inventions, to the extent that such inventions are necessary or useful to the Research Project or the rights licensed hereunder. 31 -31- (d) In no event will the Signal Patent Rights be abandoned without DPM first being given an opportunity to maintain such Signal Patent Rights. In the event that SIGNAL decides not to continue the prosecution or maintenance of a patent application or patent within the Signal Patent Rights in a country, SIGNAL shall provide DPM with prior written notice of this decision and cooperate with DPM so as to provide DPM reasonable opportunity to assume full responsibility for the continued prosecution or maintenance of such patent application or patent. In such event that SIGNAL desires to discontinue maintenance or prosecution of the Signal Patent Rights, SIGNAL agree to then assign such SIGNAL Patent Rights to DPM at no cost. 7.3 Cooperation of the Parties. Each party agrees to cooperate fully in the preparation, filing, and prosecution of any Collaboration Patent Rights under this Agreement. Such cooperation includes, but is not limited to: (a) executing all papers and instruments, or requiring its employees or agents, to execute such papers and instruments, so as to effectuate the ownership of Patent Rights set forth in Section 7.1 above and to enable the other party to apply for and to prosecute patent applications in any country; and (b) promptly informing the other party of any matters coming to such party's attention that may affect the preparation, filing, or prosecution of any such patent applications. 7.4 Infringement by Third Parties. (a) SIGNAL and DPM each shall immediately give notice to the other of any potential infringement by a third party of any Signal Patent Rights or Collaboration Patent Rights in the Field of which they become aware or of any certification of which they become aware filed under the United States "Drug Price Competition and Patent Term Restoration Act of 1984" claiming that any Signal Patent Rights or Collaboration Patent Rights covering any Product are invalid or unenforceable or that infringement will not arise from the manufacture, use or sale of Product by a third party. (b) DPM as exclusive licensee with respect to the Signal Patent Rights will have the right in the Field to bring suit or other proceeding at its expense against the infringer in its own name or in the name of SIGNAL where necessary, after consultation with SIGNAL. SIGNAL shall be kept advised 32 -32- at all times of such suit or proceedings brought by DPM. SIGNAL may, in its discretion and at its expense, join DPM as party to the suit or other proceeding, provided that DPM shall retain control of the prosecution of such suit or proceedings in such event. DPM has the right to approve of any outside counsel selected by SIGNAL. SIGNAL agrees to cooperate with DPM in its efforts to protect Signal Patent Rights, including joining as a party where necessary. (c) If DPM does not bring suit or other proceeding against the infringer, SIGNAL may in its discretion, bring suit or other proceeding at its expense against the infringer, provided however, that SIGNAL shall first consult with DPM as to whether such act(s) by a third party reasonably constitute infringement and whether it is commercially advisable to bring such suit or proceeding, as reasonably determined by DPM. DPM shall be kept advised at all times of such suit or proceedings brought by SIGNAL. DPM may, in its discretion and at its expense, join SIGNAL as party to the suit or other proceeding, provided that SIGNAL shall retain control of the prosecution of such suit or proceedings in such event. SIGNAL has the right to approve of any outside counsel selected by DPM. DPM agrees to cooperate with SIGNAL in its efforts to protect SIGNAL Patent Rights, including joining as a party where necessary. (d) Neither party shall have the right to settle any patent infringement litigation under this Section 7.4 in a manner that diminishes the rights or interests of the other party without the consent of the other party. (e) Each party will bear its own expenses with respect to any suit or other proceeding against an infringer. Any recovery in connection with such suit or proceeding will first be applied to reimburse SIGNAL and DPM for their out-of-pocket expenses, including attorney's fees. The party controlling the suit will retain the balance of any recovery. However, if damages are awarded to DPM based on lost sales or profit then DPM shall pay to SIGNAL royalties that it would have paid had DPM made the sales. 7.5 Infringement of Third Party Rights. DPM and SIGNAL shall promptly notify the other in writing of any allegation by a Third Party that the activity of either of the parties in the Field infringes or may infringe the intellectual property rights of such Third Party. DPM shall have the first right to control any defense of such claim at its own expense and by counsel of its own choice, and SIGNAL shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. If DPM fails to proceed in a timely fashion with regard to such defense, SIGNAL shall have the right to control any such defense of such claim at its 33 -33- own expense and by counsel of its own choice, and DPM shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. Neither party shall have the right to settle any patent infringement litigation under this Section 7.5 in a manner that diminishes the rights or interests of the other party without the consent of such other party. 7.6 Patent Term Extension. SIGNAL shall cooperate with DPM in obtaining patent term restoration or supplemental protection certificates or their equivalents in any country with respect to the Signal Patent Rights. In the event that elections with respect to obtaining such patent term restoration, supplemental protection certificates or their equivalents are to be made, DPM shall have the right to make the election and SIGNAL agrees to abide by such election. ARTICLE 8 CONFIDENTIALITY 8.1 Nondisclosure. The Confidential Disclosure Agreement between the parties dated November 11, 1996, is hereby incorporated into this Agreement; and, the obligations therein will be further subject to the terms and conditions of this Agreement. During the Research Term and any Extended Research Term and for a period of five (5) years thereafter, 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 (a) as expressly authorized by this Agreement, (b) as required by law or court order, or (c) to its Affiliates. 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. 8.2 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 34 -34- 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. 8.3 Publications. Each party to this Agreement recognizes that the publication of papers regarding results of Collaboration hereunder, including oral presentations and abstracts, may be beneficial to both parties provided such publications are subject to reasonable controls to protect Confidential Information. In particular, it is the intent of the parties to maintain the confidentiality of any Confidential Information included in any foreign patent application until such foreign patent application has been published. Accordingly, each party shall have the right to review and approve any paper proposed for publication by the other party, including oral presentations and abstracts, which utilizes data generated from the Collaboration and/or includes Confidential Information of the other party. Before any such paper is submitted for publication, the party proposing publication shall deliver a complete copy to the other party at least sixty (60) days prior to submitting the paper to a publisher. The receiving party shall review any such paper and give its comments to the publishing party within twenty (20) days of the delivery of such paper to the receiving party. The publishing party shall comply with the other party's request to delete references to such other party's Confidential Information in any such paper and agrees to withhold publication of same for an additional ninety (90) days in order to permit the parties to obtain patent protection, if either of the parties deem it necessary, in accordance with the terms of this Agreement. With respect to oral presentation materials and abstracts, the parties shall make reasonable efforts to expedite review of such materials and abstracts, and shall return such items as soon as practicable to the publishing party with appropriate comments, if any, but in no event later than thirty (30) days from the date of delivery to the receiving party. 35 -35- ARTICLE 9 REPRESENTATIONS, WARRANTIES AND COVENANTS 9.1 Representations and Warranties. (a) Each party hereby represents and warrants that it is duly organized and validly existing under the laws of the state of its incorporation and that it has the corporate power and authority to enter into this Agreement and to carry out the provisions hereof. (b) Each party hereby represents and warrants that it is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. (c) Each party hereby represents and warrants (i) that this Agreement is a legal and valid obligation binding upon it and is enforceable in accordance with its terms, (ii) that the execution, delivery and performance of this Agreement by such party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it, (iii) and that it is not aware of any impediment which would inhibit its ability to perform the terms and conditions imposed on it by this Agreement. (d) Each party warrants that it has enforceable written agreements with all of its employees who receive Confidential Information under this Agreement assigning to such party ownership of all intellectual property rights created in the course of their employment. (e) SIGNAL warrants that the only license agreements it has as of the Effective Date within the scope of this Agreement are with [***] by which SIGNAL acquired rights to [***] library of compounds, and [***] HCV Constructs. (f) SIGNAL warrants that there is no infringement of [***] U.S. Patents granted prior to the Effective Date which relate to HCV protease. (g) SIGNAL warrants that it owns or possesses adequate licenses or other rights to use all SIGNAL Technology necessary to the conduct of the Collaboration. As of the Effective Date, no claim is pending or, to the best of SIGNAL's knowledge, threatened, to the effect that any SIGNAL Patent Rights owned or licensed by SIGNAL, or which SIGNAL otherwise has the right to use, is invalid or unenforceable by SIGNAL, ***Confidential Treatment Requested 36 -36- and, to the best of SIGNAL's knowledge, there is no basis for any such claim (whether or not pending or threatened). To the best of SIGNAL's knowledge, all SIGNAL Know-How developed by and belonging to SIGNAL for which patent protection has not been sought has been kept confidential. SIGNAL has not granted or assigned to any Third Party any right to manufacture, have manufactured, assemble or sell any Compound or Product. 9.2 Disclaimer of Warranties. Neither party guarantees the safety or usefulness of any Product. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHER PARTY OF ANY NATURE, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 9.3 Indemnification. 9.3.1 Indemnification by SIGNAL. SIGNAL shall defend, indemnify, and hold harmless DPM and its directors, officers, agents, parent companies, affiliates, and employees, from and against any and all claim, loss, damage, liability, injury (including death), cost or expense, including without limitation expenses of litigation and reasonable attorneys' fees, in connection with any claims made or suits brought against DPM relating to this Agreement which are alleged to arise from the negligence, willful misconduct, or material breach of this Agreement by SIGNAL, its Affiliates, subcontractors or agents; provided however that SIGNAL shall not be obligated to provide indemnification hereunder to the extent that any such claim, loss, damage, liability, injury, cost or expense results from the negligence, willful misconduct, or material breach of this Agreement by DPM. 9.3.2 Indemnification by DPM. DPM shall at all times during the term of this Agreement and thereafter, indemnify, defend and hold SIGNAL, its directors, agents, officers, employees and affiliates, from and against any and all claim, loss, damage, liability, injury (including death), cost or expense, including without limitation expenses of litigation and reasonable attorneys' fees, in connection with any claims made or suits brought against SIGNAL relating to this Agreement and alleged to arise: (i) from the negligence, willful misconduct, or material breach of this Agreement by DPM, its Affiliates, subcontractors or agents or (ii) out of the death of or injury to any person or persons or out of any damage to property and resulting from the production, manufacture, sale, use, lease, 37 -37- consumption or advertisement of Product; provided however that DPM shall not be obligated to provide indemnification hereunder to the extent that any such claim, loss, damage, liability, injury, cost or expense results from the negligence, willful misconduct, or material breach of this Agreement by SIGNAL. 9.3.3 Procedure. Should a party or any of its officers, agents, parent companies, affiliates, or employees (the "Indemnitee") intend to claim indemnification under this Article, such Indemnitee shall promptly notify the other party (the "Indemnitor") in writing of any alleged loss, claim, damage, liability or action in respect of which the Indemnitee intends to claim such indemnification, and the Indemnitor shall be entitled to assume the defense thereof with counsel selected by the Indemnitor and approved by the Indemnitee, such approval not to be unreasonably withheld; provided, however, that if representation of Indemnitee by such counsel first selected by the Indemnitor would be inappropriate due to a conflict of interest between such Indemnitee and any other party represented by such counsel, then Indemnitor shall select other counsel for the defense of Indemnitee, with the fees and expenses to be paid by the Indemnitor, such other counsel to be approved by Indemnitee and such approval not to be unreasonably withheld. The indemnity agreement in this Article shall not apply to amounts paid in settlement of any loss, claim, damage, liability or action if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article, but the omission so to deliver notice to the Indemnitor will not relieve it of any liability that it may have to any Indemnitee otherwise than under this Article. The Indemnities under this Article, its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation of any action, claim or liability covered by this indemnification. Article 10 Term And Termination 10.1 Term. This Agreement shall commence as of the Effective Date and, unless sooner terminated as provided herein, shall expire as of the end of the Royalty Term. 10.2 Termination for Cause. Either party may terminate this Agreement upon sixty (60) days' written notice upon the occurrence of any 38 -38- of the following: (a) Upon or after the bankruptcy, insolvency, dissolution or winding up of the other party (other than dissolution or winding up for the purposes of reconstruction or amalgamation); or (b) Upon or after the breach of any material provision of this Agreement by the other party by causes and reasons within its control, as shown by credible evidence, if the breaching party has not commenced to cure such breach within sixty (60) days after notice thereof by the other party. 