-----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, UgaXS51x4o5Aet4+8JJiKpU34Vj1XwFMlfp85kL/9ZL6Wzd8Q25DupPNw4wxO2oL LE0/OtBgpelUlWJCtLNRfw== 0001095811-00-000636.txt : 20000323 0001095811-00-000636.hdr.sgml : 20000323 ACCESSION NUMBER: 0001095811-00-000636 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20000322 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: 333-30730 FILM NUMBER: 575251 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 #1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2000 REGISTRATION NO. 333-30730 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 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 CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
DELAWARE (AFTER REINCORPORATION) (STATE OR JURISDICTION OF INCORPORATION OR ORGANIZATION)
5555 OBERLIN DRIVE SAN DIEGO, CALIFORNIA 92121 (858) 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 5555 OBERLIN DRIVE SAN DIEGO, CALIFORNIA 92121 (858) 558-7500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: FREDERICK T. MUTO, ESQ. FAYE H. RUSSELL, ESQ JANE K. ADAMS, ESQ. RYAN S. HONG, ESQ. DENISE L. WOOLARD, ESQ. KANDACE W. RICHARDSON, ESQ. COOLEY GODWARD LLP BROBECK, PHLEGER & HARRISON LLP 4365 EXECUTIVE DRIVE, SUITE 1100 12390 EL CAMINO REAL SAN DIEGO, CA 92121 SAN DIEGO, CA 92130 (858) 550-6000 (858) 720-2500
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. [ ] CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------- Common Stock, $.001 par value per share............................ 5,750,000 $15.00 $86,250,000 $22,770(3) - ----------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
(1) Includes 750,000 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated for the purpose of calculating the amount of the registration fee in accordance with Rule 457 under the Securities Act of 1933. (3) $21,252 of such fee has been paid previously. ------------------------ 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 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MARCH 22, 2000 [SIGNAL LOGO] 5,000,000 SHARES COMMON STOCK Signal Pharmaceuticals, Inc. is offering 5,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "SGNL." We anticipate that the initial public offering price will be between $13.00 and $15.00 per share. As part of our collaboration agreement with DuPont Pharmaceuticals Company, DuPont Pharmaceuticals has agreed to purchase $2.0 million of our common stock in a private transaction concurrent with the closing of this offering at the initial public offering price. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------------
PER SHARE TOTAL ---------- ---------- Public Offering Price....................................... $ $ Underwriting Discounts and Commissions...................... $ $ Proceeds to Signal Pharmaceuticals, Inc. ................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Signal Pharmaceuticals, Inc. has granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of common stock to cover over-allotments. ------------------------------ ROBERTSON STEPHENS CHASE H&Q CIBC WORLD MARKETS THE DATE OF THIS PROSPECTUS IS , 2000. 3 [INSIDE FRONT COVER ARTWORK] DEVELOPING DRUGS TO REALIZE THE THERAPEUTIC POTENTIAL OF GENOMICS [Graphic depicting the gene regulating target and drug discovery programs of Signal. The graphic is divided into columns indicating the stage of research or development for each of Signal's current drug targets and drug candidates. The right side of the graphic lists the disease areas targeted by Signal: cancer, inflammation, bone metabolism, cardiovascular disease, neurological disease and viral infections.] Genomics is the large-scale identification and sequencing of the genes that comprise the human genome. The ability to convert the thousands of gene targets coming from genomics into drugs requires knowledge of which genes cause diseases and how to design drugs that selectively regulate these disease genes. Our drug discovery engine is an integrated set of advanced target and drug discovery technologies which accelerate the application of genomics to the generation of gene regulating drugs. Using our drug discovery engine, we have generated a pipeline of novel gene regulating targets and drugs at various stages of development for treating major diseases. 4 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF COMMON STOCK. IN THIS PROSPECTUS, "SIGNAL," "SIGNAL PHARMACEUTICALS," "WE," "US" AND "OUR" REFER TO SIGNAL PHARMACEUTICALS, INC. ------------------------------ TABLE OF CONTENTS
PAGE ---- Summary..................................................... 1 Risk Factors................................................ 5 Special Note Regarding Forward-Looking Statements........... 16 Use of Proceeds............................................. 17 Dividend Policy............................................. 17 Capitalization.............................................. 18 Dilution.................................................... 19 Selected Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 22 Business.................................................... 26 Management.................................................. 53 Certain Transactions........................................ 62 Principal Stockholders...................................... 63 Description of Capital Stock................................ 65 Shares Eligible for Future Sale............................. 68 Underwriting................................................ 70 Where You Can Find More Information......................... 72 Legal Matters............................................... 72 Experts..................................................... 72 Index to Financial Statements............................... F-1
------------------------------ Signal Pharmaceuticals(TM), PhaRMA(TM) and the Signal Pharmaceuticals stylized logo are trademarks of Signal Pharmaceuticals. This prospectus also includes trademarks owned by other parties. All other trademarks mentioned are the property of their respective owners. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. i 5 SUMMARY This summary highlights information contained elsewhere in this prospectus. We have included this information in the summary because we believe this information is highly important in making a decision to invest in our common stock. You should read this summary together with the more detailed information regarding our company and the common stock being sold in this offering appearing elsewhere in this prospectus, including our financial statements and related notes, for a more complete understanding of our business and the offering. OUR BUSINESS OVERVIEW Signal Pharmaceuticals is a biopharmaceutical company focused on discovering, developing and commercializing new classes of drugs that regulate genes associated with disease. Current initiatives in the field of genomics, which is the large-scale identification and sequencing of the genes that comprise the human genome, are generating a large flow of information regarding the role of genes in health and disease. We believe our approach can convert this enormous amount of valuable information into new classes of superior drugs. We have advanced the application of genomics beyond identifying genes to understanding the role of genes in disease and how these genes are regulated. This allows us to design novel classes of drugs that selectively regulate genes that cause disease. Our technologies enable us to identify and pursue numerous gene regulating drug targets across multiple diseases and to rapidly identify drugs for development. We believe our approach will yield drugs that treat the underlying causes of a disease, unlike many current drugs which only relieve the symptoms of a disease. Our efforts are focused in several major disease areas in which abnormal gene regulation plays an important role in the onset and progression of disease. These disease areas represent large commercial markets, including cancer, inflammatory disease, osteoporosis, cardiovascular disease, neurological disease and viral infections. OUR DRUG DISCOVERY ENGINE We have developed and integrated a large set of advanced target and drug discovery technologies, which we refer to as our "drug discovery engine," to accelerate the application of genomics to the discovery of important new classes of gene regulating drugs. We first map gene regulating pathways, which are networks of proteins inside cells that relay information to activate or suppress genes. We next select specific gene regulating proteins, or gene switches, within these pathways that control one or more genes that result in disease. We then generate novel drugs that regulate these gene switches. We believe our discovery and development capabilities provide us and our collaborators with a highly advanced and competitive technology platform for target and drug discovery. To protect our discoveries, we pursue patent exclusivity for our drug targets, drug leads and related drug candidates. We own or have exclusive licenses to 38 issued United States and foreign patents and 87 pending United States and foreign patents. OUR ACCOMPLISHMENTS Our drug discovery engine has enabled us to build a large and diverse portfolio of gene regulating drug targets, drug leads and drug candidates. To date, together with our collaborators, we have: - advanced drug discovery programs in six major disease areas; - explored and mapped 10 gene regulating pathways to identify the crucial gene switches that control disease; - identified 27 gene switches that we believe to be important targets for treating disease; - assembled a large and diverse screening library of more than 300,000 distinct compounds and natural products and a proprietary library designed to be potentially effective inhibitors of gene switches; - developed 29 drug discovery tests, or "screens," which allow us to search rapidly through our compound library for new drugs; 1 6 - identified 24 novel series of potent and selective drug leads that regulate our disease targets; - commenced evaluation of drug leads in 15 animal models that mimic human diseases; and - developed two drug candidates for which we expect to file Investigational New Drug applications, or INDs, in 2000, assuming preclinical studies required to begin human testing are favorably completed without delays. Our first drug candidate, SP8490, is for treating breast cancer and other cancers. In preclinical animal studies, SP8490, when orally administered, was effective in treating breast cancer and demonstrated equal or superior efficacy to tamoxifen, the current leading hormonal therapy for breast cancer. In addition, SP8490 displayed a superior safety profile in animal models that assess harmful side effects. The second drug candidate, NSP6783, is for preventing or treating nerve damage caused by cancer chemotherapy. In animal studies, this orally administered drug candidate provided significant protection of peripheral nerves and their function in an animal model of nerve damage caused by the chemotherapy drug taxol. In addition, we have discovered other gene regulating drug leads that are effective in several animal models, including models of rheumatoid arthritis, asthma, osteoporosis and epilepsy. We are conducting our drug discovery and development programs both independently and with our corporate collaborators: Nippon Kayaku, Ares-Serono, Axys Pharmaceuticals and DuPont Pharmaceuticals. Currently, our corporate collaborators fund significant portions of our research and development expenditures. We have retained United States co-commercialization or profit-sharing rights for the areas of cancer and inflammatory disease in three of our four collaborative programs. OUR STRATEGY There are five important elements of our business and scientific strategy: - We plan to advance our leadership position in the field of gene regulating targets and drugs by continuing to enhance the capabilities and scale of our discovery technologies. - We plan to continue expanding our product portfolio by mapping multiple gene regulating pathways, identifying multiple drug targets within each of these gene regulating pathways and selecting those targets for drug discovery that can be validated in multiple diseases. - We will develop orally administered drugs for large disease markets where current drugs do not adequately address these diseases. - We intend to establish a United States franchise for drugs that treat cancer and inflammatory disease. - We will continue to seek to establish strategic collaborations with leading pharmaceutical and biotechnology companies and will seek to retain substantial United States commercial rights in those collaborations in our franchise areas. OUR HISTORY We were incorporated in California in July 1992, and we intend to reincorporate in Delaware prior to the completion of this offering. As of December 31, 1999, we had 87 full-time employees with experienced scientists and managers skilled in each phase of target and drug discovery. We had an accumulated deficit as of December 31, 1999 of approximately $37.8 million and expect to continue to incur losses for at least the next several years. Our research laboratories and executive offices are located at 5555 Oberlin Drive, San Diego, California 92121, and our telephone number at that address is (858) 558-7500. Our website is located at www.signalpharm.com. Information contained on our website is not part of this prospectus. 