10.3 Effect of Expiration or Termination. (a) Expiration or termination of this Agreement shall not relieve the parties of any obligation accruing prior to such expiration or termination. Without limiting the foregoing, except as set forth in this Agreement, the obligations and rights of the parties under Articles 5 and 8, Sections 6.4, 9.2, 9.3 and 10.3 and Articles 12 and 13 shall survive termination or expiration of this Agreement. (b) Following the expiration of the Research Term and any Extended Research Term, (i) the parties will continue to collaborate on the same terms and conditions for Compounds and Products in development as of the last day of the Research Term and any Extended Research Term, (ii) the RMC will continue to manage the Research Project until the date on which the last Compound and Product in development as of the last day of the Research Term and any Extended Research Term commences a Phase I clinical trial, and (iii) without limitation, the rights and obligations of the parties with respect to such Products under Sections 4.1, 4.2, 4.4, 5.4, 5.5 and 5.6 and Articles 6 and 7 shall survive through the end of the Royalty Term. (c) Without limiting any remedies otherwise available to DPM, if DPM terminates this Agreement for cause pursuant to Section 10.2, (a) all licenses set forth in Article 4 shall continue for so long as DPM is not in breach of its obligations to pay to SIGNAL all milestone payments and royalty payments in accordance with this Agreement and complies with the provisions of Article 6 of this Agreement, and (b) SIGNAL shall return to DPM any Confidential Information of DPM. (d) Without limiting any remedies otherwise available to SIGNAL, if SIGNAL terminates this Agreement for cause pursuant to 39 -39- Section 10.2, (a) all licenses granted by SIGNAL to DPM hereunder shall terminate and revert to SIGNAL, and (b) DPM shall return to SIGNAL any Confidential Information of SIGNAL. 10.4. Failure to Pursue. If DPM is not diligently pursuing the development of at least one Product using good faith commercially reasonable efforts in accordance with industry standards and consistent with the usual practice followed by DPM in pursuing the development of its other similar pharmaceutical products, then SIGNAL shall have the right to terminate the license right granted to DPM pursuant to Article 4 only with respect to such Product which SIGNAL asserts is not being diligently pursued by DPM. SIGNAL shall not have the right to terminate under this Section 10.4 with respect to such Product unless (a) DPM is given ninety (90) days prior written notice by SIGNAL of SIGNAL's intent to terminate with respect to such Product, stating the reasons and justification for such termination and recommending steps which DPM should take in such development, and (b) DPM has not taken good faith commercially reasonable steps during such ninety (90) day period to diligently pursue development of such Product. Notwithstanding the foregoing, SIGNAL shall in no event have the right to terminate such license for such Product if the development of such Product is not being pursued on the basis that a competitive product is being diligently developed by DPM pursuant to this Agreement, or that such Product is deemed by DPM unlikely to yield satisfactory results in clinical trials or regulatory submissions, or that such Product is believed by DPM to be commercially unattractive. In the event SIGNAL disagrees with the reasons why DPM is not pursuing such Product, SIGNAL can so notify DPM and the further development and commercialization of such Product may be undertaken by SIGNAL at its risk and expense, and subject to SIGNAL negotiating a license with DPM under Collaboration Technology for such Product as set forth in Section 4.2, second paragraph. 10.5. Failure to Retain Qualified Scientists. DPM may terminate this Agreement upon ninety (90) days prior written notice in the event that SIGNAL is unable to retain sufficient qualified researchers to provide commercially reasonable support for the Research Project. ARTICLE 11 PUBLICITY 11.1 Publicity Review. DPM and SIGNAL will jointly discuss and agree, based on the principles of Section 11.2, on any statement to the 40 -40- public regarding the execution and the subject matter of this Agreement or any other aspect of this Agreement, except with respect to disclosures required by law or regulation. Promptly following the Effective Date, the parties shall issue a joint press release, which press release shall not refer to any contingent payments in aggregate. 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 approval shall 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 press release, prospectus, annual report, or other public statement; and provided, further, that either party may 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. However, any such use of the name of the other party shall be submitted to that party in advance of such use in order to make any reasonable, good faith modifications. 11.2 Standards. In the discussion and agreement referred to in Section 11.1, the principles observed by DPM and SIGNAL will be accuracy, the requirements for confidentiality under Article 8, the advantage a competitor of DPM or SIGNAL may gain from any public or Third Party statements under Section 11.1, the requirements of disclosure under any securities laws or regulations of the United States, including those associated with public offerings, and the standards and customs in the pharmaceutical industry for such disclosures by companies comparable to DPM and SIGNAL. ARTICLE 12 DISPUTE RESOLUTION 12.1 Disputes. The parties recognize that disputes as to certain matters may from time to time arise which relate to either party's rights and/or obligations hereunder. It is the objective of the parties to establish procedures to facilitate the resolution of such disputes in an expedient manner by mutual cooperation and without resort to litigation. Any disputes arising between the parties relating to, arising out of or in any way connected with the Agreement or any term or condition hereof, or the performance by either party of its obligations hereunder (including any disputes between the representatives of SIGNAL and DPM on the RMC), whether before or after termination of the Agreement, ("Disputes") will be resolved as set forth in this Section. Any Dispute between 41 -41- representatives of SIGNAL and DPM shall be resolved by the RMC. Failing resolution of such Dispute by the RMC, or in the event of a Dispute between representatives of SIGNAL and DPM on the RMC, the Dispute will be presented to the chief executive officers of DPM and SIGNAL, who shall attempt in good faith to promptly resolve such Dispute. If such chief executive officers are unable to resolve such Dispute, any litigation instituted by DPM shall, unless otherwise agreed to in writing by SIGNAL, be filed in a California federal or state court and any litigation instituted by SIGNAL shall, unless otherwise agreed to in writing by DPM, be filed in a Delaware federal or state court. ARTICLE 13 MISCELLANEOUS 13.1 Activities Outside of Collaboration. Except as otherwise specifically provided herein, all activities of the parties outside of the Collaboration are outside of the scope of this Agreement and nothing herein is intended to limit SIGNAL or its Affiliates from using the SIGNAL Technology for other purposes. 13.2 Assignment. (a) Either party may assign any of its rights or obligations under this Agreement in any country to any Affiliates; provided, however, that such assignment shall not relieve the assigning party of its responsibilities for performance of its obligations under this Agreement. (b) This Agreement may not be assigned or otherwise transferred by either party, except to Affiliates, without the consent of the other party; provided, however, that DPM or SIGNAL may, without such consent, assign this Agreement and its rights and obligations hereunder to its Affiliates and parent corporations, or in connection with the transfer or sale of all or substantially all of its business, or in the event of its merger or consolidation or change in control or similar transaction; and provide further, that in the event of such a transaction, no intellectual property rights of the acquiring corporation shall be included in the technology licensed hereunder except with the approval of the acquiring corporation. (c) This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties. Any assignment not in accordance with this Agreement shall be void. 42 -42- 13.3 Force Majeure. Neither party shall lose any rights hereunder or be liable to the other party for damages or losses on account of failure of performance by the defaulting party if the failure is occasioned by government action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or any other similar cause beyond the control of the defaulting party; provided, however, that the party claiming force majeure has exerted all reasonable efforts to avoid or remedy such force majeure. 13.4 Notices. Any notice or other communication pursuant to this Agreement shall be sufficiently made or given on the date of mailing if sent to such party by facsimile on such date, with paper copy being sent by certified first class mail, postage prepaid, or by next day express delivery service, addressed to it at its address below (or such address as it shall designate by written notice given to the other party). In the case of DPM: President, DuPont Merck Research Laboratories The DuPont Merck Pharmaceutical Company Experimental Station, Bldg. 400 Wilmington, Delaware 19880-0400 (fax number: 302-992-3040) with copy to: Associate General Counsel Legal Department The DuPont Merck Pharmaceutical Company 974 Centre Road, DuPont Merck Plaza, WR722 Wilmington, Delaware 19807-2802 (fax number: 302-892-8536) In the case of SIGNAL: Chief Executive Officer Signal Pharmaceuticals Inc. 5555 Oberlin Drive San Diego, CA 92121 43 -43- (fax number: 619-558-7513) with a copy to: Frederick T. Muto, Esquire Cooley Godward LLP 4365 Executive Drive San Diego, CA 92121 (fax number: 619-453-3555) 13.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to any rules of conflict of laws, except that all questions concerning the construction or effect of patent rights will be construed in accordance with the laws of the country granting those rights. 13.6 Waiver. Except as specifically provided for herein, the waiver from time to time by either of the parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such party's rights or remedies provided in this Agreement. 13.7 Severability. If any term, covenant or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (a) the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (b) the parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the parties that the basic purposes of this Agreement are to be effectuated. 13.8 Independent Contractors. It is expressly agreed that SIGNAL and DPM shall be independent contractors and that the relationship between the two parties shall not constitute a partnership or agency of any kind. Neither SIGNAL nor DPM shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other, without the prior written 44 -44- authorization of the party to do so. 13.9 Entire Agreement. This Agreement sets forth all of the covenants, promises, agreements, warranties, representations, conditions and understandings between the parties hereto with respect to the subject matter hereof and supersedes and terminates all prior agreements and understanding between the parties, except all obligations of the parties under the Confidential Disclosure Agreement referenced in Section 8.1 survive and are subject to further terms and conditions of this Agreement. There are no covenants, promises, agreements, warranties, representations conditions or understandings, either oral or written, between the parties other than as set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the parties hereto unless reduced to writing and signed by the respective authorized officers of the parties. 13.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.11 EEOC Compliance. SIGNAL agrees to comply with the following Equal Employment Opportunity Compliance statement: (a) SIGNAL will not discriminate against any individual performing of behalf of SIGNAL under this Agreement because of race, religion, sex, age within statutory limits, disability, national origin, or veteran status. SIGNAL agrees to post in conspicuous places notices setting forth the provisions of this non-discrimination clause. (b) SIGNAL will, in all solicitation or advertisements for candidates or applicants for employment with SIGNAL and involving the performance of this Agreement, state that all qualified applicants will receive consideration for employment without regard to race, religion, sex, age within statutory limits, national origin, disability or veteran status. (c) In the event of SIGNAL non-compliance with these non-discrimination clauses or with any laws, rules, regulations, or orders, this Agreement may be canceled, terminated, or suspended at the discretion of DPM in accordance with Section 10.2. SIGNAL warrants that it has complied with all applicable laws, rules, orders and regulations covering services specified herein, including but not limited to Executive Order 11246 (and the rules and regulations promulgated thereunder), the Rehabilitation Act of 1973 and the Vietnam Era Veterans Readjustment Act of 1974. 45 -45- 13.12 Use of Trade Names. Subject to Section 11.1, neither party will, without prior written consent of the other party, use any trademark or trade name owned by the other party, or owned by an Affiliate or Parent corporation of the other party, in any publication, publicity, advertising, or otherwise. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their duly authorized officers as of the date first above written. THE DUPONT MERCK PHARMACEUTICAL SIGNAL PHARMACEUTICALS, INC. COMPANY By: [SIG] By: /s/ ALAN LEWIS --------------------------------- ----------------------------------- Name: President & CEO Name: Alan Lewis ------------------------------- --------------------------------- Title: December 26, 1997 Title: PRES/CEO ------------------------------ -------------------------------- 46 -46- Appendix 1 [***] ***Confidential Treatment Requested 47 Appendix 2 List of HCV Constructs [***] ***Confidential Treatment Requested 48 -49- Appendix 3 Signal Compound Libraries [***] ***Confidential Treatment Requested 49 -50- Appendix 4 Example 1 [***] ***Confidential Treatment Requested 50 -51- Appendix 5 Signal License Agreement [***] ***Confidential Treatment Requested 51 -52- Appendix 6 Signal Patent Rights None as of the Effective Date. 52 -53- Schedule A Collaboration Patent Rights or Signal Patent Rights None as of the Effective Date EX-10.51 12 EXHIBIT 10.51 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.51 COLLABORATION AGREEMENT BETWEEN SIGNAL PHARMACEUTICALS, INC., A CALIFORNIA CORPORATION AND NIPPON KAYAKU CO., LTD., A JAPANESE CORPORATION 2 TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINITIONS..............................................................2 1.1 "Affiliate"...................................................................2 1.2 "CNS".........................................................................2 1.3 "CNS Field"...................................................................2 1.4 "Collaboration"...............................................................2 1.5 "Collaboration Know-How"......................................................2 1.6 "Collaboration Patents".......................................................2 1.7 "Commercializing Party".......................................................3 1.8 "Compound"....................................................................3 1.9 "Control".....................................................................3 1.10 "Effective Date"..............................................................3 1.11 "FDA".........................................................................3 1.12 "Field".......................................................................3 1.13 "FTE".........................................................................3 1.14 "Joint Commercialization Agreement"...........................................3 1.15 "Joint Commercialization Alternative".........................................3 1.16 "Know-How"....................................................................3 1.17 "Net Sales of Other Products".................................................3 1.18 "Net Sales of Products".......................................................4 1.19 "Nippon Kayaku Know-How"......................................................4 1.20 "Nippon Kayaku Patents".......................................................4 1.21 [***] .....................................................................4 1.22 "Other Product"...............................................................4 1.23 "Patent"......................................................................4 1.24 "Patent Committee"............................................................4 1.25 "Patent Costs"................................................................5 1.26 "PNS Field"...................................................................5 1.27 "Product".....................................................................5 1.28 "Research"....................................................................5 1.29 "Research Lead"...............................................................5