2 7 THE OFFERING Common stock offered by Signal Pharmaceuticals........................... 5,000,000 shares Common stock to be outstanding after this offering.................................. 19,236,756 shares Use of proceeds........................... We intend to use the net proceeds of this offering for research and development, the acquisition of research and development technologies, compound libraries and product rights, capital investments, repayment of debt and working capital and general corporate purposes. Proposed Nasdaq National Market symbol.... SGNL ------------------------------ The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 and assumes the completion of the sale of $2.0 million of our common stock to DuPont Pharmaceuticals in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $14.00 per share. The number of shares of common stock to be outstanding after the offering excludes: - 1,493,607 shares subject to options outstanding as of December 31, 1999, at a weighted average exercise price of $0.72 per share. Subsequent to December 31, 1999, we granted options to purchase 589,375 shares of common stock at a weighted average exercise price of $2.50 per share; - 125,000 shares subject to warrants outstanding as of December 31, 1999, at an exercise price of $4.20 per share; - 1,417,018 additional shares that we could issue under our 2000 Equity Incentive Plan; - 250,000 shares that we could issue under our Non-Employee Directors' Stock Option Plan; and - 500,000 shares that we could issue under our Employee Stock Purchase Plan. ------------------------------ Unless otherwise stated, information in this prospectus is based on the following assumptions: - the conversion of all our outstanding shares of preferred stock into shares of common stock upon the closing of this offering; - no exercise of the underwriters' over-allotment option; - our reincorporation in Delaware and the filing of our amended and restated certificate of incorporation prior to the closing of this offering; and - a 1-for-2 stock split to be effected prior to the completion of this offering. 3 8 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenue....................................... $ 299 $ 3,933 $ 7,579 $15,414 $11,748 Expenses: Research and development.................... 5,173 7,724 10,337 15,573 16,748 General and administrative.................. 1,937 2,471 2,791 4,798 3,011 ------- ------- ------- ------- ------- Total expenses........................... 7,110 10,195 13,128 20,371 19,759 ------- ------- ------- ------- ------- Loss from operations.......................... (6,811) (6,262) (5,549) (4,957) (8,011) Interest income (expense), net................ 329 53 (191) 600 155 ------- ------- ------- ------- ------- Net loss...................................... (6,482) (6,209) (5,740) (4,357) (7,856) Imputed dividend on preferred stock........... -- -- -- -- (818) ------- ------- ------- ------- ------- Net loss applicable to common shareholders.... $(6,482) $(6,209) $(5,740) $(4,357) $(8,674) ======= ======= ======= ======= ======= Historical net loss per share applicable to common shareholders, basic and diluted...... $ (9.12) $ (7.29) $ (5.65) $ (3.31) $ (5.29) ======= ======= ======= ======= ======= Weighted average shares....................... 711 852 1,016 1,318 1,641 ======= ======= ======= ======= ======= Pro forma net loss per share applicable to common shareholders, basic and diluted...... $ (0.63) ======= Shares used in computing pro forma net loss per share, basic and diluted................ 13,752 =======
DECEMBER 31, 1999 ---------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 9,420 $ 75,670 Working capital............................................. 3,960 70,210 Total assets................................................ 14,539 80,789 Long-term obligations under capital leases and equipment notes payable............................................. 1,805 1,805 Accumulated deficit......................................... (37,776) (37,776) Total stockholders' equity.................................. 5,983 72,233
Please see note 1 of notes to our financial statements for an explanation of the determination of the number of shares used in computing per share data. The pro forma as adjusted balance sheet data reflect the net proceeds from the sale by us of shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and our estimated offering expenses, and our receipt of $2.0 million from DuPont Pharmaceuticals in exchange for the 142,857 shares of common stock to be issued in a private transaction concurrent with the closing of this offering. 4 9 RISK FACTORS Any investment in shares of our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus before you decide to buy our common stock. If any of the following risks occurs, our business, financial condition, results of operations and future growth prospects would likely be materially adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. IF WE CONTINUE TO INCUR OPERATING LOSSES FOR LONGER THAN WE ANTICIPATE, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS. We have generated operating losses since our inception in 1992 and as of December 31, 1999 had an accumulated deficit of approximately $37.8 million. We expect to continue to incur significant operating losses for the foreseeable future as we continue to incur increasing costs related to research and development, expansion of our operations and initiation of clinical trials. Payments, if any, from corporate collaborators, interest income and governmental grants are expected to be our only sources of revenue for the foreseeable future. To date, we have not received any significant milestone revenue and have received license fees and research and development payments of $41.2 million. Revenue from commercial sales of products based upon any drug target or drug lead that we may identify are not expected for a number of years, if at all. Any such revenue will depend on our ability, alone or with others, to successfully research, develop, obtain regulatory clearance for, manufacture and market our products under development. The extent of our future losses may exceed our expectations and jeopardize our ability to continue our operations. BECAUSE OUR DRUG CANDIDATES ARE AT AN EARLY STAGE OF DEVELOPMENT, THERE IS A HIGH RISK OF FAILURE. We have no products that have received regulatory clearance for commercial sale. In addition, we have no compounds in human testing, referred to as clinical trials. All of our compounds are in the research or preclinical development stage, and we face the risks of failure inherent in researching and developing drugs based on new technologies. We may be unable to file INDs for our two drug candidates, SP8490 and NSP6783, by the end of 2000 as we expect. None of our compounds, including SP8490 and NSP6783, may ever enter clinical trials, be commercialized or generate revenue in the future. THE DRUG DISCOVERY AND DEVELOPMENT PROCESS IS HIGHLY SPECULATIVE AND WE, OR OUR COLLABORATORS WORKING WITH US, MAY NEVER CREATE A COMMERCIAL DRUG. The discovery and development of new drugs is highly uncertain and subject to a number of significant risks which could prevent us or our collaborators from ever creating a commercial drug. Drug leads and drug candidates that appear to be promising at early stages of development may not enter clinical development or reach the market for a number of reasons, including the possibilities that the drug leads and drug candidates will: - be found ineffective or cause harmful side effects during preclinical testing or clinical trials; - fail to receive necessary regulatory clearance; - be difficult or expensive to manufacture on a commercial scale; or - fail to generate market demand. To our knowledge, no drugs based on genomics discoveries have been commercialized. In addition, we are not aware of any marketed drugs that were designed specifically to target gene regulating pathways in 5 10 order to treat the underlying molecular causes of a disease. Our current and potential discoveries of the gene regulating pathways associated with specific diseases may not lead to the development or commercialization of drugs. To date, none of the compounds generated by us or through our collaborations has been approved for clinical testing. None may ever be submitted for clinical testing. If we identify any potential products, either independently or through our collaborations, they will face the following risks: - our discovery and development programs may not be successfully initiated or completed; - any IND we file, including any INDs that we may file relating to SP8490 and NSP6783, may not be accepted by the FDA or other applicable regulatory authorities; - clinical trials may not commence or be completed as planned; - required regulatory clearance may not be obtained on a timely basis, if at all; or - any products for which clearance is obtained may not be commercially successful. In addition, success in preclinical testing and early stage clinical trials does not ensure that later clinical trials will be successful. IF WE CANNOT MAINTAIN OUR CURRENT CORPORATE COLLABORATIONS OR ENTER INTO NEW CORPORATE COLLABORATIONS, WE MAY NEVER DEVELOP OR COMMERCIALIZE PRODUCTS OR ACHIEVE PROFITABILITY. We rely, to a significant extent, on our corporate collaborators to provide funding that supports our research and to conduct some research, preclinical and clinical development, manufacturing and marketing. To date, approximately 90% of the revenue that we have received has been from our collaborations. We expect that a similar percentage of our revenue for the foreseeable future will be generated by collaborations. If any of our corporate collaborators were to breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner, the preclinical or clinical development or commercialization of the affected drug candidates or research programs could be delayed or terminated. In addition, we expect to rely on our corporate collaborators for commercialization of some of our products. Our ability to continue to fund our research and development programs, maintain adequate capital reserves and, ultimately, achieve profitability will be dependent upon our and our collaborators' ability to achieve specified milestones under existing collaborations with Nippon Kayaku, Ares-Serono, Axys and DuPont Pharmaceuticals or our ability to enter into additional collaborations. We have not yet entered into collaborations for a number of our existing or prospective programs. Even if a potential collaborator believes that our technologies and research discoveries justify entering into an agreement with us, its budgeting cycle, resources or other priorities may not permit a timely collaboration. We also must compete with other companies for the limited number of existing opportunities to enter into collaborative arrangements. We may not be able to negotiate additional collaborative agreements in the future on acceptable terms, if at all. In particular, potential collaborators may be unwilling to enter into an agreement that allows us to retain rights in our focus areas of cancer and inflammatory disease. In addition, current or future collaborative agreements may not be successful. Finally, current or future collaborators may pursue or develop alternative technologies either on their own or in collaboration with others, including our competitors. In the absence of such collaborative agreements, we may be required to delay or curtail our research and development activities to a significant extent. 