i. ***Confidential Treatment Requested 3 TABLE OF CONTENTS (CONTINUED)
PAGE 1.30 "Research Management Committee"...............................................5 1.31 "Research Plan"...............................................................5 1.32 "Research Term"...............................................................5 1.33 "Rest of the World"...........................................................5 1.34 "Royalty Alternative".........................................................5 1.35 "Signal Know-How".............................................................5 1.36 "Signal Patents"..............................................................6 1.37 "Third Party".................................................................6 1.38 "Valid Claim".................................................................6 ARTICLE 2 RESEARCH PHASE OF COLLABORATION..........................................6 2.1 Research......................................................................6 2.2 Responsibilities of the RMC...................................................6 2.3 Determination of Research Lead................................................7 2.4 Know-How, Reports and Delivery of Compounds...................................7 2.5 Animal Models.................................................................8 2.6 Research Contributions........................................................9 2.7 Research Expenses.............................................................9 2.8 Visiting Scientists...........................................................9 ARTICLE 3 DEVELOPMENT AND COMMERCIALIZATION PHASE OF COLLABORATION..................10 3.1 Co-Development and Commercialization of the Products in the Field............10 3.2 Royalty Alternative in the Field.............................................11 ARTICLE 4 PAYMENTS..................................................................12 4.1 Funding for Research.........................................................12 4.2 Nippon Kayaku Royalties on Sales of Products in the PNS Field in Japan.......12 4.3 Royalties on Sales of Products Outside the Field.............................12 4.4 Royalties on Sales of Other Products in the Field............................12 4.5 Royalties on Sales of Other Products Outside the Field.......................13 4.6 Royalties Under Royalty Alternative..........................................13
ii. 4 TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE 5 ROYALTY OBLIGATIONS.....................................................13 5.1 Royalties For Sales of Products or Other Products............................13 5.2 Foreign Exchange.............................................................13 5.3 Blocked Currency.............................................................13 5.4 Taxes........................................................................13 5.5 Payment......................................................................14 5.6 Duration.....................................................................14 5.7 Accounting...................................................................14 5.8 Sales by Sublicensees........................................................14 ARTICLE 6 LICENSE GRANTS..........................................................15 6.1 Licenses During Collaboration................................................15 6.2 Commercialization Licenses...................................................17 6.3 Sublicenses..................................................................18 ARTICLE 7 CONFIDENTIALITY; PUBLICATIONS...........................................18 7.1 Confidentiality; Exceptions..................................................18 7.2 Authorized Disclosure........................................................19 7.3 Publications.................................................................19 7.4 Public Disclosure............................................................19 ARTICLE 8 OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS......................20 8.1 Ownership of Collaboration Patents; Nippon Kayaku Patents; Signal Patents......................................................................20 8.2 Patent Filings...............................................................20 8.3 Enforcement Rights...........................................................21 ARTICLE 9 REPRESENTATIONS AND WARRANTIES; EXCLUSIVITY.............................23 9.1 Representations and Warranties...............................................23 9.2 Limitation on Warranties.....................................................24 9.3 Negative Covenants...........................................................24 ARTICLE 10 TERM AND TERMINATION....................................................25 10.1 Term.........................................................................25 10.2 Termination For Breach.......................................................25
iii. 5 TABLE OF CONTENTS (CONTINUED)
PAGE 10.3 Termination For Bankruptcy...................................................25 10.4 Surviving Rights.............................................................25 10.5 Accrued Rights, Surviving....................................................25 10.6 Termination Not Sole Remedy..................................................26 ARTICLE 11 INDEMNIFICATION; INSURANCE..............................................26 11.1 Research and Development Indemnification.....................................26 11.2 Indemnification Procedures...................................................26 11.3 Insurance....................................................................27 ARTICLE 12 DISPUTE RESOLUTION......................................................27 12.1 Disputes.....................................................................27 12.2 Dispute Resolution Procedures................................................27 ARTICLE 13 MISCELLANEOUS...........................................................28 13.1 Assignment...................................................................28 13.2 Research and Development Entities............................................28 13.3 Consents Not Unreasonably Withheld...........................................28 13.4 Force Majeure................................................................29 13.5 Further Actions..............................................................29 13.6 No Trademark Rights..........................................................29 13.7 Notices......................................................................29 13.8 Waiver.......................................................................30 13.9 Severability.................................................................30 13.10 Ambiguities..................................................................30 13.11 Counterparts.................................................................30 13.12 Entire Agreement.............................................................30 13.13 Governing Law................................................................31 13.14 Headings.....................................................................31
iv. 6 COLLABORATION AGREEMENT THIS COLLABORATION AGREEMENT (the "Agreement") is made effective as of February 9, 1998 by and between SIGNAL PHARMACEUTICALS, INC., a California corporation having its principal place of business at 5555 Oberlin Drive, San Diego, California 92121 ("Signal"), and NIPPON KAYAKU CO., LTD., a Japanese corporation having its principal place of business at Tokyo Fujimi Building, 11-2, Fujimi 1-chome, Chiyoda-ku, Tokyo 102, Japan ("Nippon Kayaku"). Signal and Nippon Kayaku may be referred to herein as a "Party" or, collectively, as "Parties." RECITALS WHEREAS, Signal has developed and licensed certain technology and intellectual property in the area of drug discovery and lead optimization and is experienced in the research and development of small-molecule drugs; WHEREAS, Nippon Kayaku is a pharmaceutical company dedicated to the research, development and commercialization of pharmaceutical products; WHEREAS, Nippon Kayaku has identified the compound [***] (as described in Exhibit A hereto) and the derivatives thereof; WHEREAS, Signal and Nippon Kayaku concluded a secrecy agreement dated September 20, 1996 (the "Secrecy Agreement") and a material transfer agreement dated May 19, 1997 (the "Material Transfer Agreement"), under which Signal has conducted the evaluation of certain information and a sample of the compound [***] received from Nippon Kayaku, and Signal has notified Nippon Kayaku of its desire to conduct a pilot experiment to examine the effects of the compound [***] and to conclude a further agreement relating to a right to research and develop the compound [***] and the derivatives thereof jointly with Nippon Kayaku; WHEREAS, Nippon Kayaku has exclusive rights to the compound [***]; WHEREAS, Signal and Nippon Kayaku wish to establish a collaborative relationship to develop and commercialize novel products based on or derived from [***] for the treatment and prevention of diseases and disorders of the central nervous system and peripheral nervous system; and WHEREAS, Signal and Nippon Kayaku wish to enter into this Agreement to establish the collaboration on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the Parties hereto, intending to be legally bound, do hereby agree as follows: 1. ***Confidential Treatment Requested 7 ARTICLE 1 DEFINITIONS The following terms shall have the following meanings as used in the Agreement: 1.1 "AFFILIATE" means an individual, trust, business trust, joint venture, partnership, corporation, association or any other entity which (directly or indirectly) is controlled by, controls or is under common control with a Party. For the purposes of this definition, the term "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") as used with respect to any Party, shall mean the possession (directly or indirectly) of at least fifty percent (50%) of the outstanding voting securities of a corporation or comparable equity interest in any other type of entity, or, where the laws of the jurisdiction in which such entity operates prohibit ownership by a Party of fifty percent (50%), such ownership shall be at the maximum level of ownership allowed by such laws. 1.2 "CNS" means central nervous system. 1.3 "CNS FIELD" means the treatment or prevention of CNS diseases or disorders in humans. 1.4 "COLLABORATION" means the activities, rights and obligations of Signal and Nippon Kayaku encompassed in their relationship in accordance with the Research Plan during the Research Term and, in any further relationship between the Parties pursuant to the Joint Commercialization Agreement, during the life of such further relationship. 1.5 "COLLABORATION KNOW-HOW" means Know-How (i) relating to Compounds; (ii) relating to results and data from animal studies conducted as part of the Research under this Agreement in accordance with the Research Plan; or (iii) otherwise arising from or in connection with the conduct of the Research under this Agreement in accordance with the Research Plan and jointly owned by or within the common Control of the Parties or their respective Affiliates, but excluding Collaboration Patents. 1.6 "COLLABORATION PATENTS" means all Patents that claim or cover inventions (i) made jointly (as determined in accordance with the rules of inventorship under United States patent law) by officers, employees, consultants or agents of Signal or one of its Affiliates, on the one hand, and officers, employees, consultants or agents of Nippon Kayaku or one of its Affiliates, on the other hand, in connection with activities conducted pursuant to the Research Plan, (ii) which come under the common Control of Signal or one of its Affiliates, on the one hand, and Nippon Kayaku or one of its Affiliates, on the other hand, prior to the end of the Research Term or (iii) based on or derived from a Compound and conceived or reduced to practice during the Research Term by officers, employees, consultants or agents of one or both of the Parties. 2. 8 1.7 "COMMERCIALIZING PARTY" shall have the meaning assigned to it in Section 5.1. 1.8 "COMPOUND" shall mean a small-molecule compound based on or derived from [***], which is either synthesized through medicinal chemistry and combinatorial chemistry techniques or identified through searching the database of Signal's compound library as described in Section 2.4(c), that, in each case, is identified in the course of the Research by one or both of the Parties. 1.9 "CONTROL" means, with respect to an item of information or intellectual property right, possession of the ability to grant a license or sublicense as provided for herein under such item or right without violating the terms of any agreement or other arrangement with any Third Party. 1.10 "EFFECTIVE DATE" means the date first written above in this Agreement. 1.11 "FDA" means the United States Food and Drug Administration. 1.12 "FIELD" means the CNS Field and the PNS Field. 1.13 "FTE" means full-time equivalent scientific personnel. 1.14 "JOINT COMMERCIALIZATION AGREEMENT" shall have the meaning assigned to it in Section 3.1(a). 1.15 "JOINT COMMERCIALIZATION ALTERNATIVE" shall have the meaning assigned to it in Section 3.1(a). 1.16 "KNOW-HOW" means techniques, data, materials and chemicals materially relating to the Field, including, without limitation, inventions, practices, methods, knowledge, know-how, skill, experience, test data including pharmacological, toxicological and clinical test data, analytical and quality control data, patent and legal data or descriptions. 1.17 "NET SALES OF OTHER PRODUCTS" means the gross amounts invoiced for sales of Other Products by Signal or Nippon Kayaku, as the case may be, and its Affiliates and sublicensees to Third Parties pursuant to one or more of the licenses granted under Article 6 less (a) discounts actually granted, (b) credits or allowances actually granted upon claims, damaged goods, rejections or returns of any such Other Product, including recalls, (c) freight, postage, shipping and insurance charges actually allowed or paid for delivery of any such Other Product, to the extent billed and (d) taxes, duties or other governmental charges (other than income taxes) levied on, absorbed or otherwise imposed on sales of any such Other Products. Sales of Other Products for use in clinical trials prior to receipt of regulatory approval for such Other Products shall not be included in Net Sales of Other Products. 3. ***Confidential Treatment Requested 9 1.18 "NET SALES OF PRODUCTS" means the gross amounts invoiced for sales of Products by Signal or Nippon Kayaku, as the case may be, and its Affiliates and sublicensees to Third Parties pursuant to one or more of the licenses granted under Article 6 less (a) discounts actually granted, (b) credits or allowances actually granted upon claims, damaged goods, rejections or returns of any such Product, including recalls, (c) freight, postage, shipping and insurance charges actually allowed or paid for delivery of any such Product, to the extent billed and (d) taxes, duties or other governmental charges (other than income taxes) levied on, absorbed or otherwise imposed on sales of any such Products. Sales of Products for use in clinical trials prior to receipt of regulatory approval for such Products shall not be included in Net Sales of Products. 1.19 "NIPPON KAYAKU KNOW-HOW" means Know-How that is (i) owned or within the Control of Nippon Kayaku or an Affiliate of Nippon Kayaku prior to the end of the Research Term and (ii) necessary or useful for the manufacture, use, sale or import of products pursuant to one or more of the licenses granted under Article 6, but excluding Nippon Kayaku Patents and Collaboration Know-How. 1.20 "NIPPON KAYAKU PATENTS" means all Patents owned or Controlled by Nippon Kayaku or an Affiliate of Nippon Kayaku (excluding Collaboration Patents) necessary or useful for the manufacture, use, sale or import of products pursuant to one or more of the licenses granted under Article 6, including, without limitation, any such Patents related to [***], where such Patents cover (i) inventions made prior to the Effective Date of this Agreement, (ii) inventions made solely by employees or agents of Nippon Kayaku or an Affiliate of Nippon Kayaku after the Effective Date and prior to the end of the Research Term (but specifically excluding Collaboration Patents covered by Section 1.6(iii)), or (iii) inventions which come under the Control of Nippon Kayaku or its Affiliates after the Effective Date and prior to the end of the Research Term; a list of the Nippon Kayaku Patents as of the Effective Date is set forth on Schedule I. 1.21 "[***]" means the compound Controlled by Nippon Kayaku known as [***] and described on Exhibit A hereto. 1.22 "OTHER PRODUCT" shall mean any pharmaceutical product based on or derived from a Compound other than a Research Lead. 1.23 "PATENT" means (i) foreign and domestic Letters Patent including one or more Valid Claims, including any extension (including Supplemental Protection Certificate), registration, confirmation, reissue, continuation, divisional, continuation-in-part, reexamination or renewal thereof, and (ii) pending applications for any of the foregoing. 1.24 "PATENT COMMITTEE" means the committee established pursuant to Section 8.2(c) herein. 4. ***Confidential Treatment Requested 10 1.25 "PATENT COSTS" means the out-of-pocket fees and expenses paid to outside legal counsel and other Third Parties and filing, prosecution and maintenance expenses incurred in connection with the establishment and maintenance of rights under Patents. 1.26 "PNS FIELD" means the treatment or prevention of diabetic neuropathy, chemotherapy-induced neuropathy or other neuropathies in humans but specifically excluding therapeutic and diagnostic products directed at pain, lower urinary tract dysfunction and peripheral vascular disease. 1.27 "PRODUCT" shall mean any pharmaceutical product based on or derived from any Research Lead that is covered by one or more of Signal Patents, Signal Know-How, Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents or Collaboration Know-How. 1.28 "RESEARCH" means all work performed by the Parties or on their behalf pursuant to the Research Plan directed towards or in connection with the discovery, identification and investigation of Research Leads during the Research Term. 1.29 "RESEARCH LEAD" means a Compound identified by either Party (separately or jointly) pursuant to Research performed during the Research Term showing at least [***] more potency than [***], as decided by the RMC. [***] greater potency will be determined as follows: [***] 1.30 "RESEARCH MANAGEMENT COMMITTEE" or "RMC" means the committee established pursuant to Section 2.2 herein. 1.31 "RESEARCH PLAN" means the plan for conducting the Research as described in Section 2.1 hereof and attached as Exhibit B hereto, as such plan may be modified or amended by the RMC from time to time in writing. 1.32 "RESEARCH TERM" means the period commencing on the Effective Date and ending on the second anniversary of the Effective Date, unless terminated earlier pursuant to Sections 10.2 or 10.3. 1.33 "REST OF THE WORLD" means the entire world excluding Japan. 1.34 "ROYALTY ALTERNATIVE" shall have the meaning assigned to it in Section 3.2. 1.35 "SIGNAL KNOW-HOW" means Know-How that is (i) owned or within the Control of Signal or an Affiliate of Signal prior to the end of the Research Term and (ii) necessary or useful for the manufacture, use, sale or import of products pursuant to 5. ***Confidential Treatment Requested 11 one or more of the licenses granted under Article 6, but excluding Signal Patents and Collaboration Know-How. 1.36 "SIGNAL PATENTS" means all Patents owned or Controlled by Signal or an Affiliate of Signal (excluding Collaboration Patents) necessary or useful for the manufacture, use, sale or import of products pursuant to one or more of the licenses granted under Article 6 where such Patents cover (i) inventions made prior to the Effective Date of this Agreement, (ii) inventions made solely by employees or agents of Signal or an Affiliate of Signal after the Effective Date and prior to the end of the Research Term (but specifically excluding Collaboration Patents covered by Section 1.6(iii)), or (iii) inventions which come under the Control of Signal or an Affiliate of Signal after the Effective Date and prior to the end of the Research Term; a list of the Signal Patents as of the Effective Date is set forth on Schedule II. 1.37 "THIRD PARTY" means any entity or individual other than Signal, Nippon Kayaku and Affiliates of either. 1.38 "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 a court or other appropriate body of competent jurisdiction, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer. ARTICLE 2 RESEARCH PHASE OF COLLABORATION 2.1 RESEARCH. The purpose of the Research is to identify Research Leads that are suitable for development into Products for commercialization in the Field. The Parties agree that the Research shall be conducted as specified in the Research Plan attached hereto as Exhibit B, as such Research Plan may be amended from time to time in writing by the RMC, with each Party to use commercially reasonable and diligent efforts (as defined below) to perform its responsibilities under the Research Plan. 2.2 RESPONSIBILITIES OF THE RMC. The Parties shall establish a Research Management Committee ("RMC") promptly after the date of the execution of this Agreement. The RMC shall be comprised of three (3) representatives of each Party. The initial members of the RMC are set forth on Schedule III. Either Party may appoint substitute or replacement members of the RMC to serve as their representatives as long as any such substitutes or replacements are persons of comparable standing and authority within the Parties' organizations. Decisions by the RMC shall be made by unanimous vote. The RMC shall have the responsibility and authority to: (a) plan and monitor the Research; 6. 12 (b) review and modify the Research Plan; (c) evaluate the results of the Research; (d) discuss information relating to the Research; (e) review scientific publications of the Parties concerning the Research; (f) determine whether a Compound is a Research Lead; (g) determine whether a Compound is not suitable for pursuit under the Collaboration; and (h) review and approve a protocol of Research furnished by either Party with respect to animal models in the Field. Either Party may refer any dispute to the appropriate officers of the Parties for consideration and resolution pursuant to Article 12. The RMC shall meet at least once per calendar quarter, with two of such meetings per calendar year being conducted in each of San Diego, California and Tokyo, Japan, or at such other times and places agreed to by the Parties, until the end of the Research Term. 2.3 DETERMINATION OF RESEARCH LEAD. Upon the identification by one or both of the Parties in the course of the Research of a Research Lead, such Party or Parties shall promptly provide notice thereof (the "Research Lead Notice"), which notice shall include all relevant data regarding such Research Lead, to the RMC and, if applicable, the other Party. The identification of a Research Lead shall give rise to the Parties' rights set forth in Article 3 with respect to such Research Lead. In the event that no Research Lead has been identified on or before the end of the Research Term, the Collaboration shall terminate. 2.4 KNOW-HOW, REPORTS AND DELIVERY OF COMPOUNDS. (a) Each Party shall disclose to the other Party all Collaboration Know-How learned, acquired or discovered by such Party at any time on or before the end of the Research Term, as promptly as is reasonably practicable after such Collaboration Know-How is learned. At the time of effectiveness of any license granted hereunder, Signal and/or Nippon Kayaku, as appropriate under the license granted, (i) shall make available and disclose to the other Party such Signal Know-How or Nippon Kayaku Know-How, as the case may be, known by such Party as of such date, and (ii) shall also disclose any Signal Know-How or Nippon Kayaku Know-How, as the case may be, learned, acquired or discovered by such Party at any time thereafter for so long as such license continues in full force and effect, as promptly as is reasonably practicable after such Signal Know-How or Nippon Kayaku Know-How is learned. The Parties shall exchange at a minimum quarterly written reports (with copies to the RMC) presenting a meaningful summary of 7. 13 Research done under this Agreement. Each Party shall provide the other with raw data, including QSAR, for work carried out in the course of the Research, if reasonably requested by the other Party. Know-How and other information regarding the Research disclosed by one Party to the other Party pursuant hereto may be used only in accordance with the rights granted under this Agreement. (b) All Compounds synthesized in the course of the Research shall first be used for purposes of the Collaboration. When the RMC determines that Compounds are not suitable for pursuit under the Collaboration, then in order to avoid any conflict with its other corporate partners, Signal shall, within thirty (30) days following such determination, test such Compounds in assays under certain other Signal programs; a list of such Signal programs as of the Effective Date is set forth on Schedule IV. In the event that a Compound shows activity in any such assay, Signal shall not be obligated to disclose or provide such Compound to Nippon Kayaku, and no license granted to Nippon Kayaku hereunder with respect to such Compound shall be effective, unless and until such time as Signal is not contractually prohibited from disclosing, providing or licensing such Compound to Nippon Kayaku. In the event that a Compound shows no activity in any such assay or if development of such Compound is discontinued under any such other Signal program, such Compound shall be freely available for use outside the Field by each of the Parties in accordance with the terms of this Agreement. (c) It is understood, and the Parties hereby acknowledge and agree, that as Signal chemists develop structure-activity relationships from the active analogues of [***] in the course of the Collaboration, Signal shall, using its database management program, conduct sub-structure searches of the Signal compound library for compounds to screen in the Collaboration, which may include compounds made or acquired with financial support from Signal's existing collaborative partners, as set forth on Schedule IV hereto. Any of these compounds that are not active in such existing partners' assays shall be evaluated in the Collaboration, regardless of whether such compounds were made or acquired as part of such existing partners' programs. (d) The mechanism by which Signal will deliver samples and supplies of Compounds to Nippon Kayaku is described in Exhibit C hereto. Signal will provide Nippon Kayaku with the experimental details to reproduce any and all parts of the libraries provided under this Agreement. 2.5 ANIMAL MODELS. Studies in the Research with respect to animal models in the Field shall be done in the U.S. and in Japan with the RMC's approval. Signal shall be responsible for the conduct of any such studies done in the U.S., and Nippon Kayaku shall be responsible for the conduct of any such studies done in Japan. Costs of animal model studies conducted in the U.S. and in Japan shall be shared equally by the Parties; provided, however, that, at Nippon Kayaku's option and expense, Nippon Kayaku may conduct any such animal model studies Signal does not agree to do. 8. ***Confidential Treatment Requested 14 2.6 RESEARCH CONTRIBUTIONS. (a) BY SIGNAL. Signal agrees to exert commercially reasonable and diligent efforts to perform its obligations under the Research Plan. In the performance of such work, Signal shall maintain and utilize scientific and other staff (including consultants), laboratories, offices and other facilities consistent with such undertaking. Nippon Kayaku understands that Signal has engaged certain scientific collaborators and consultants to perform research services relating to the Field, and that the efforts of such collaborators and consultants relating to the Field shall be included within the Research to the extent contemplated by the Research Plan. Subject to Nippon Kayaku's fulfillment of its obligation to provide research funding as set forth in Section 4.1, Signal agrees to commit an average of at least [***] FTEs to the Research during the Research Term. Notwithstanding the foregoing, the Parties hereby acknowledge that during the initial calendar quarter of the Research Term, Signal may commit [***] FTEs to the Research. (b) BY NIPPON KAYAKU. Nippon Kayaku agrees to exert commercially reasonable and diligent efforts to perform its obligations under the Research Plan. In the performance of such work, Nippon Kayaku shall maintain and utilize scientific and other staff (including consultants), laboratories, offices and other facilities consistent with such undertaking. (c) COMMERCIALLY REASONABLE AND DILIGENT EFFORTS. As used herein, the term "commercially reasonable and diligent efforts" will mean, unless the Parties agree otherwise in writing, those efforts consistent with the exercise of prudent scientific and business judgment, as applied to research activities conducted with regard to other products of similar potential and market size. In the event of any unanticipated and severe changes in regulatory affairs or technical developments or in the event of extreme conditions or similar unforeseen events with respect to the Research, the Parties agree to discuss such changed circumstances and appropriate mechanisms to address them. 2.7 RESEARCH EXPENSES. All expenses of the Research shall be borne by the Party incurring such expenses without contribution from or offset by the other Party, unless otherwise agreed in writing by the Parties or expressly provided herein. 2.8 VISITING SCIENTISTS. Nippon Kayaku may, at its option, send up to [***] visiting scientists [***], each of whom must be acceptable to Signal) to Signal's facilities in San Diego. Nippon Kayaku shall be responsible for such scientists' salaries and living and other expenses, and Signal shall provide laboratory space and supervision. Such scientists shall sign Signal's standard form of Confidential Disclosure Agreement and shall work exclusively on projects relating to the Research while at Signal's facilities. 9. ***Confidential Treatment Requested 15 Signal shall give Nippon Kayaku's scientists full and correct instructions necessary to avoid any loss, damage, death or injury, and Nippon Kayaku shall cause such scientists to obey such instructions. ARTICLE 3 DEVELOPMENT AND COMMERCIALIZATION PHASE OF COLLABORATION 3.1 CO-DEVELOPMENT AND COMMERCIALIZATION OF THE PRODUCTS IN THE FIELD. (a) STRUCTURE. Within thirty (30) days following the date of any Research Lead Notice pursuant to which the RMC has determined that a Compound identified in the course of the Research is a Research Lead (the "Election Period"), the Parties will meet to discuss whether to pursue the development of such Research Lead jointly by entering into a joint venture arrangement through the creation of a separate entity or otherwise sharing the expenses and profits of the development and commercialization of Products based on such Research Lead worldwide in the CNS Field and in the Rest of the World in the PNS Field (the "Joint Commercialization Alternative"). If, during the Election Period, the Parties agree to pursue the Joint Commercialization Alternative, the Parties will negotiate in good faith the formal structure of such development and commercialization arrangement pursuant to separate agreement or arrangement (a "Joint Commercialization Agreement"), which shall include the principles set forth in this Section 3.1 and in Exhibit D, within six (6) months following delivery of the Research Lead Notice. A new six (6) month period will commence upon the subsequent delivery of a Research Lead Notice with respect to a different Research Lead or the substitution by the RMC or the Parties of one Research Lead for another. Any such Joint Commercialization Agreement shall specify the Parties' relative rights and responsibilities with respect to continued pre-clinical development, clinical development, and marketing and promotion rights, and shall include all appropriate licenses pursuant to Article 6 hereof. (b) PROFITS, LOSSES AND OPERATING EXPENSES. The Joint Commercialization Agreement shall reflect equal sharing by the Parties of Profits and Losses and Operating Expenses for Products based on the applicable Research Lead (except for Products developed and commercialized by Nippon Kayaku pursuant to the license granted under Section 6.1(b)(i)); provided, however, that in the event the Parties agree with respect to a particular country to some other cost-sharing arrangement, Profits and Losses and Operating Expenses in such country will be shared according to costs incurred. Royalties and license fees payable by either Party (or any joint venture entity formed by the Parties hereunder or under the Joint Commercialization Agreement by the Parties) to Third Parties with respect to such Products shall be treated as an expense. Under any 10. 