6 11 To date, we have not received any significant milestone revenue and have received license fees and research and development payments of $41.2 million. These payments have not covered all of the expenses incurred in conducting our business. Our future revenue will depend in part on our ability to receive milestone payments and royalties triggered by the continued development and commercialization of drugs by our collaborators, over which we have little or no control. We currently have arrangements with four corporate collaborators: Nippon Kayaku, Ares-Serono, Axys Pharmaceuticals and DuPont Pharmaceuticals. If one of these collaborators were to terminate its arrangement with us, it could cause a substantial decrease in our revenue as well as potential delay or curtailment of ongoing research and development activities. Our collaborations may generally be terminated upon a breach by either party. Moreover, some of our collaborations may be terminated by our collaborators if we fail to achieve specified research and development milestones. We have in the past encountered, and may in the future encounter, difficulty in satisfying some stated milestones under our collaboration agreements. There has been a significant number of recent business combinations among our current and potential collaborators that have resulted in a reduced number of potential collaborators. If business combinations involving our corporate collaborators were to occur, the effect could be to cause delays in, reduce the scope of, or terminate one or more of our corporate collaborations. Some of our corporate or academic collaborators are conducting multiple drug discovery and development efforts within each disease area that is the subject of the collaboration with us. Generally, in each of our collaborations, we have agreed not to conduct independently, or with any third party, any research that is in conflict with the rights granted under the collaboration agreement. Our collaborations may have the effect of limiting the areas of research and development that we may pursue. BECAUSE WE EXPECT TO GENERATE A SIGNIFICANT PERCENTAGE OF OUR FUTURE REVENUES FROM CO-COMMERCIALIZATION AND PROFIT-SHARING ARRANGEMENTS, THE SUCCESS OR FAILURE OF THESE ARRANGEMENTS WILL SIGNIFICANTLY IMPACT OUR FUTURE FINANCIAL RESULTS. Under three of our current collaborations, we have co-commercialization or profit-sharing rights, and we plan to enter into additional collaborations that provide us with similar rights. Because these types of arrangements are expected to generate a larger percentage of our future revenues as compared with collaborations under which we receive only royalties, these collaborations may disproportionately affect our financial success. If these collaborations are not successful, or if we decide to abandon or license some or all of these co-commercialization or profit-sharing rights to third parties, we may not achieve all of our financial objectives. OUR COMPETITORS MAY BE ABLE TO DEVELOP AND MARKET PRODUCTS MORE QUICKLY OR THAT ARE MORE EFFECTIVE THAN OURS, WHICH WOULD REDUCE OR ELIMINATE OUR COMMERCIAL OPPORTUNITY. The competition among pharmaceutical and biotechnology companies to identify drug targets and drug candidates for development is intense and is expected to increase. Our commercial opportunity will be reduced or eliminated if our competitors develop and market products more quickly or that are more effective, have fewer side effects, are easier to administer or are less expensive than our product candidates. Other companies have product candidates in clinical trials to treat most of the diseases for which we are seeking to discover and develop product candidates. Even if we or our collaborators are successful in developing effective drugs, our products may not compete effectively with these products or other successful products. 7 12 In addition, our competitors include fully integrated pharmaceutical companies, biotechnology companies, universities and public and private research institutions that have substantially greater capital resources, larger research and development staffs and facilities, greater experience in drug development and in obtaining regulatory clearance and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to: - attract qualified personnel; - attract parties for acquisitions, joint ventures or other collaborations; and - license the proprietary technology of institutions that is competitive with the technology we are developing and applying. BECAUSE WE MUST OBTAIN REGULATORY CLEARANCE TO TEST AND MARKET OUR PRODUCTS IN THE UNITED STATES AND FOREIGN JURISDICTIONS, WE CANNOT PREDICT WHETHER OR WHEN WE WILL BE PERMITTED TO COMMERCIALIZE OUR PRODUCTS. The pharmaceutical industry is subject to stringent regulation by a wide range of authorities in the geographic areas where we intend to develop and commercialize products. A pharmaceutical product cannot be marketed in the United States until it has completed rigorous preclinical testing and clinical trials and an extensive regulatory clearance process implemented by the FDA. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Before commencing clinical trials in humans, we must submit and receive clearance from the FDA by means of an IND application. Clinical trials are subject to oversight by institutional review boards and the FDA and: - must be conducted in conformance with the FDA's good laboratory practice regulations; - must meet requirements for institutional review board oversight; - must meet requirements for informed consent; - must meet requirements for good clinical and manufacturing practices; - are subject to continuing FDA oversight; - may require large numbers of test subjects; and - may be suspended by us or the FDA at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or if the FDA finds deficiencies in the IND application or the conduct of these trials. Before receiving FDA clearance to market a product, we must demonstrate that the product is safe and effective on the patient population that will be treated. Data obtained from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory clearances.Additionally, we have limited experience in conducting and managing the clinical trials and manufacturing processes necessary to obtain regulatory clearance. If regulatory clearance of a product is granted, this clearance will be limited to those disease states and conditions for which the product is demonstrated through clinical trials to be safe and efficacious. We cannot ensure that any compound developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing clearance. 8 13 Outside the United States, our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authorities. This foreign regulatory approval process includes all of the risks associated with FDA clearance described above. For additional information concerning regulatory clearance of our potential products, see "Business -- Government Regulation." IF WE REQUIRE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, WE MAY NEED TO RAISE THESE FUNDS ON UNFAVORABLE TERMS, OR MAY NOT BE ABLE TO RAISE THESE FUNDS AT ALL. We will need substantial funds to continue the research, development and testing of our potential products. If adequate funds are not available, or are available on unfavorable terms, we may be required to delay, reduce in scope or eliminate one or more of our programs. Our future capital requirements will depend on, and could increase substantially as a result of, many factors, including the following: - progress in, and the costs of, our research and development programs; - the scope, prioritization and number of programs; - our acquisition and development of technologies; - our acquisition of potential products; - the progress of preclinical and clinical testing; - our ability to enter into additional collaborations; - our receipt of license, milestone, royalty and other payments from our collaborations; - the modification or termination of any of our current or future collaborations; - the time and costs involved in obtaining regulatory clearances; - the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent and other intellectual property claims; - competing technological and market developments; - the costs of securing manufacturing arrangements for clinical or commercial production; and - financial market conditions for debt and equity offerings. We currently depend on our corporate collaborators for substantially all of our research and development funding. As of December 31, 1999, we had received approximately $54.3 million in license fees, research and development funding, milestone payments and equity investments from our past and current collaborators. We may not continue to receive funding under our existing collaborative agreements and our existing or potential future collaborative arrangements may not be adequate to fund our operations. We also may seek alternative sources of financing or financing structures in the future. Alternative financing arrangements may not be available, and even if available, may not be adequate for the successful development of products. We intend to raise additional funds through private or public financings, research and development financings, collaborative relationships or other joint venture relationships and may seek to fund some of our programs through other financing sources. Because of our long-term capital requirements, we may seek to raise money through equity whenever we deem market conditions to be favorable, even if we do not need additional capital at that time. We do not know whether any such additional funding will be available when needed or that available financing will be on favorable terms. If we raise additional funds by issuing equity or convertible debt securities, you may experience substantial dilution, and debt financing, if available, may involve restrictive covenants. 