16 such Joint Commercialization Agreement, the terms "Profits," "Losses" and "Operating Expenses" would have the meanings given them in Exhibit D. (c) CONTRACTING FOR SERVICES. Any such Joint Commercialization Agreement would further contemplate contracting with each Party and/or their Affiliates, or contracting with Third Parties, for services such as pre-clinical and clinical development, clinical trials, regulatory affairs, manufacturing, marketing, promotion, training, distribution and sales of Products. Any such contracting shall be determined by the Parties on a Product-by-Product basis. Each Party and its Affiliates shall provide any such service at cost plus a commercially reasonable mark-up determined with reference to prevailing standards in the industry for similar services. (d) SUPPLY OF BULK DRUG SUBSTANCE AND DRUG PRODUCT. The Joint Commercialization Agreement between the Parties shall, at Nippon Kayaku's option, provide for Nippon Kayaku to supply bulk drug substance on a worldwide basis for a percentage of Net Sales of Products on commercially reasonable terms to be negotiated in good faith by the Parties. In anticipation of this supply arrangement, Nippon Kayaku will provide compounds and formulations of Research Leads for all pre-clinical and clinical studies (including toxicology studies) at a price and on such other commercially reasonable terms to be negotiated in good faith by the Parties, and Nippon Kayaku will ensure that its facilities meet all GMP and GLP standards, maintain DMFs and comply with all regulatory requirements necessary to obtain regulatory and marketing approvals. In the event that Nippon Kayaku does not provide such bulk drug substance and such drug product for all pre-clinical and clinical studies (including toxicology studies), then the foregoing option to supply bulk drug substance on a worldwide basis for a percentage of Net Sales of Products shall lapse and be of no further force or effect. (e) ADDITIONAL TERMS. The Joint Commercialization Agreement would also provide for: (i) common Product brand names; (ii) common regulatory filings and indications; (iii) common Product positioning and marketing plans; and (iv) with respect to the development and commercialization of Products in the CNS Field, an option to seek Third Party support for funding and/or expertise; provided, however, that, notwithstanding any such Third Party support, Nippon Kayaku shall have the right to develop and commercialize Products jointly with any entity formed by the Parties hereunder or under the Joint Commercialization Agreement in the CNS Field in Japan. 3.2 ROYALTY ALTERNATIVE IN THE FIELD. In the event that, during the Election Period, one Party (the "non-participating Party") elects not to participate in the development and commercialization of Products, then the other Party, if it elects to proceed with development and commercialization of Products in the Field (the "Royalty Alternative"), shall be solely responsible for the costs of development and commercialization and shall pay to the non-participating Party a royalty of [***] of Net Sales of Products by such Commercializing Party (as defined below) or its Affiliates or sublicensees. In addition, in the event that the Parties have entered into a 11. ***Confidential Treatment Requested 17 Joint Commercialization Agreement, either Party may thereafter at any time elect by written notice to the other Party to convert to the Royalty Alternative in a particular country and receive the royalty described in the preceding sentence with respect to Net Sales of Products in such country. ARTICLE 4 PAYMENTS 4.1 FUNDING FOR RESEARCH. Nippon Kayaku agrees to fund the Research at Signal over a two (2) year period in the aggregate amount of [***] for (a) the costs and expenses for Signal's committing an average of at least [***] to the Research, (b) any supervision provided by Signal relating to the Research to the visiting scientists of Nippon Kayaku and (c) the use of Signal's facilities by such visiting scientists of Nippon Kayaku for the purposes of Research. Such amount shall be payable in advance in two (2) installments of [***] within one (1) week following each of the Effective Date and the first anniversary of the Effective Date. 4.2 NIPPON KAYAKU ROYALTIES ON SALES OF PRODUCTS IN THE PNS FIELD IN JAPAN. In consideration of the license granted to Nippon Kayaku pursuant to Section 6.1(b)(i), Nippon Kayaku shall pay to Signal a royalty of [***] of Net Sales of Products by Nippon Kayaku, its Affiliates or sublicensees of Products in the PNS Field in Japan. 4.3 ROYALTIES ON SALES OF PRODUCTS OUTSIDE THE FIELD. (a) In consideration of the license granted to Signal under Section 6.2.1(a), Signal shall pay to Nippon Kayaku a royalty of [***] of Net Sales of Products by Signal, its Affiliates or sublicensees outside the Field plus any pass-through royalties. (b) In consideration of the license granted to Nippon Kayaku under Section 6.2.1(b), Nippon Kayaku shall pay to Signal, a royalty of [***] of Net Sales of Products by Nippon Kayaku, its Affiliates or sublicensees outside the Field plus any pass through royalties. 4.4 ROYALTIES ON SALES OF OTHER PRODUCTS IN THE FIELD (a) In consideration of the license granted to Signal under Section 6.2.2(a), Signal shall pay to Nippon Kayaku a royalty of [***] of Net Sales of Other Products by Signal, its Affiliates or sublicensees in the Field plus any pass-through royalties. (b) In consideration of the license granted to Nippon Kayaku under Section 6.2.2(b), Nippon Kayaku shall pay to Signal, a royalty of [***] of Net 12. ***Confidential Treatment Requested 18 Sales of Other Products by Nippon Kayaku, its Affiliates or sublicensees in the Field plus any pass through royalties. 4.5 ROYALTIES ON SALES OF OTHER PRODUCTS OUTSIDE THE FIELD. (a) In consideration of the license granted to Signal under Section 6.2.3(a), Signal shall pay to Nippon Kayaku a royalty of [***] of Net Sales of Other Products by Signal, its Affiliates or sublicensees outside the Field plus any pass-through royalties. (b) In consideration of the license granted to Nippon Kayaku under Section 6.2.3(b), Nippon Kayaku shall pay to Signal, a royalty of [***] of Net Sales of Other Products by Nippon Kayaku, its Affiliates or sublicensees outside the Field plus any pass through royalties. 4.6 ROYALTIES UNDER ROYALTY ALTERNATIVE. In the event of election of the Royalty Alternative by a Party pursuant to Section 3.2, the Commercializing Party shall pay to the non-participating Party the royalty specified in Section 3.2. ARTICLE 5 ROYALTY OBLIGATIONS 5.1 ROYALTIES FOR SALES OF PRODUCTS OR OTHER PRODUCTS. Any royalty obligations of a Party (the "Commercializing Party") shall be subject to the provisions of this Article 4. 5.2 FOREIGN EXCHANGE. All amounts payable hereunder shall be paid in U.S. dollars. The remittance of royalties payable on Net Sales of Products or Net Sales of Other Products will be payable in U.S. dollars to the Party entitled to receive the royalty hereunder (the "Receiving Party") at a bank and to an account designated by the Receiving Party using the selling rate of exchange for the currency of the country from which the royalties are payable as published by the Wall Street Journal, New York, NY, USA, for the last business day of the quarterly period for which the royalties are due. 5.3 BLOCKED CURRENCY. In each country where the local currency is blocked and cannot be removed from the country, at the election of the Commercializing Party, royalties accrued in that country shall be paid to the Receiving Party in the country in local currency by deposit in a local bank designated by the Receiving Party. 5.4 TAXES. The Receiving Party shall pay any and all taxes levied on account of such payments it receives under this Agreement. If laws or regulations require that taxes be withheld, the Commercializing Party will (i) deduct those taxes from the remittable payment, (ii) timely pay the taxes to the proper taxing authority, and (iii) send 13. ***Confidential Treatment Requested 19 proof of payment to the Receiving Party and certify its receipt by the tax authorities within sixty (60) days following that payment. 5.5 PAYMENT. Royalty payments under this Agreement shall be made to the Receiving Party or its designee quarterly within sixty (60) days following the end of each calendar quarter for which royalties are due from the Commercializing Party. Each royalty payment shall be accompanied by a report summarizing the Net Sales of Products or Net Sales of Other Products during the relevant three-month period. 5.6 DURATION. The Commercializing Party shall pay royalties hereunder, on a country by country basis, until the later of: (i) the last to expire Signal Patent or Collaboration Patent (if Nippon Kayaku is the Commercializing Party) or Nippon Kayaku Patent or Collaboration Patent (if Signal is the Commercializing Party), a Valid Claim of which covers the manufacture, use or sale of such Product or Other Product in such country, or (ii) the date ten (10) years after the date of first commercial sale of such Product or Other Product in such country by the Party, its Affiliates, or sublicensees; provided, however, that all royalty obligations of the Parties shall cease thirty (30) years after the Effective Date. 5.7 ACCOUNTING. The Commercializing Party shall maintain complete and accurate records, consistent with its general internal recordkeeping policies, which are relevant to costs, expenses and payments under this Agreement and shall make its internal sales ledgers for sales of Products or Other Products upon which royalties are payable available during reasonable business hours for a period of five (5) years from creation of individual records for examination of any one calendar year's records at the other Party's expense and not more often than once every two (2) years by a certified public accountant selected by the other Party and reasonably acceptable to the Commercializing Party, audited for the sole purpose of verifying for the inspecting Party the correctness of calculations of such costs, expenses or payments made under this Agreement. If any such audit fails to identify material underpayments (in excess of five percent (5%) of the amounts that should have been paid) by the Commercializing Party for any calendar year audited, the out-of-pocket expenses of both Parties in such audit shall be borne by the Party requesting the audit. If any such material discrepancies are identified by any such audit for any calendar year audited, the Commercializing Party shall reimburse the Party requesting the audit for such discrepancies and shall bear the out-of-pocket expenses of both Parties in such audit. Any records or accounting information received from the other Party shall be Confidential Information for purposes of Article 7. 5.8 SALES BY SUBLICENSEES. In the event the Commercializing Party grants licenses or sublicenses to Third Parties to make, use and sell a Product or Other Product with respect to which a royalty payment is due hereunder, and the Commercializing Party is not otherwise supplying any Product or Other Product to such licensee or sublicensee, such licenses or sublicenses shall include an obligation for the licensee or sublicensee to 14. 20 account for and report its Net Sales of such Products or Net Sales of such Other Products on the same basis as if such sales were Net Sales of such Products or Net Sales of such Other Products by the Party granting the license or sublicense, and such Party shall account for, report and pay appropriate royalties to the Party receiving royalties under this Agreement as if the Net Sales of such Products or Net Sales of such Other Products of the sublicensee were Net Sales of such Products or Net Sales of such Other Products of the Party granting the license or sublicense (regardless of whether such Party has actually received payment from the party to whom it granted such license or sublicense), subject to the provisions of Section 5.3 above regarding blocked currency payments. ARTICLE 6 LICENSE GRANTS 6.1 LICENSES DURING COLLABORATION. (a) RESEARCH TERM LICENSES. (i) Signal grants to Nippon Kayaku an exclusive, except as to Signal, royalty-free, worldwide license to make and use methods and materials solely to carry out the Research for the discovery, identification and investigation of Compounds in the Field, with the right to grant sublicenses to Affiliates only (except as agreed by the Parties in writing), under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How, during the Research Term. (ii) Nippon Kayaku grants to Signal an exclusive, except as to Nippon Kayaku, royalty-free, worldwide license to make and use methods and materials solely to carry out the Research for the discovery, identification and investigation of Compounds in the Field, with the right to grant sublicenses to Affiliates only (except as agreed by the Parties in writing), under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How, during the Research Term. (b) LICENSES IN THE PNS FIELD. (i) Signal shall and hereby does grant to Nippon Kayaku an exclusive (even as to Signal), royalty-bearing license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Products in the PNS Field solely in Japan. (ii) In the event of the election of the Joint Commercialization Alternative, effective upon execution or consummation by the Parties of a definitive Joint Commercialization Agreement, Signal shall and hereby does grant to Nippon Kayaku or to the joint venture (in the event that a separate joint venture entity is formed), such licenses under Signal Patents, Signal Know-How, Collaboration Patents and 15. 21 Collaboration Know-How, and Nippon Kayaku shall and does hereby grant to Signal or to the joint venture (in the event that a separate joint venture entity is formed) such licenses under the Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How, as are necessary or useful to make, have made, use, sell and import Products in the PNS Field in the Rest of the World in the manner agreed to by the Parties under the Joint Commercialization Agreement. (iii) In the event of election of the Royalty Alternative, the non-participating Party shall and hereby does grant to the Commercializing Party an exclusive (even as to the non-participating Party) license, with the right to grant sublicenses, under non-participating Party Patents, non-participating Party Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use, sell and import Products in the PNS Field in those countries in the Rest of the World as to which the Royalty Alternative applies. (c) LICENSES IN THE CNS FIELD. (i) In the event of the election of the Joint Commercialization Alternative, effective upon execution or consummation by the Parties of a definitive Joint Commercialization Agreement, Signal shall and hereby does grant to Nippon Kayaku or to the joint venture (in the event that a separate joint venture entity is formed), such licenses under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How, and Nippon Kayaku shall and does hereby grant to Signal or to the joint venture (in the event that a separate joint venture entity is formed) such licenses under the Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How, as are necessary or useful to make, have made, use, sell and import Products in the CNS Field in the manner agreed to by the Parties under the Joint Commercialization Agreement. (ii) In the event of election of the Royalty Alternative, the non-participating Party shall and hereby does grant to the Commercializing Party an-exclusive (even as to the non-participating Party) license, with the right to grant sublicenses, under non-participating Party Patents, non-participating Party Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use, sell and import Products in the CNS Field in those countries as to which the Royalty Alternative applies. The licenses granted pursuant to subsections (b)(ii) and (c)(i) above shall be subject to the obligation of the Parties to share Profits and Losses and Operating Expenses in accordance with Section 3.1 above and shall not be royalty-bearing. 16. 22 6.2 COMMERCIALIZATION LICENSES. 6.2.1 PRODUCTS OUTSIDE THE FIELD. (a) Nippon Kayaku shall and hereby does grant to Signal a co-exclusive (with Nippon Kayaku), worldwide, royalty-bearing license, with the right to grant sublicenses, under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Products outside the Field, subject to the Parties' rights and obligations under Section 4.3; and (b) Signal shall and hereby does grant to Nippon Kayaku a co-exclusive (with Signal), worldwide, royalty-bearing license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Products outside the Field, subject to the Parties' rights and obligations under Section 4.3. Promptly following the effectiveness of such license grants, each Party shall deliver to the other Party copies of all confidential information and materials relating to the applicable Patents and Know-How to enable such other Party to fully utilize the license rights granted hereunder. 6.2.2 OTHER PRODUCTS IN THE FIELD. Effective upon expiration of the Research Term: (a) Nippon Kayaku shall and hereby does grant to Signal a co-exclusive (with Nippon Kayaku), worldwide, royalty-bearing license, with the right to grant sublicenses, under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Other Products in the Field, subject to the Parties' rights and obligations under Section 4.4; and (b) Signal shall and hereby does grant to Nippon Kayaku a co-exclusive (with Signal), worldwide, royalty-bearing license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Other Products in the Field, subject to the Parties' rights and obligations under Section 4.4. 6.2.3 OTHER PRODUCTS OUTSIDE THE FIELD. Effective upon expiration of the Research Term: (a) Nippon Kayaku shall and hereby does grant to Signal a co-exclusive (with Nippon Kayaku), worldwide, royalty-bearing license, with the right to grant sublicenses, under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration 17. 23 Patents and Collaboration Know-How to make, have made, use and sell Other Products outside the Field, subject to the Parties' rights and obligations under Section 4.5; and (b) Signal shall and hereby does grant to Nippon Kayaku a co-exclusive (with Signal), worldwide, royalty-bearing license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use and sell Other Products outside the Field, subject to the Parties' rights and obligations under Section 4.5. 6.3 SUBLICENSES. Each Party shall notify any permitted sublicensee hereunder of all rights and obligations of such Party under this Agreement licensed to such sublicensee. Upon termination of this Agreement for breach pursuant to Section 10.2, no existing sublicenses granted by the defaulting or terminating Party shall be affected by such termination, and all such sublicenses shall remain in effect according to their terms as sublicenses of the non-defaulting Party. ARTICLE 7 CONFIDENTIALITY; PUBLICATIONS 7.1 CONFIDENTIALITY; EXCEPTIONS. (a) NONDISCLOSURE. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, during the term of this Agreement and a ten (10) year period thereafter, the receiving Party shall keep confidential and shall not publish or otherwise disclose or use for any purpose, other than as provided for in this Agreement, any Know-How, information included in any pending application included in the applicable Patents or other materials furnished to it by the other Party pursuant to this Agreement or developed or acquired in connection with the Collaboration (collectively, "Confidential Information"). (b) EXCEPTIONS. The restrictions under this Section 7.1 shall not apply to the extent that it can be established by the receiving Party that such Confidential Information: (i) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure by the other Party; (ii) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (iii) becomes 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; or 18. 24 (iv) is lawfully received by the receiving Party from a Third Party who does not acquire it, directly or indirectly, from the other Party under an obligation of confidence after its disclosure. 7.2 AUTHORIZED DISCLOSURE. Each Party may disclose Confidential Information hereunder to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or conducting pre-clinical or clinical trials, provided that a Party making any such disclosure will give prompt notice to the other Party of such disclosure requirement and, except to the extent inappropriate in the case of patent applications, will use its reasonable efforts to secure confidential treatment of such Confidential Information required to be disclosed and to minimize the extent of such disclosure. Each Party also may disclose to its collaborators for the Collaboration, under confidentiality obligations, Confidential Information developed by such Party during the course of this Collaboration. 7.3 PUBLICATIONS. Either Party may publish or present the results of the Research subject to the prior review by the other Party for patentability and protection of Confidential Information. Each party (the "submitting Party") shall provide to the other the opportunity to review any proposed abstract, manuscript or presentation which covers the results of the Research by delivering a copy thereof to the other Party (the "reviewing Party") no less than forty-five (45) days before its intended submission for publication or presentation. The reviewing Party shall have thirty (30) days from its receipt of any such abstract, manuscript or presentation in which to notify the submitting Party in writing of any specific concern, based upon either the need to seek patent protection or concern regarding competitive disadvantage arising from the proposal. In the absence of such a notice within such thirty (30) day period, the publication or presentation of such abstract, manuscript or presentation shall be deemed approved by the reviewing Party. In the event of concern, the submitting Party agrees not to submit such publication or to make such presentation that contains such Confidential Information until the reviewing Party is given a reasonable period of time (not to exceed forty-five (45) days) to seek patent protection for any material in such publication or presentation which it believes is patentable or to resolve any other issues. Each Party also agrees to delete from any such proposed publication any Confidential Information of the other Party upon its reasonable request based upon the commercial value of the secrecy of such Confidential Information. 7.4 PUBLIC DISCLOSURE. The Parties shall agree to the public announcement of the execution of this Agreement excluding provisions relating to economical conditions; provided, however, that the Parties shall negotiate the contents of the public announcement with each other and decide on them prior to the public announcement. Thereafter, the Parties shall consult and agree with each other prior to the issuances of any press releases that discuss aspects of the Collaboration; provided, however, that each 19. 25 Party shall be entitled to make public disclosures required by law, including compliance with securities laws. ARTICLE 8 OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS 8.1 OWNERSHIP OF COLLABORATION PATENTS; NIPPON KAYAKU PATENTS; SIGNAL PATENTS. Nippon Kayaku and Signal shall be joint owners of all Collaboration Patents with all ownership rights under such Collaboration Patents as fully entitled by law, subject only to the licenses expressly granted herein. The Parties agree to take all such actions, including execution of all documents, necessary or appropriate so that the Collaboration Patents shall be owned jointly by Nippon Kayaku and Signal. Nippon Kayaku shall retain all right, title and interest in and to any Nippon Kayaku Patents, subject only to the licenses expressly granted herein. Signal shall retain all right, title and interest in and to any Signal Patents, subject only to the licenses expressly granted herein. Each Party acknowledges and agrees, subject to the first sentence of this Section 8.1, that any and all discoveries, know-how, inventions, methods and ideas and the like made or discovered solely by its officers, employees, consultants or agents shall be owned solely by it and that any and all discoveries, know-how, inventions, methods, ideas and the like made jointly by officers, employees, consultants or agents of each will be jointly owned, as determined in accordance with the rules of inventorship under United States patent law. 8.2 PATENT FILINGS. (a) NIPPON KAYAKU PATENTS. Nippon Kayaku shall supervise and direct patenting of all inventions covered by any Nippon Kayaku Patents, and shall file and prosecute all patent applications covering any Nippon Kayaku Patents. All Patent Costs and Nippon Kayaku's internal costs and expenses of filing, prosecuting and maintaining the Nippon Kayaku Patents shall be borne by Nippon Kayaku. Nippon Kayaku shall maintain all Patents that issue on such applications. (b) SIGNAL PATENTS. Signal shall supervise and direct patenting of all inventions covered by any Signal Patents, and shall file and prosecute all patent applications covering any Signal Patents. All Patent Costs and Signal's internal costs and expenses of filing, prosecuting and maintaining the Signal Patents shall be borne by Signal. Signal shall maintain all Patents that issue on such applications. (c) COLLABORATION PATENTS. The responsibility for the preparation, filing, prosecution and maintenance of Collaboration Patents will be administered through a Patent Committee comprised of two (2) members: one (1) appointed by Signal and one (1) appointed by Nippon Kayaku. The Parties intend that: 20. 26 (i) The Patent Committee shall meet together at such site and timing or conduct discussion by means of telephone calls, by letter, by telefax or by E-mail at such site and means, as may be agreed by the Parties. Each Party shall pay its own costs in attending Patent Committee meetings. The Patent Committee shall provide reports to the RMC on a semi-annual basis of the status of the Collaboration Patents. Either Party may refer any dispute to the appropriate officers of the Parties for consideration and resolution pursuant to Article 12; (ii) Unless otherwise determined by the Patent Committee, the supervision and direction of patenting of all inventions covered by the Collaboration Patents, and filing and prosecution of all patent applications covering Collaboration Patents, shall be the responsibility of Signal in the United States and shall be the responsibility of Nippon Kayaku in Japan; and (iii) The Parties shall share equally the Patent Costs of preparing, filing, prosecuting and maintaining the Collaboration Patents and shall each bear their own internal costs and expenses of filing, prosecuting and maintaining the Collaboration Patents. (d) COOPERATION. Each Party agrees to cooperate with the Party responsible for the filing, prosecution and maintenance of Patents. Such cooperation will include the execution of all documents necessary or appropriate for such responsible Party to fulfill its obligations hereunder. (e) RESTRICTIONS ON TRANSFER. No Collaboration Patents shall be assigned, transferred or licensed by a Party to any Third Party without the prior written consent of the other Party; provided, however, that a Party may, without the consent of the other Party, grant sublicenses under Section 6.2.2 or 6.2.3. (f) ELECTION NOT TO PURSUE. If a Party decides, at any time, not to file or maintain any Patent as provided hereunder, it shall give the other Party notice to this effect and upon such notice such other Party shall have the right, but not the obligation, to file and maintain such Patent, in its own name and at its own expense, and, if it so elects to file and maintain, then the Party deciding not to so file or maintain shall assign to such other Party the rights in such Patent. 8.3 ENFORCEMENT RIGHTS. (a) DEFENSE AND SETTLEMENT OF THIRD PARTY CLAIMS. If a Third Party asserts that a Patent or other right owned by it is infringed by the manufacture, use or sale of any pharmaceutical product subject to any of the licenses granted under Article 6 during the term of this Agreement, the Party commercializing such product shall control the defense of such claim at its initial cost and expense; provided, however, that in the event that such matter includes claims with respect to the Collaboration Patents or 21. 27 Collaboration Know-How, the RMC (or, if after the Research Term, the Parties mutually) shall determine how to respond to such claim, and shall control the defense of such claim, with the initial cost and expense of such defense to be shared equally by the Parties. No settlement shall be entered into without the prior written consent of the Party commercializing any such product if such settlement would adversely affect its interests, which consent shall not be unreasonably withheld. (b) INFRINGEMENT BY THIRD PARTIES WITH RESPECT TO PRODUCTS DURING RESEARCH TERM. If any Signal Patent, Nippon Kayaku Patent or Collaboration Patent is infringed by a Third Party in any country in connection with the manufacture, use and sale of any pharmaceutical product subject to any of the licenses granted under Article 6 in such country during the Research Term, the Party to this Agreement first having knowledge of such infringement shall promptly notify the other in writing. The notice shall set forth the facts of that infringement in reasonable detail. In the event a Collaboration Patent is infringed by a Third Party, the RMC shall control any action or proceeding with respect to such infringement, at its expense by counsel of its choice, and the Parties shall share equally in the costs thereof. In the case of Signal Patents or Nippon Kayaku Patents, the Party owning or Controlling such Patent shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect to such infringement, by counsel of its own choice, and the other Party shall have the right, at its own expense, to be represented in any action involving any such Patent by counsel of its own choice. If the Party owning or Controlling such Patent fails to bring an action or proceeding within a period of sixty (60) days after having knowledge of infringement of such Patent and such infringement would have a commercially significant adverse effect on such products, the other Party shall have the right to bring and control any such action by counsel of its own choice, and the first Party shall have the right to be represented in any such action by counsel of its own choice at its own expense. If one Party brings any such action or proceeding, the other Party agrees to be joined as a Party plaintiff if necessary to prosecute the action and to give the first Party reasonable assistance and authority to file and prosecute the suit. (c) INFRINGEMENT BY THIRD PARTIES WITH RESPECT TO PRODUCTS AFTER RESEARCH TERM. If any Signal Patent, Nippon Kayaku Patent or Collaboration Patent is infringed by a Third Party in any country in connection with the manufacture, use or sale of any pharmaceutical product subject to this Agreement in such country following the Research Term and prior to any termination of the Collaboration, the Party to this Agreement first having knowledge of such infringement shall promptly notify the other in writing. The notice shall set forth the facts of that infringement in reasonable detail. In the event that the Parties have entered into a Joint Commercialization Agreement, infringement matters shall be handled in the manner specified in such Agreement. Otherwise, the Commercializing Party shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect to such infringement of any Signal Patent, Nippon Kayaku Patent or Collaboration Patent, 22. 