9 14 WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, WHICH MAY MAKE IT DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. If revenue declines or does not grow as anticipated, we may not be able to correspondingly reduce our operating expenses. A large portion of our expenses, including expenses for facilities, equipment, contracted research and personnel, is relatively fixed. In addition, we plan to significantly increase operating expenses in 2000. Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular fiscal period. Due to the possibility of fluctuations in our revenue and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Some of the factors that could cause our operating results to fluctuate include: - termination or reduction in the scope of our corporate collaborations; - the success rate of our discovery and development efforts associated with milestones and royalties; - our ability to enter into new agreements with corporate collaborators or to extend the terms of our existing corporate collaboration agreements; - our ability to satisfy all applicable regulatory requirements; and - general and industry-specific economic conditions that may affect our corporate collaborators' research and development expenditures. IF OUR TECHNOLOGIES OR THOSE OF OUR COLLABORATORS ARE ALLEGED OR FOUND TO INFRINGE THE PATENTS OR PROPRIETARY RIGHTS OF OTHERS, WE MAY BE SUED OR HAVE TO LICENSE THOSE RIGHTS FROM OTHERS ON UNFAVORABLE TERMS. Our commercial success will depend significantly on our ability to operate without infringing the patents and proprietary rights of third parties. Our technologies along with our licensors' and our collaborators' technologies may infringe the patents or proprietary rights of others. An adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent office could subject us to significant liabilities, require disputed rights to be licensed from or to other parties or require us, our licensors or our collaborators to cease using a technology necessary to carry out research, development and commercialization. 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 us or one of our licensors or collaborators may have a material adverse effect on us. We could incur substantial costs if we are required to defend ourselves in patent suits brought by third parties, if we participate in patent suits brought against or initiated by our licensors or collaborators or if we initiate such suits. We may not have sufficient funds or resources in the event of litigation. Additionally, we may not prevail in any such action. A number of pharmaceutical companies, biotechnology 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 us or our collaborators. For instance, a number of patents may have been issued or may be issued in the future on targets or their use in screens for evaluating the activity of compounds on a specific drug target, called screening assays, that could prevent us and our collaborators from developing screens using such targets, compounds relating to such targets or relating to other aspects of technology that we utilize or expect to utilize. In addition, we are unable to determine all of the patents or patent applications that may materially affect our or our collaborators' ability to make, use or sell any potential products. We are aware of one issued United States patent relating to specific methods for regulating gene expression. We may in the future have to prove we are not infringing the patent or be required to obtain a 10 15 license to the patent, and we do not know whether such a license will be available on commercially reasonable terms, or at all. We are also aware of a United States patent which has been issued to a third party claiming subject matter relating to the NF-kB pathway which appears to overlap with technology claimed in some of our pending NF-kB patent applications. We believe that one or more interference proceedings will be initiated by the U.S. Patent and Trademark Office to determine priority of invention for this subject matter. We cannot be certain of the outcome of any such proceedings. Any conflicts resulting from third-party patent applications and patents could significantly reduce the coverage of the patents owned, optioned by or licensed to us or our collaborators and limit our ability or that of our collaborators to obtain meaningful patent protection. If patents are issued to third parties that contain competitive or conflicting claims, we, our licensors or our collaborators may be legally prohibited 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. We, our licensors and or our collaborators may be legally prohibited from using patented technology, may not be able to obtain any license to the patents and technologies of third parties on acceptable terms, if at all, or may not be able to obtain or develop alternative technologies. In addition, like many biopharmaceutical companies, we 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 us. We or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. OUR ABILITY TO COMPETE MAY DECREASE IF WE DO NOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. Our commercial success will depend in part on our and our collaborators' ability to obtain and maintain patent protection for our proprietary technologies, drug targets and potential products and to effectively preserve our trade secrets. Because of the substantial length of time and expense associated with bringing potential products through the development and regulatory clearance processes to reach the marketplace, the pharmaceutical industry places considerable importance on obtaining patent and trade secret protection. We seek patent protection for our proprietary technology, drug targets and potential products. However, the patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, we cannot predict the type and breadth of claims allowed in these patents. The degree of future protection for our proprietary rights is uncertain. Many factors may affect our patent position, including whether: - we were the first to make the inventions covered by each of our pending patent applications; - we were the first to file patent applications for these inventions; - others will independently develop similar or alternative technologies or duplicate any of our technologies; - any of our pending patent applications will result in issued patents; - any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties; - we will develop additional proprietary technologies that are patentable; or - the patents of others will have an adverse effect on our ability to do business. In addition to patent protection, we also rely 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, we require our employees, consultants and some 11 16 collaborators to execute confidentiality and invention assignment agreements upon commencement of a relationship with us. These agreements may not provide meaningful protection for our trade secrets, confidential information or inventions in the event of unauthorized use or disclosure of such information, and adequate remedies may not exist in the event of such unauthorized use or disclosure. IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL AS NECESSARY, IT COULD DELAY OR IMPAIR THE QUALITY OF OUR PRODUCT DEVELOPMENT PROGRAMS AND RESULT IN REDUCED RESEARCH AND DEVELOPMENT EFFORTS. Our success is highly dependent on the principal members of our scientific and management staff, as well as our scientific advisors and consultants. If we lose the services of one or more of these individuals, it could prevent us from advancing our technology, developing potential products or achieving profitability. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other technology-based businesses, particularly in the San Diego area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to meet the demands of our collaborators in a timely fashion or to support our internal research and development programs. In particular, our product development programs depend on our ability to attract and retain highly skilled scientists, including molecular biologists, biochemists and engineers, and clinical and regulatory experts. Our employees are "at-will" which means they may quit at any time and we may fire them at any time. Our planned activities will require additional expertise in specific industries and areas applicable to the products developed through our technologies. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. WE DEPEND ON THIRD PARTIES TO PERFORM MANY PRECLINICAL AND CLINICAL DEVELOPMENT ACTIVITIES, AND OUR DEVELOPMENT PROGRAMS MAY BE DELAYED OR TERMINATED IF THEY FAIL TO PERFORM THEIR RESPONSIBILITIES COMPLETELY AND ON TIME. We rely and will continue to rely in part on third parties to perform preclinical and clinical development activities. Specifically, we expect to contract with third parties for the manufacture of drug product, the conduct of preclinical animal studies, including studies regarding biological activity, safety, absorption, metabolism and elimination of drug candidates, and the performance of clinical trials for safety and efficacy in humans. Our agreements for contract preclinical and clinical development services place substantial responsibilities on third parties for development of our drug candidates which could result in delays in or termination of development if these third parties fail to perform as expected. We may not be able to maintain any of these existing relationships, or establish new ones on favorable terms, if at all. We may not be able to enter into these arrangements without undue delays or excessive expenditures. Furthermore, these third parties may not perform as expected. WE HAVE NO MANUFACTURING EXPERIENCE AND MUST RELY ON THIRD-PARTY MANUFACTURING. To date, we have not manufactured any products for preclinical, clinical or commercial purposes and do not have any manufacturing facilities. We currently use third-party contract manufacturers, and may in the future use our corporate collaborators, for the production of materials for preclinical and clinical trials and for the manufacture of future products for commercialization. If we are unable to secure such outside manufacturing capabilities, we will not be able to conduct preclinical product development, clinical trials or commercialize our potential products as planned. WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH. We will need to expand and effectively manage our operations and facilities in order to successfully complete our existing corporate collaborative agreements, facilitate additional collaborations and pursue future 12 17 internal research, development and commercialization efforts. We expect to significantly increase our rate of growth to meet our strategic objectives. If our growth accelerates, it will place a strain on us. In addition, we will be required to expand our management capabilities, enhance our operating and financial systems and expand our facilities to manage our growth effectively. If we continue to grow, it is possible that the number and skills of management and scientific personnel, systems and facilities currently in place may not be adequate. OUR BUSINESS INVOLVES THE USE OF HAZARDOUS MATERIALS WHICH COULD CAUSE US TO INCUR SUBSTANTIAL COSTS IN THE EVENT SUCH MATERIALS ARE NOT STORED, HANDLED OR DISPOSED OF CORRECTLY. Our research and development processes involve the controlled use of hazardous materials, including infectious biological materials, chemicals and various radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result and any such liability could exceed our resources and result in lengthy interruption of business operations. If an accident occurred, we would likely incur significant costs to comply with environmental laws and regulations in the future. OUR STOCK PRICE WILL LIKELY BE VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN. The market prices of technology companies, particularly life science companies, have been highly volatile. Our stock may be affected by this type of market volatility, as well as by our own performance. The following factors, among other risk factors, may have a significant effect on the market price of our common stock: - developments in our relationships with current or future corporate collaborators; - announcements of technological innovations or new products by us or our competitors; - developments in patent or other proprietary rights; - fluctuations in our operating results; - litigation initiated by or against us; - future royalties and profit-sharing from product sales, if any, by our collaborators; - developments in domestic and international governmental policy or regulation; and - economic and other external factors or other disaster or crisis. WE MAY BE SUED FOR PRODUCT LIABILITY AND OUR INSURANCE COVERAGE MAY NOT BE SUFFICIENT. We may be held liable if any product we or our collaborators develop, or any product which is made with the use of any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. We currently have no product liability insurance. When we attempt to obtain product liability insurance, this insurance may be expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our collaborators. If we are sued for any injury caused by our products, our liability could exceed our total assets. 