28 by counsel of its own choice, and the other Party shall have the right, at its own expense, to be represented in any action involving any of its Patents or any Collaboration Patent by counsel of its own choice. If the Commercializing Party fails to bring an action or proceeding within a period of sixty (60) days after having knowledge of infringement of such Patent and such infringement would have a commercially significant adverse effect on such products, the other Party shall have the right to bring and control any such action by counsel of its own choice, and the Commercializing Party shall have the right to be represented in any such action by counsel of its own choice at its own expense. If one Party brings any such action or proceeding, the other Party agrees to be joined as a party plaintiff if necessary to prosecute the action and to give the first Party reasonable assistance and authority to file and prosecute the suit. (d) MONETARY AWARDS. Any damages or other monetary awards recovered shall be allocated first, to the costs and expenses of the Party bringing suit, and the costs and expenses, if any, of the other Party. Any amounts remaining shall be allocated as follows: (i) in accordance with the allocation of Profits and Losses if the Parties have entered into a Joint Commercialization Agreement, or (ii) to the Party bringing the suit, which amounts shall be treated as Net Sales of Products or Net Sales of Other Products subject to the applicable royalty obligations set forth in this Agreement. A settlement or consent judgment or other voluntary final disposition of a suit under Sections 8.4(b) or (c) may not be entered into without the prior written consent of the Party not bringing the suit. (e) INFRINGEMENT OF COLLABORATION PATENTS OUTSIDE THE FIELD. With respect to infringement of the Collaboration Patents outside the Field, the Parties shall consult with each other regarding the institution, prosecution and control of any action or proceeding with respect to the infringement of any of the Collaboration Patents. In the absence of agreement, each Party may proceed in such manner as the law permits. Each Party shall bear its own expenses, with any recovery allocated pro rata according to costs and any excess shared equally by the Parties. ARTICLE 9 REPRESENTATIONS AND WARRANTIES; EXCLUSIVITY 9.1 REPRESENTATIONS AND WARRANTIES. Each of the Parties hereby represents and warrants and covenants as follows: (a) BINDING OBLIGATION. This Agreement is legally and validly binding upon each Party and enforceable in accordance with its terms. The execution, delivery and performance of the Agreement by each Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it is bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it. 23. 29 (b) NO CONFLICTING GRANTS. Except as set forth in Section 2.4(b) and Schedule IV hereto, each Party has not granted, and during the term of the Agreement will not grant, any right to any Third Party relating to its respective technology including Know-How and Patents in the Field which would conflict with the rights granted to the other Party hereunder. (c) VALID LICENSE. Each Party owns or Controls under valid licenses with right of sublicense all of the rights, title and interest in and to its Know-How. Each Party warrants that to the best of its knowledge, except as otherwise disclosed, no license, sublicense or any of its Patents for which the other Party is granted rights hereunder is invalid as of the Effective Date and each Party will inform the other Party immediately if it makes any determination to the contrary. (d) NO THIRD PARTY LICENSES NEEDED. Neither Party is currently aware of any license from any Third Party (other than any license such Party has previously obtained) necessary to enable the Parties to conduct the Research contemplated by the Research Plan or commercialize the pharmaceutical products contemplated by this Agreement. 9.2 LIMITATION ON WARRANTIES. Nothing herein shall be construed as a representation or warranty by either Party to the other that any Patent or Know-How or other intellectual property right owned or Controlled by such Party is valid, enforceable, or not infringed by any Third Party, or that the practice of such rights does not infringe any property right of any Third Party. Neither Party makes any warranties, express or implied, concerning the success of the Research, or the commercial utility of Research Leads or any pharmaceutical products developed or commercialized hereunder. EXCEPT AS EXPRESSLY MADE HEREIN, EACH PARTY DISCLAIMS ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OF ANY PRODUCT, OR ANY REPRESENTATION OR WARRANTY THAT A PRODUCT ENCOMPASSED BY THE RIGHTS LICENSED HEREUNDER WILL NOT INFRINGE ANY THIRD PARTY'S INTELLECTUAL PROPERTY RIGHTS. 9.3 NEGATIVE COVENANTS. Each Party hereby covenants to the other that such Party shall not use or practice the other Party's Patents or Know-How in any field or in any manner except as specifically licensed under this Agreement. 24. 30 ARTICLE 10 TERM AND TERMINATION 10.1 TERM. This Agreement shall commence as of the Effective Date and, unless sooner terminated as provided herein, shall continue in effect until the later of (i) the conclusion of the Collaboration between the Parties or (ii) the date on which all royalty obligations of the Parties cease pursuant to Section 5.6. 10.2 TERMINATION FOR BREACH. (a) BREACH BY SIGNAL. If Signal materially breaches this Agreement at any time, and has not cured such breach within ninety (90) days after written notice thereof from Nippon Kayaku, then Nippon Kayaku shall have the right to terminate this Agreement effective upon written notice thereof, whereupon (i) all licenses granted by Nippon Kayaku to Signal hereunder shall terminate and revert to Nippon Kayaku, (ii) all licenses granted to Nippon Kayaku shall remain in full force and effect so long as Nippon Kayaku is not in breach of its obligations to Signal under this Agreement and (iii) Signal shall return to Nippon Kayaku all Confidential Information of Nippon Kayaku. (b) BREACH BY NIPPON KAYAKU. If Nippon Kayaku materially breaches this Agreement, at any time, and has not cured such breach within ninety (90) days after written notice thereof from Signal, then Signal shall have the right to terminate this Agreement effective upon written notice thereof, whereupon (i) all licenses granted by Signal to Nippon Kayaku hereunder shall terminate and revert to Signal, (ii) all licenses granted to Signal shall remain in full force and effect so long as Signal is not in breach of its obligations to Nippon Kayaku under this Agreement and (iii) Nippon Kayaku shall return to Signal all Confidential Information of Signal. 10.3 TERMINATION FOR BANKRUPTCY. Either Party hereto shall have the right to terminate this Agreement forthwith by written notice to the other Party (i) if the other Party is declared insolvent or bankrupt by a court of competent jurisdiction, (ii) if a voluntary or involuntary petition in bankruptcy is filed in any court of competent jurisdiction against the other Party, or (iii) if the other Party shall make or execute an assignment for the benefit of creditors. 10.4 SURVIVING RIGHTS. In addition to the rights described in Section 10.2, the obligations and rights of the Parties under Sections 6.3, 8.1, 8.2(c), 8.2(d), 10.4, 10.5, 10.6, 11.1 and 11.2 and Articles 5, 7, 12 and 13 shall survive termination or expiration of this Agreement. 10.5 ACCRUED RIGHTS, SURVIVING. Termination or expiration of the Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of either Party prior to such termination or expiration, including, without 25. 31 limitation, any payment obligations of the Parties and any and all damages arising from any breach hereunder. Such termination or expiration shall not relieve either Party from obligations which are expressly indicated to survive termination or expiration of the Agreement. 10.6 TERMINATION NOT SOLE REMEDY. Termination is not the sole remedy under this Agreement and, whether or not termination is effected, all other remedies will remain available except as agreed to otherwise herein. ARTICLE 11 INDEMNIFICATION; INSURANCE 11.1 RESEARCH AND DEVELOPMENT INDEMNIFICATION. Each Party (the "Indemnifying Party") shall indemnify, defend and hold the other Party (the "Indemnified Party") harmless from and against any and all suits, judgments, damages, claims, actions, demands, liabilities, expenses and/or losses, including reasonable legal expenses and attorneys' fees ("Losses"): (a) arising out of (i) any injuries to person and/or damage to property resulting from negligent acts of the Indemnifying Party performed in carrying out the Research hereunder, including failure by the Indemnifying Party to provide the Indemnified Party with any Know-How of the Indemnifying Party which, if timely received, would have avoided injury, death or damage, provided such failure to provide such Know-How is due to negligence on the part of the Indemnifying Party, or (ii) personal injury to the Indemnified Party's employees or agents or damage to the Indemnified Party's property resulting from acts performed by, under the direction of, or at the request of the Indemnifying Party (other than acts otherwise required to be performed by the Indemnified Party by this Agreement) in carrying out activities contemplated by this Agreement; or (b) with respect to pharmaceutical products covered by this Agreement (determined on a country-by-country basis), resulting directly from the manufacture, use, handling, storage, sale or other disposition of chemical agents or such products by the Indemnifying Party, its Affiliates, agents or sublicensees, except to the extent such Losses result directly from the negligence of the Indemnified Party, its Affiliates, agents or sublicensees. 11.2 INDEMNIFICATION PROCEDURES. In the event that Indemnified Party is seeking indemnification under Section 11.1, it shall inform 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 the claim solely for monetary consideration), and shall 26. 32 cooperate as requested (at the expense of the Indemnifying Party) in the defense of the claim. 11.3 INSURANCE. The Parties will work with one another to coordinate appropriate insurance coverage for the activities contemplated by the Parties under this Agreement. ARTICLE 12 DISPUTE RESOLUTION 12.1 DISPUTES. The Parties recognize that disputes as to certain matters may from time to time arise which relate to either Party's rights and/or obligations hereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of such disputes in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article 12 if and when such a dispute arises between the Parties. 12.2 DISPUTE RESOLUTION PROCEDURES. (a) If the Parties or the RMC cannot resolve the dispute within twenty (20) days of formal request by either Party to the other, any Party may, by written notice to the other (the "Dispute Notice"), have such dispute referred to their respective officers designated below or their successors, for attempted resolution by good faith negotiations within thirty (30) days after such notice is received. Said designated officers are as follows: For Nippon Kayaku: Head, Research & Development Division Pharmaceuticals Group For Signal: Chief Executive Officer
(b) Any such dispute arising out of or relating to this Agreement which is not resolved between the Parties or the designated officers of the Parties pursuant to the foregoing shall be resolved by final and binding arbitration conducted in Honolulu, Hawaii, USA under the current Licensing Agreement Arbitration Rules of the American Arbitration Association ("AAA"); provided, however, that depositions shall be permitted as follows: each Party may take no more than seven (7) depositions with a maximum of six (6) hours of examination time per deposition, and each such deposition shall take place in Honolulu, Hawaii, USA, unless otherwise agreed by the Parties. The arbitration shall be conducted by three (3) arbitrators who are knowledgeable in the subject matter which is at issue in the dispute and who are selected by mutual agreement of the Parties or, failing such agreement, shall be selected according to the AAA rules. In conducting the arbitration, the arbitrators shall be able to decree any and all relief of an equitable 27. 33 nature, including but not limited to such relief as a temporary restraining order, a preliminary injunction, a permanent injunction or replevin of property. The arbitrators shall also be able to award actual, general or consequential damages, but shall not award any other form of damages (i.e., punitive damages). The Parties shall share equally the arbitrators' fees and expenses pending the resolution of the arbitration unless the arbitrators, pursuant to their right but not their obligations, require the nonprevailing Party to bear all or any portion of the costs of the prevailing Party. The decision of the arbitrators shall be final and may be sued on or enforced by the Party in whose favor it runs in any court of competent jurisdiction at the option of such Party. ARTICLE 13 MISCELLANEOUS 13.1 ASSIGNMENT. (a) TO AFFILIATES. Notwithstanding any provision of this Agreement to the contrary, either Party may assign any of its rights or obligations under this Agreement in any country to any Affiliates; provided, however, that such assignment shall not relieve the assigning Party of its responsibilities for performance of its obligations under this Agreement. (b) ON SALE OF COMPANY. Either Party may also assign its rights or obligations under this Agreement in connection with the sale of all or substantially all of its assets, or otherwise with the prior written consent of the other Party. This Agreement shall survive any merger of either Party with or into a Third Party and no consent for a merger or similar reorganization shall be required hereunder; provided, that in the event of such merger or in the event of a sale of all assets, no intellectual property rights of the acquiring corporation shall be included in the technology licensed hereunder. (c) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any assignment not in accordance with this Agreement shall be void. 13.2 RESEARCH AND DEVELOPMENT ENTITIES. Either Party may assign its rights and obligations under this Agreement to an entity or entities (e.g., partnership or corporation) that are specifically formed for financial purposes that would not jeopardize the collaboration hereunder and that finance research and development performed by such Party, which entity able to carry out such Party's obligations hereunder; provided, however, that such assignment shall not relieve the assigning Party of responsibility for performance of its obligations under this Agreement. 13.3 CONSENTS NOT UNREASONABLY WITHHELD. Whenever provision is made in this Agreement for either Party to secure the consent or approval of the other, that 28. 34 consent or approval shall not unreasonably be withheld, and whenever in this Agreement provision is made for one Party to object to or disapprove a matter, such objection or disapproval shall not unreasonably be exercised. 13.4 FORCE MAJEURE. Neither Party shall lose any rights hereunder or be liable to the other Party for damages or losses on account of failure of performance by the defaulting Party if the failure is occasioned by government action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or any other similar cause beyond the control of the defaulting Party, provided that the Party claiming force majeure has exerted all reasonable efforts to avoid or remedy such force majeure; provided, however, that in no event shall a Party be required to settle any labor dispute or disturbance. 13.5 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or useful in order to carry out the purposes and intent of this Agreement. 13.6 NO TRADEMARK RIGHTS. Except as otherwise provided herein, no right, express or implied, is granted by the Agreement to use in any manner the name "Signal" or "Nippon Kayaku" or any other trade name or trademark of the other Party or its Affiliates in connection with the performance of the Agreement. 13.7 NOTICES. All notices hereunder shall be in writing and shall be deemed given if delivered personally, mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service, to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice; provided, that notices of a change of address shall be effective only upon receipt thereof): If to Signal, to: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 Attention: Alan J. Lewis, Ph.D. Chief Executive Officer Telephone: (619) 558-7500 Telecopy: (619) 558-7513 29. 