13 18 THE CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS AND DEPRESS OUR STOCK PRICE. After this offering, our executive officers, directors and stockholders with at least 5% of our stock will control approximately 54.1% of our outstanding common stock. If these officers, directors and principal stockholders act together, they will be able to influence significantly and possibly control matters requiring approval by our stockholders, including approvals of amendments to our certificate of incorporation, mergers, a sale of all or substantially all of our assets, going private transactions and other fundamental transactions. They may also be able to control the election of our board of directors members. This concentration of ownership could depress our stock price. THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE. Prior to this offering, there has been no public market for shares of our common stock. An active, liquid trading market may not develop following completion of this offering, or if developed, may not be maintained. We will determine the initial public offering price for the shares through negotiations between us and representatives of the underwriters. This price may not be indicative of prices that will prevail later in the trading market. The market price of our common stock may decline below the initial public offering price, and you may not be able to resell your shares at or above the initial public offering price. WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO YOU. Our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to you. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. Because of these provisions, you might not be able to receive a premium on your investment. These provisions: - authorize our board of directors, without stockholder approval, to issue up to 5,000,000 shares of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and prevent a takeover attempt; - limit who has the authority to call a special meeting of our stockholders; - prohibit stockholder action by written consent, requiring stockholder actions to be taken at stockholder meetings; - establish advance notice requirements for nominations for election to the board of directors and for proposals to be acted upon at stockholder meetings; and - establish staggered terms for the members of the board of directors. Any of the provisions described above could delay or make more difficult transactions involving a change in control of us or our management. FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE. The market price of our common stock could decline as a result of sales by our existing stockholders of a large number of shares of our common stock in the public market after the closing of this offering, or the perception that these sales could occur. These sales could make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. In addition, the market price of our common stock could decline if we sell additional equity securities in connection with financings or collaborative arrangements. 14 19 YOUR INVESTMENT WILL BE IMMEDIATELY DILUTED. We expect that initial public offering price to be substantially higher than the net tangible book value per share of the common stock. Therefore, if you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in pro forma net tangible book value of $10.28 per share. You may incur additional dilution if the holders of outstanding options or warrants exercise those options or warrants. Additional information regarding the dilution to investors in this offering is included in this prospectus under the headings "Dilution" and "Shares Eligible for Future Sale." 15 20 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. These include statements about our expectations, plans, objectives, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as "anticipate," "estimate," "plans," "projects," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend" and similar expressions. These statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed for the reasons described in this prospectus. You should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 16 21 USE OF PROCEEDS Our proceeds from the sale of the 5,000,000 shares of common stock we are offering are estimated to be $66.3 million ($76.0 million if the underwriters' over-allotment option is exercised in full), after deducting the underwriting discount and our estimated offering expenses. We intend to use approximately $8.7 million of the net proceeds from this offering to fund drug discovery and development to be conducted during 2000, including internal discovery programs and joint research and development with corporate and academic collaborators. We also intend to use the net proceeds from this offering for future research and development, the acquisition of research and development technologies and compound libraries, manufacture of drug candidates, capital investments, repayment of debt, working capital and general corporate purposes. We also may use a portion of the net proceeds to fund acquisitions of product or target rights or businesses, although we have no current agreements or commitments for any such acquisition. The amounts and timing of these expenditures will vary depending on a number of factors, primarily the amount and timing of revenues from our current or future collaborators, including amendments of the terms of such collaborative arrangements. Pending the uses described above, we will invest the net proceeds of this offering in short- and intermediate-term, interest-bearing, investment-grade securities. We believe the net proceeds of this offering, together with our existing capital resources, interest income and committed revenue from our existing collaborations, should be sufficient to fund our anticipated operating expenses and capital requirements until at least the end of 2001. We will continue to expend substantial resources for the expansion of drug discovery and development, including costs associated with preclinical testing and clinical trials. We will be required to expend substantial funds in the course of completing required additional development, preclinical testing and clinical trials of and regulatory clearance for product candidates, if any. Our future liquidity and capital requirements will depend on many factors, including: - continued scientific progress in our research and development programs; - the size and complexity of these programs; - the retention of existing and establishment of future collaborative arrangements, if any; - the scope and results of preclinical testing and clinical trials; - the time and expense involved in obtaining regulatory clearances, if any; - competing technological and marketing developments; - the time and expense of filing and prosecuting patent applications and enforcing patent claims; and - other factors beyond our control. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently expect to retain our future earnings, if any, for the development of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of our secured loan from MMC/GATX Partnership No. 1 prohibit us from paying any dividends and making any distributions and limit our ability to repurchase stock. 17 22 CAPITALIZATION You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the notes to those statements included elsewhere in this prospectus.
DECEMBER 31, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ---------- ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Long-term obligations, less current portion................. $ 1,805 $ 1,805 $ 1,805 Stockholders' equity: Convertible preferred stock, $.001 par value; 12,371,319 shares authorized and 12,246,296 shares issued and outstanding, actual; 5,000,000 shares authorized and no shares issued and outstanding, pro forma; 5,000,000 shares authorized and no shares issued or outstanding, pro forma as adjusted.................................. 12 -- -- Common stock, $.001 par value; 17,644,354 shares authorized and 1,847,603 shares issued and outstanding, actual; 50,000,000 shares authorized and 14,093,899 shares issued and outstanding, pro forma; 50,000,000 shares authorized and 19,236,756 shares issued and outstanding, pro forma as adjusted..................... 2 14 19 Additional paid-in capital................................ 45,112 45,112 111,357 Deferred compensation..................................... (1,272) (1,272) (1,272) Notes receivable from stockholders........................ (95) (95) (95) Accumulated deficit....................................... (37,776) (37,776) (37,776) -------- -------- -------- Total stockholders' equity........................... 5,983 5,983 72,233 -------- -------- -------- Total capitalization................................. $ 7,788 $ 7,788 $ 74,038 ======== ======== ========
This table sets forth as of December 31, 1999: - our actual capitalization; - our pro forma capitalization, assuming the conversion of all of our outstanding preferred stock into common stock in conjunction with the closing of this offering; - our pro forma as adjusted capitalization which also gives effect to the sale of 5,000,000 shares of our common stock in this offering and the sale of 142,857 shares of common stock to DuPont Pharmaceuticals in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $14.00 per share after deducting estimated underwriting discounts and commissions and estimated expenses of this offering. The number of shares of common stock to be outstanding after this offering assumes no exercise of the underwriters' over-allotment option. The number of shares to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999, and excludes: - 1,493,607 shares subject to options outstanding as of December 31, 1999, at a weighted average exercise price of $0.72 per share. Subsequent to December 31, 1999, we granted options to purchase 589,375 shares of common stock at a weighted average exercise price of $2.50 per share; - 125,000 shares subject to warrants outstanding as of December 31, 1999, at an exercise price of $4.20 per share; - 1,417,018 additional shares that we could issue under our 2000 Equity Incentive Plan; - 250,000 shares that we could issue under our Non-Employee Directors' Stock Option Plan; and - 500,000 shares that we could issue under our Employee Stock Purchase Plan. Of the total shares outstanding, 128,911 shares are subject to our right of repurchase as of December 31, 1999. 18 23 DILUTION Our pro forma net tangible book value as of December 31, 1999 was $5.4 million, or $.38 per share, after giving effect to the automatic conversion of all outstanding shares of preferred stock into an aggregate of 12,246,296 shares of common stock, which will occur upon the closing of the offering. After giving effect to the sale of the common stock in this offering and the sale of 142,857 shares to DuPont Pharmaceuticals in a private transaction concurrent with the closing of this offering at an assumed initial public offering price of $14.00 per share, after deducting the estimated underwriting discount and offering expenses, the adjusted pro forma net tangible book value at December 31, 1999, would have been $71.6 million, or $3.72 per share. Pro forma net tangible book value per share before the offering has been determined by dividing pro forma net tangible book value (total tangible assets less total liabilities) by the pro forma number of shares of common stock outstanding at December 31, 1999. The offering will result in an increase in pro forma net tangible book value per share of $3.34 to existing stockholders and dilution in pro forma net tangible book value per share of $10.28 to new investors who purchase shares in the public offering. Dilution is determined by subtracting pro forma net tangible book value per share after the public offering and the sale of shares to DuPont Pharmaceuticals from the assumed initial public offering price of $14.00 per share. The following table illustrates this dilution: Assumed initial public offering price per share............. $14.00 Pro forma net tangible book value per share as of December 31, 1999............................................... $0.38 Increase per share attributable to new investors.......... 3.34 ----- Pro forma net tangible book value per share after the public offering and the sale of shares to DuPont Pharmaceuticals........................................... 3.72 ------ Net tangible book value dilution per share to new investors............................................. $10.28 ======
If the underwriters' over-allotment option is exercised in full, the pro forma net tangible book value per share after this offering would be $4.07 per share, the increase in net tangible book value per share to existing stockholders would be $3.69 per share and the dilution in net tangible book value to new investors would be $9.93 per share. The following table summarizes, on a pro forma basis as of December 31, 1999, the differences between the total consideration paid and the average price per share paid by the existing stockholders and the new investors with respect to the number of shares of common stock purchased from us based on an assumed public offering price of $14.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION -------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- ------------- Existing stockholders........... 14,093,899 73% $ 41,648,504 37% $ 2.96 New investors................... 5,142,857 27 71,999,998 63 $14.00 ---------- --- ------------ --- Total......................... 19,236,756 100% $113,648,502 100% ========== === ============ ===
These tables assume no exercise of stock options and warrants outstanding at December 31, 1999 and include 128,911 shares subject to repurchase by us at $0.46 per share. At December 31, 1999, there were 1,493,607 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $0.72 per share. Subsequent to December 31, 1999, we granted options to purchase 589,375 shares of common stock at a weighted average exercise price of $2.50 per share. In addition, 125,000 shares of Series C-1 preferred stock are issuable upon exercise of outstanding warrants at an exercise price of $4.20 per share. 19 24 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to our statements of operations for the years ended December 31, 1997, 1998 and 1999 and with respect to our balance sheet at December 31, 1998 and 1999, are derived from the financial statements that have been audited by Ernst & Young LLP, independent auditors, which are included elsewhere herein and are qualified by reference to such financial statements. Our statement of operations data for the years ended December 31, 1995 and 1996 and the balance sheet data at December 31, 1995, 1996 and 1997 have been derived from the financial statements audited by Ernst & Young LLP, our independent auditors, which are not included herein. 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 our financial statements and notes thereto appearing elsewhere in this prospectus.
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue: Collaborative agreements: Related party................................. $ -- $ -- $ 250 $ 3,000 $ 4,525 Unrelated parties............................. -- 3,586 7,065 12,027 6,696 Grants........................................... 299 347 264 387 527 ------- ------- ------- ------- ------- Total Revenue............................ 299 3,933 7,579 15,414 11,748 ------- ------- ------- ------- ------- Expenses: Research and development......................... 5,173 7,724 10,337 15,573 16,748 General and administrative....................... 1,937 2,471 2,791 4,798 3,011 ------- ------- ------- ------- ------- Total Expenses.............................. 7,110 10,195 13,128 20,371 19,759 ------- ------- ------- ------- ------- Loss from operations............................... (6,811) (6,262) (5,549) (4,957) (8,011) Interest income.................................... 453 187 326 1,052 607 Interest expense................................... (124) (134) (517) (452) (452) ------- ------- ------- ------- ------- Net loss........................................... (6,482) (6,209) (5,740) (4,357) (7,856) Imputed dividend on preferred stock................ -- -- -- -- (818) ------- ------- ------- ------- ------- Net loss applicable to common shareholders......... $(6,482) $(6,209) $(5,740) $(4,357) $(8,674) ======= ======= ======= ======= ======= Historical net loss per share applicable to common shareholders, basic and diluted.................. $ (9.12) $ (7.29) $ (5.65) $ (3.31) $ (5.29) ======= ======= ======= ======= ======= Weighted average shares............................ 711 852 1,016 1,318 1,641 ======= ======= ======= ======= ======= Pro forma net loss per share applicable to common shareholders, basic and diluted.................. $ (0.63) ======= Number of shares used in computing pro forma net loss per share, basic and diluted................ 13,752 =======
20 25
DECEMBER 31, ---------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................................. $ 4,211 $ 5,460 $ 20,866 $ 12,952 $ 9,420 Working capital............................... 3,616 2,606 15,379 9,123 3,960 Total assets.................................. 6,866 9,047 23,838 19,558 14,539 Long-term obligations under capital leases and equipment notes payable..................... 513 2,746 1,548 2,460 1,805 Accumulated deficit........................... (12,796) (19,005) (24,745) (29,102) (37,776) Total stockholders' equity.................... 5,574 1,512 15,164 12,125 5,983
Please see note 1 of notes to our financial statements for an explanation of the determination of the number of shares used in computing per share data. 21 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We were incorporated in July 1992 and have devoted substantially all of our resources since that time to research and development in order to identify proprietary drug targets and discover novel small molecule drugs that regulate genes associated with disease. Through both internally funded programs and in conjunction with our corporate collaborators, we are working to identify gene regulating drug targets and potential products for treating cancer, inflammatory disease, bone metabolic disease, cardiovascular disease, neurological disease and viral infections. We have incurred significant losses since inception, with an accumulated deficit of $37.8 million as of December 31, 1999, due primarily to ongoing expenditures related to our research and development programs. We expect to continue to incur substantial increases in expenditures and operating losses for at least the next several years as we expand our 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. In addition, we have granted stock options at exercise prices below the assumed initial public offering price, which we expect will result in substantial and recurring non-cash compensation expense over the next several years. In February 2000, we granted options to purchase 589,375 shares which will result in additional deferred compensation of approximately $6.0 million. Our 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, expansion and termination of research and development programs, the acquisition of technologies, compound libraries and product rights, as well as the progress of our 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. A key element of our strategy is to enter into collaborations with pharmaceutical and biotechnology companies in order to enhance our target and drug discovery programs and to fund our capital requirements. Our principal sources of revenue for the next several years are expected to consist of license fees and upfront payments, research and development funding and milestone payments under such collaborations, government grants, if any, and interest income. To date, our revenue has been due primarily to arrangements with the following collaborators: Tanabe, which was entered into in March 1996 and concluded in March 1998; Organon, which was entered into in July 1996 and concluded in August 1999; Roche Bioscience, which was entered into in August 1996 and concluded in August 1999; Ares-Serono, which was entered into in November 1997; DuPont Pharmaceuticals, which was entered into in December 1997; Nippon Kayaku, which was entered into in February 1998; and Axys Pharmaceuticals, which was entered into in October 1999. Under our collaborative arrangements, we have received payments of $54.3 million to date in license fees, research and development payments and equity investments, of which $37.1 million has been recognized as revenue. To date, we have received an equity milestone of $1.0 million and license fees, upfront payments and research and development payments of $41.2 million. In 1997, we recognized aggregate revenue of $725,000 in license fees and upfront payments, $6.6 million in research and development payments from our collaborators and $264,000 in government grants. In 1998, we recognized aggregate revenue of $3.1 million in license fees and upfront payments, $11.9 million in research development payments from our collaborators and $387,000 in government grants. In 1999, we recognized aggregate revenue of $1.9 million in license fees and upfront payments, $9.4 million in research and development payments from our collaborators and $528,000 in government grants. Under the terms of our collaborations described above, as of December 31, 1999, our corporate collaborators had agreed to provide future research funding of up to approximately $10.4 million over a two-year period, including $1.5 million subject to possible cancellation, as well as additional payments upon the achievement of specific research and development milestones and royalties or profit-sharing upon the commercialization of any products. 