35 If to Nippon Kayaku, to: Nippon Kayaku Co., Ltd. Tokyo Fujimi Building 11-2, Fujimi 1-chome Chiyoda-ku, Tokyo 102 Japan Attention: Mr. Motonobu Yazaki Managing Director Telephone: 03-3237-5011 Telecopy: 03-3237-5081 13.8 WAIVER. Except as specifically provided for herein, the waiver from time to time by either of the Parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such Party's rights or remedies provided in this Agreement. 13.9 SEVERABILITY. If any term, covenant or condition of this Agreement or the application thereof to any Party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (i) the remainder of this Agreement, or the application of such term, covenant or condition to Parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (ii) the Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the Parties that the basic purposes and economic terms of this Agreement are to be effectuated. 13.10 AMBIGUITIES. Ambiguities, if any, in this Agreement shall not be construed against any Party, irrespective of which Party may be deemed to have authored the ambiguous provision. 13.11 COUNTERPARTS. This Agreement may be executed in two (2) counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. 13.12 ENTIRE AGREEMENT. This Agreement sets forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto and supersedes and terminates all prior agreements and understanding between the Parties, except the Secrecy Agreement and the Material Transfer Agreement. There are no covenants, promises, agreements, warranties, representations conditions or understandings, either oral or written, between the Parties other than as set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the Parties hereto unless reduced to writing and signed by the respective authorized officers of the Parties. 30. 36 13.13 GOVERNING LAW. Resolution of all disputes arising out of or related to this Agreement or the performance, enforcement, breach or termination of this Agreement and any remedies relating thereto, shall be governed by and construed under the substantive laws of the State of California and the federal law of the United States of America, without regard to conflicts of law rules. 13.14 HEADINGS. The Article headings and Section headings are placed herein merely as a matter of convenience and are not to be constructed as a part of this Agreement. 31. 37 IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate originals by their proper officers as of the date and year first above written. NIPPON KAYAKU CO., LTD. By: /s/ MOTONOBU YAZAKI -------------------------------------- Name: Motonobu Yazaki ------------------------------------ Title: Managing Director ----------------------------------- SIGNAL PHARMACEUTICALS, INC. By: /s/ ALAN LEWIS -------------------------------------- Name: Alan Lewis ------------------------------------ Title: Pres/CEO ----------------------------------- 32. 38 EXHIBIT A [***] 33. ***Confidential Treatment Requested 39 EXHIBIT B RESEARCH PLAN [***] 34. ***Confidential Treatment Requested 40 EXHIBIT C [***] 35. ***Confidential Treatment Requested 41 EXHIBIT D PROFITS, LOSSES AND OPERATING EXPENSES For purposes of the Joint Commercialization Agreement, the terms set forth below shall have the following meaning (all references to "overhead" in this Exhibit D shall be determined in accordance with generally accepted accounting principles): 1. "ADVERTISING AND EDUCATION EXPENSE" means costs, including direct overhead directly attributable to the Collaboration but excluding other overhead, incurred by a Party or for its account which are specifically identifiable to the advertising and marketing of Products, and related professional education, of a Product and consistent with a marketing plan and budget mutually acceptable to the Parties; provided, however, that such term shall exclude Selling and Promotion Expenses. 2. "CLINICAL DEVELOPMENT COSTS" means costs, including direct overhead directly attributable to the Collaboration but excluding other overhead, incurred by a Party or for its account, specifically identifiable to the development of a Product, which is aimed at achieving regulatory approval to market such Product or an expanded or significantly modified label for a Product as to which regulatory approval to market such Product has been previously obtained, including Cost of Goods for Product for use in clinical trials and costs incurred with regulatory submissions, wages and benefits to the extent employees work on clinical trials or regulatory submissions (calculated on a full-time equivalent basis) and investigator grants and laboratory materials. 3. "COST OF GOODS" means the cost of Products shipped in either bulk or final therapeutic form, as the Parties may then agree. As used herein, the cost of Products means (i) in the case of products and services acquired from Third Parties, payments made to such Third Parties, and (ii) in the case of manufacturing services performed by the Parties, including manufacturing services in support of Third Party manufacturing, the actual unit costs of manufacture in bulk form or final manufacturing, as the case may be, plus the variances and other costs specifically provided for herein. Actual unit costs shall consist of direct material and direct labor costs plus manufacturing overhead directly attributable to the Products at standard, all calculated in accordance with reasonable cost accounting methods, consistently applied, of the Party performing the work. Direct material costs shall include the costs incurred in purchasing materials, including sales and excise taxes imposed thereon and customs duty and charges levied by government authorities, and all costs of packaging components. Direct labor shall include the cost of employees engaged in direct manufacturing activities and direct or indirect quality control and quality assurance activities who are directly employed in Product manufacturing and packaging. 36. 42 Overhead attributable to the Products shall include a reasonable allocation of indirect labor (not previously included in direct labor), a reasonable allocation of administrative costs, and a reasonable allocation of facilities costs. Such allocations shall be in accordance with reasonable cost accounting methods, consistently applied, of the Party performing the work. 4. "DISTRIBUTION COSTS" means the costs, including direct overhead directly attributable to the Collaboration but excluding other overhead, incurred by a Party or for its account, specifically identifiable to the distribution of a Product to a Third Party including (i) handling and transportation to fulfill orders (excluding such costs, if any, treated as a deduction in the definition of Net Sales), (ii) customer services including order entry, billing and adjustments, inquiry and credit and collection, and (iii) direct cost of facilities utilized for the storage and distribution of Products. 5. "LOSSES" means Net Sales of Products less Operating Expenses, if such amount is less than zero (0). 6. "OPERATING EXPENSES" means (i) Clinical Development Costs, (ii) Cost of Goods, (iii) Distribution Costs, (iv) Selling and Promotion Expenses, (v) Advertising and Education Expenses, (vi) royalties payable to a Third Party for the manufacture, use or sale of Products, (vii) the direct costs of ongoing medical studies to support such Product, excluding overhead, (viii) direct expenses associated with market withdrawals, field adjustments or recalls, (ix) capital expenditures specifically identifiable to the development and commercialization of Products (and not otherwise included herein), and (x) direct expenses relating to selling by non-Affiliates, training, adverse event reporting, patents and trademarks. 7. "PROFITS" means Net Sales of Products less Operating Expenses, if such amount is greater than or equal to zero (0). 8. "SELLING AND PROMOTION EXPENSES" means costs incurred to operate and maintain the sales force which promotes Products, sales bulletins and other communications, sales meetings, specialty sales forces, consultants, call reporting and other monitoring/tracking costs, district and regional sales management, home office personnel who support the sales force, and other ancillary services. 37. 43 SCHEDULE I [***] ***Confidential Treatment Requested 44 SCHEDULE II [***] ***Confidential Treatment Requested 45 SCHEDULE III INITIAL MEMBERS OF RESEARCH MANAGEMENT COMMITTEE Initial Signal Representatives: [***] Initial Nippon Kayaku Representatives: [***] 42. ***Confidential Treatment Requested 46 SCHEDULE IV CERTAIN SIGNAL PROGRAMS 1. Molecular Targets [***] 2. Cell Based Targets [***] 3. Viral Targets [***] 43. ***Confidential Treatment Requested EX-10.53 13 EXHIBIT 10.53 1 EXHIBIT 10.53 May 13, 1998 Merl F. Hoekstra, Ph.D. 10321-216th St. S.E. Snohomish, WA 98296 Dear Merl: Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is pleased to offer you the position of Vice President Target Discovery, reporting to Dr. Alan Lewis, President/Chief Executive Officer. Your employment with Signal will commence on June __, 1998. Your starting salary will be $6,250.00 semi-monthly (which when annualized would equal $150,000), less all required withholding for taxes, employee's share of FICA and other deductions. Signal is offering you a one time signing bonus of $15,000 to help you quickly make the transition to join us. The bonus shall be repayable to Signal if you voluntarily leave, or are terminated for cause within the first year of your employment. A bonus of up to 15% of salary will be awarded based upon performance against measurable, mutually agreed upon goals. Individual goals will be assigned specific percent weighting. You will be eligible for all standard Company benefits, including medical, 401k, and paid vacation benefits. If our medical benefits do not permit your immediate participation in our plan, we will pay your COBRA expenses until you become eligible. Signal reserves the right to modify Company benefits from time to time as it deems necessary. In addition, under Signal's 1997 Stock Option Plan (the "Plan"), the Company will offer you an Incentive Stock Option to purchase outright 200,000 (two hundred thousand) shares of Signal Common Stock at fair market value (which presently is $0.50 per share). Under the Plan, one-fourth (25%) of the shares will vest on the first day of your thirteenth month of employment. The remaining shares will vest in equal monthly installments over a three year period. The unvested shares will be subject to repurchase by the company at their cost to you, should you leave the company before all shares have vested. In addition, all shares issued under the Plan are subject to certain limitations on the sale and use of the stock. Signal will pay for up to 120 days in the Residence Inn, or comparable accommodations, to allow time for you to locate suitable housing. Signal will work with you to coordinate the transport of your household goods from Snohomish, WA to San Diego, and will reimburse you for all reasonable costs associated with the move. Reimbursed moving expenses will include reasonable and customary closing costs for the sale of your house, including realtor's fees and real estate excise tax, reasonable and customary costs for the purchase of a 2 Merl F. Hoekstra, Ph.D. May 13, 1998 page 2 new home, including loan origination fees and points, and the cost of recording the deed or mortgage; payment for movement of household goods (and two cars), including packing, unpacking, insurance and up to 4 months storage. In addition, Signal will reimburse you or up to four trips home to Snohomish, WA from San Diego until such time your family has relocated to the San Diego area. All expenses will be documented and paid either directly to the vendor or reimbursed to you by normal means. The Company will follow federal, state and local tax regulations with regards to reporting reimbursements associated with the move and will "gross up" any compensation element of directly paid or reimbursed relocation expenses so that you will net such amounts after payment of taxes, social security etc. Notwithstanding the above, Signal will reimburse a maximum of $50,000 for such moving expenses. Your employment is for an indefinite term. In other words, the employment relationship is "at will," and either you or Signal has the right to terminate that employment relationship at any time, provided however that if you are terminated prior to the end of one year's service for any reason other than your death, disability or termination for cause (defined below) you will be paid the equivalent of six months base salary as a severance payment. Termination "for cause" is limited to the following events: your conviction of any felony, or conviction of embezzlement or misappropriation of money or other property of the company; your failure, refusal, or inability to perform your duties on behalf of Signal, which are consistent with the scope and nature of your responsibilities as an officer of the Company and which are not remedies by you within a reasonable time period after receipt of written notice of such alleged violative activities, or the commission of any intentional tort by you against the company; or any act of gross negligence, corporate waste, disloyalty, or unfaithfulness by you to Signal. Signal requires a baseline blood draw from all new employees. This will be done on your first day of employment at Signal. These vials will be stored offsite to protect your privacy. No testing will be done to the sample unless required by legal proceedings. You will be asked to sign Signal's Proprietary Information and Inventions Agreement. In addition, you will be expected to abide by Company rules and regulations as described in the Company handbook. Proprietary Information for purposes of the Proprietary Information and Inventions Agreement includes Proprietary Information only to the extent such matters have not previously been made public, are not thereafter made public or do not otherwise become available to you from a third party not, to your best knowledge, bound by any confidentiality agreement with the Company. The phrase "made public" as used in the Proprietary Information and Inventions Agreement shall apply to matters within the domain of (a) the general public or (b) Company's industry. Further, the provision in paragraph 2(c) in Signal's Proprietary Information and Inventions Agreement will be limited to "Inventions" developed during the term of your employment relationship with the company (i.e. not apply to Inventions that might arise out of subsequent employment during the year following the termination of your employment with Company). 3 Merl F. Hoekstra, Ph.D. May 13, 1998 page 3 The employment terms in this letter supersede any other agreements or promises made to you. As required by law, this offer is subject to satisfactory proof of your right to work in the United States. Please indicate your acceptance of this offer by signing one of the originals and returning it to Laurie Cain, in our Human Resources Department. This offer will expire at 5 p.m. on May 20, 1998. If we do not receive a reply from you by this time (verbally or written), this offer will be officially rescinded. We have greatly enjoyed our meetings with you and look forward to your joining the Signal team. We feel that your experience and enthusiasm can make a substantial contribution to the success of Signal. Sincerely, /s/ ALAN J. LEWIS - ------------------------------------- Alan J. Lewis President and Chief Executive Officer ACCEPTED BY: /s/ MERL F. HOEKSTRA - -------------------------------- Merl F. Hoekstra, PhD May 14, 1998 - -------------------------------- Date EX-23.1 14 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the references to our firm under the caption "Experts" and "Selected Financial Data" and to the use of our report dated January 16, 1998, except for Note 7, as to which the date is May 5, 1998, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-52901) and related Prospectus of Signal Pharmaceuticals, Inc. for the registration of its common stock. /s/ ERNST & YOUNG LLP San Diego, California August 5, 1998 -----END PRIVACY-ENHANCED MESSAGE-----