22 27 RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 Revenue. Revenue for the year ended December 31, 1999 decreased to $11.7 million from $15.4 million for the year ended December 31, 1998. The decrease was due primarily to the termination of the Tanabe agreement in 1998 which resulted in decreased revenues of $4.1 million. Revenue for the year ended December 31, 1998 increased to $15.4 million from $7.6 million for the year ended December 31, 1997. The increase was due primarily to additional collaborative agreements that were in place during 1998 and an amendment to the collaborative agreement with Tanabe which resulted in recognition of additional research and development revenue of $6.4 million and $840,000, respectively. Research and Development Expenses. Our research and development expenses for the year ended December 31, 1999 increased to $16.7 million from $15.6 million for the year ended December 31, 1998. The increase in 1999 was due primarily to increased salary and relocation expense of $857,000, resulting from the hiring of additional research and development personnel and increased product development expense of $576,000. Research and development expenses for the year ended December 31, 1998 increased to $15.6 million from $10.3 million for the year ended December 31, 1997. The increase was due primarily to increased expenses for salaries and relocation of $1.7 million resulting from the hiring of additional research and development personnel, the purchase of materials of $1.2 million for expansion of our research programs, facilities expansion of $506,000, depreciation expense of $500,000, amortization of deferred compensation of $376,000, increased travel expenses of $198,000 and the initiation of additional academic research collaborations of $184,000. General and Administrative Expenses. Our general and administrative expenses for the year ended December 31, 1999 decreased to $3.0 million from $4.8 million in 1998. The decrease was due primarily to reductions in fees for professional services of $1.0 million, equipment rentals of $245,000 and salary expense of $185,000 due to lower general and administrative headcount. Our general and administrative expenses for the year ended December 31, 1998 increased to $4.8 million from $2.8 million for the year ended December 31, 1997. The increase was due primarily to increased fees for professional services of $827,000, and increased salary expense of $591,000 resulting from the hiring of additional personnel, amortization of deferred compensation of $231,000 and facilities expansion of $160,000. Interest Income (Expense), Net. Net interest income (expense) for the years ended December 31, 1999, 1998 and 1997 was $155,000, $600,000 and ($191,000), respectively. The decrease in net interest income in 1999 from 1998 was due primarily to lower average cash balances. The increase in net interest income in 1998 from 1997 was due primarily to higher average cash balances. Imputed Dividend. Due to our achievement of a certain milestone in 1999, DuPont Pharmaceuticals purchased 144,354 shares of our Series F-1 Preferred Stock for total cash proceeds of $1.0 million. We recognized an imputed dividend of $818,487 to reflect a beneficial conversion feature on these preferred shares. Income Taxes. At December 31, 1999, we had federal and state net operating loss carryforwards of approximately $30.6 million and $11.7 million, respectively. The federal tax loss carryforwards will begin expiring in 2007, unless previously used, and the state tax loss carryforwards began expiring in 1998. We have 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 under 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, we do not believe any such limitation will have a material effect upon the utilization of these carryforwards. 23 28 LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded our operations primarily through private placements of preferred stock, funds provided under the Tanabe, Organon, Roche Bioscience, Ares-Serono, DuPont Pharmaceuticals, Nippon Kayaku and Axys Pharmaceuticals collaborative agreements, and, to a lesser extent, through debt and equipment financing, interest income and government research grant revenue. As of December 31, 1999, we have received $40.8 million in net proceeds from the sales of equity securities, $41.2 million under our collaborative agreements, $7.0 million in debt and equipment financing, $2.9 million in interest income and $1.8 million in research grants from the NIH. As of December 31, 1999, we had approximately $9.4 million in cash, cash equivalents and short-term investments. Net cash used in operations was $2.9 million, $4.8 million and $2.3 million in 1999, 1998 and 1997, respectively. Net cash used in operations decreased in 1999 from 1998 due primarily to initial license fees and upfront payments and research and development payments under our collaborative agreements. Net cash used in operations increased in 1998 from 1997 due primarily to prepayment by our corporate collaborators of a portion of research and development funding for 1998 in 1997. As of December 31, 1999, we have purchased with cash $5.1 million in property and equipment, primarily for facility improvements and laboratory and office equipment. We have financed approximately $4.9 million of our equipment through capital leases and equipment note obligations. At December 31, 1999, we had outstanding debt of $416,000 under a secured promissory note that we issued on December 2, 1996. The principal amount of this secured promissory note is payable in monthly installments of $88,334, with the final monthly payment scheduled for May 31, 2000. The promissory note is secured by substantially all of our assets except for our intellectual property. The terms of the loan limit our ability to incur additional debt, repurchase our stock and pay dividends. We were in compliance with all covenants under the arrangement as of December 31, 1999. We believe the net proceeds of this offering and the sale of $2.0 million of shares of common stock at a price per share equal to the initial public offering price to DuPont Pharmaceuticals in a private transaction concurrent with the closing of this offering, together with our existing capital resources, committed revenue from our existing collaborations and interest income should be sufficient to fund our anticipated operating expenses and capital requirements at least through the end of the year 2001. These funding requirements include continued and increased expenditures for research and development activities, as well as expenditures related to facility improvements, the purchase of additional laboratory and office equipment, the purchase of technology, compound libraries and product rights, the repayment of debt, working capital and general corporate purposes. We have not entered into any formal commitments to use the proceeds from the offering for increased personnel, capital expenditures or any other purpose. We cannot assure you that changes in our research and development plans and collaborations, the acquisition of additional technology, compound libraries and product rights or other changes affecting our operating expenses or use of capital will not result in the expenditure of available resources before such time. The costs associated with the clinical development of new drugs are substantial and generally increase over time. If we are successful in advancing one or more drug candidates into clinical development, our need for additional capital will increase substantially. In any event, we will need to raise substantial additional capital to fund our operations in future periods. We intend to seek additional funding through collaborative arrangements, public or private equity or debt financing, property and equipment financing or other financing sources that may be available. If additional funds are raised through the sale of equity securities, substantial dilution to you may result. Debt financing, if available, may involve restrictive covenants. Further, we cannot assure you that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, or reduce the scope of, or eliminate one or more of our research or development programs or to obtain funds through strategic collaborations that are on unfavorable terms or that may require us to relinquish rights to some of our technologies, product candidates, products or marketing territories that we would otherwise seek to retain. Our failure to raise capital when needed could have a material adverse effect on our business, financial condition and results of operations. 24 29 New Accounting Pronouncements. We expect to adopt SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. SFAS No. 133 will require us to recognize all derivatives on the balance sheet at fair value. We do not anticipate that the adoption of the SFAS No. 133 will have a significant effect on our results of operations or financial position. 25 30 BUSINESS OVERVIEW Signal Pharmaceuticals is a biopharmaceutical company focused on discovering, developing and commercializing new classes of "small molecule" drugs, which are drugs that can be taken in pill form, that regulate disease-associated genes. We believe our approach can convert the enormous amount of valuable information coming from genomics initiatives into new classes of superior drugs. Our powerful drug discovery engine enables us to identify and pursue numerous potential gene-regulating drug targets across multiple diseases and to rapidly identify drugs for development. Our efforts are focused in several major disease areas in which abnormal gene regulation plays an important role in the development of disease. These disease areas represent large commercial markets, including cancer, inflammatory disease, osteoporosis, cardiovascular disease, neurological disease and viral infections. We have developed and integrated a large set of advanced target and drug discovery technologies to accelerate the application of genomics to the discovery of important new classes of gene regulating drugs. This drug discovery engine consists of: - advanced cellular, molecular and genomic technologies that we use to discover clinically important drug targets; - proprietary automated biochemical and cell-based drug discovery systems, known as high throughput screening assays, and diverse libraries of compounds that we use to rapidly identify small molecule compounds that are active against multiple drug targets; - our proprietary library of compounds having attractive drug-like properties and designed to selectively inhibit novel classes of gene switches; and - proprietary three-dimensional models of drug targets, combined with advanced chemistry technologies, to efficiently generate potent and selective small molecule compounds, or drug leads, and to move these forward as drug candidates into preclinical evaluation and clinical development. Our drug discovery engine has enabled us to build a large and diverse portfolio of drug targets, drug leads and drug candidates. To date, together with our collaborators, we have: - identified 27 drug targets in 10 major gene regulating pathways; - developed 29 drug discovery screens; - identified 24 novel series of drug leads and commenced evaluation of a number of these drug leads in 15 animal models that mimic human diseases; and - developed two drug candidates which currently are in late-stage preclinical development. We are conducting our drug discovery and development programs both independently and with our corporate collaborators: Nippon Kayaku, Ares-Serono, Axys Pharmaceuticals and DuPont Pharmaceuticals. Currently, our corporate collaborators fund significant portions of our research and development expenditures. In three of our four collaborative programs, we have retained United States co-commercialization or profit-sharing rights for the areas of cancer and inflammatory disease. BACKGROUND GENES AND DISEASE The human body contains an estimated 140,000 genes. Genes control all cellular functions responsible for maintaining human health by serving as blueprints for the production of proteins in cells, a process known as gene expression. Proteins, which control a cell's biological function, include hormones, enzymes and cytokines, which are proteins secreted by cells that mediate the inflammatory response. Critical cell functions regulated by proteins include growth, differentiation and survival. 26 31 Recent advances in cellular and molecular biology have shown that malfunctions in gene regulation either cause or predispose humans to most diseases. These malfunctions cause cells to produce inappropriate amounts or types of proteins. For example, the uncontrolled proliferation of cells characteristic of cancer and inflammatory diseases is the result of over-activation of multiple genes and the proteins they produce, such as cytokines and enzymes. Conversely, under-activation 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. Many complex diseases are caused by the abnormal activity of not just one but multiple genes. Such complex diseases include cancer, obesity, diabetes and inflammatory, cardiovascular and neurological diseases. REGULATION OF GENES BY GENE SWITCHES Gene regulation is a highly controlled process in which specific sets of genes are switched on and off in select tissues to maintain the body's essential functions. Genes are controlled by networks of proteins inside cells which relay information through pathways from a cell's surface to its nucleus where genes are expressed. These pathways consist of several large and distinct classes of gene regulating proteins, or gene switches, which include transcription factors, kinases and ligases. Transcription factors are molecular switches that bind to the regions of genes that control the level and duration of gene expression and protein production. Kinases are enzymes that transmit information within cells and ultimately lead to gene expression. Ligases control the proper levels of gene regulating proteins in cells. Each of these three classes of gene switches can control not just one but multiple genes that contribute to disease. Therefore, drugs designed to target these gene switches at pivotal points in a gene regulating pathway can have a major impact on the subsequent expression of entire sets of genes that contribute to disease. [GRAPHIC] Genomics is the large-scale identification and sequencing of the genes that comprise the human genome. Currently this information is being compiled in databases, and the sequencing of the entire human genome is nearing completion. This genomic database provides a starting point for understanding the underlying role of genes in disease, but by itself is inadequate to identify key disease-related gene switches. To realize the 27 32 substantial potential of genomics initiatives, key gene switches involved in disease need to be identified in order to permit the rapid development of superior drug therapies. CURRENT LIMITATIONS OF DRUG DISCOVERY AND GENOMICS Conventional drug discovery efforts principally are focused on identifying compounds that affect targets outside the cell, such as cell surface receptors and secreted proteins, and provide only symptomatic relief without treating the underlying molecular causes of disease. For example, in rheumatoid arthritis, aspirin and related compounds only relieve the symptoms of pain and inflammation. These drugs do not address the destruction of arthritic joints caused by the disease. Drugs directed toward targets outside the cell also have a number of potential limitations in treating complex diseases where the underlying molecular mechanisms are located within cells. These drugs often do not control the specific sets of genes that are responsible for the onset and progression of disease and may also result in side effects due to their non-specific action. Further, by focusing principally on receptors and other proteins located outside the cell, these drugs are directed toward only a limited number of the total potential disease targets. An additional limitation is that many current drugs or drugs in development, especially proteins, must be injected and are not available in pill form. Recent advances in genomics have the potential to significantly improve drug discovery. Most genomics efforts have been directed principally toward the identification and sequencing of the large number of genes that comprise the human genome. These developments have not enabled the rapid identification of drug targets, because the gene sequence data by itself provides limited information, if any, about a gene's relationship to a specific disease. To fully capitalize on the therapeutic potential of genomics, there is a need to map critical gene regulating pathways and identify key gene switches as drug targets for disease therapy. SIGNAL'S GENE REGULATING DRUGS We have developed and integrated a large set of proprietary target and drug discovery technologies to accelerate the application of genomics to the discovery of important new classes of gene regulating drugs. We first map the gene regulating pathways to identify drug targets, or gene switches, that control specific genes and result in disease. This information is then used to discover novel gene regulating drugs by applying our drug discovery engine. We believe our discovery and development capabilities provide us and our collaborators with a highly advanced and competitive technology platform for target and drug discovery. This engine consists of: - Advanced cellular, molecular and genomic technologies. We use information produced from human genomics initiatives to map gene regulating pathways and identify clinically important drug targets for specific diseases. We have generated proprietary human cell lines, from multiple tissues of the body, to create in vitro, or test tube, models of disease and to evaluate the activity and selectivity of drug candidates. We also use functional genomics and proteomics, which is the large-scale linking of genes and their protein products to their biological functions, for mapping gene regulating pathways and identifying disease targets for use in drug discovery; - Proprietary high throughput screening systems and diverse compound libraries. We have assembled a library of more than 300,000 distinct small molecule compounds and natural products which we screen using our proprietary biochemical and cell-based screening technologies. Our screening systems include a proprietary screening technology that simultaneously screens multiple kinases to provide drug activity and specificity data across multiple drug targets; - A proprietary, specially designed kinase inhibitor library. We identified the active sites, or molecular locks, on a number of gene regulating kinase targets using our extensive knowledge of the three dimensional structures of these targets. We believe gene regulating targets identified in the future will contain similar locks. Our kinase inhibitor library is designed to contain compounds expected to fit like molecular keys into these locks, enhancing our ability to identify effective inhibitors of current as well as yet-undiscovered gene regulating targets. In addition, we design these compounds to have attractive pharmaceutical properties, such as solubility, chemical stability, non-reactivity and the ability to be taken in pill form, which accelerates the development of viable drug candidates; and 28 33 - Structure-based drug design. We use our proprietary three-dimensional models of drug targets, combined with advanced chemistry technologies, to efficiently generate drug leads and advance drug candidates into preclinical and clinical development. We believe that, together, these integrated target and drug discovery capabilities enable us to proceed rapidly from target identification to screening and optimization of drug candidates. To date, we alone or with our collaborators have identified 27 drug targets in 10 gene regulating pathways with potential applications in at least six major disease areas. We also have developed 29 drug discovery screens, identified 24 drug leads and commenced evaluation of drug leads in 15 animal models of disease. We and our collaborators have developed two drug candidates in our cancer program for which we intend to submit INDs by the end of 2000, assuming preclinical development is favorably completed without delay. We believe that our proprietary drug discovery engine enables us to overcome many of the current limitations of conventional drug discovery and genomics for the following reasons: We Identify Multiple Drug Targets for Each Therapeutic Program. It is estimated that there are more than 2,000 gene switches within cells which activate or suppress genes in a broad range of diseases. We are identifying those gene switches that are critical drug targets for disease therapy. Many of these targets are highly amenable to inhibition with small molecule drugs which can be administered in pill form. We believe that identifying multiple targets in each of our therapeutic programs increases the likelihood of generating a large and sustainable pipeline of superior drug candidates. For example, in our cancer program, we and our collaborators have identified 15 key gene switches within four gene regulating pathways. We Select Drug Targets That Simultaneously Regulate Multiple Disease-Causing Genes. We are discovering drugs that may be effective in treating diseases where a single drug target regulates multiple genes involved in disease. For instance, we have identified potent and selective inhibitors of the cJun N-terminal kinase or JNK, drug target which modulate the expression of a broad set of disease-associated genes such as interleukin-2, or IL-2, gamma interferon and tumor necrosis factor a, or TNFa. These JNK inhibitors have disease-modifying activity in animal models of arthritis and asthma. Our Drug Leads and Drug Candidates Are Highly Selective for Specific Gene Targets. Many of our drug targets regulate genes functioning in an over- or under-activated state, and do not affect normal levels of gene expression required to maintain essential cellular functions. Therefore, we expect the safety profile of our drugs to be superior to less specific drugs. For example, our inflammation program focuses on gene regulating pathways that are not turned on in normal tissues but are primarily turned on by inflammatory proteins during a disease process, causing tissue damage. OUR STRATEGY Our goal is to build a leading pharmaceutical company focused on the discovery, development and commercialization of new classes of drugs regulating gene function. There are five important elements of our business strategy: Advance Our Leadership Position in Discovering and Developing Novel Gene Regulating Drugs. We have developed and integrated a large set of proprietary target and drug discovery technologies into a drug discovery engine for generating new classes of gene regulating drugs. We plan to expand our leadership in this area by continuing to develop and integrate advances in functional genomics, proteomics, drug screening systems, structure-based drug design, medicinal chemistry, pharmacology and preclinical drug development. We plan to continue to add management and technical expertise to accelerate the development and commercialization of gene regulating drugs. We will license from others or acquire leading technologies that complement our core capabilities. Build a Large and Diversified Product Portfolio. To date we have developed a portfolio of two preclinical drug candidates, four drug leads and 27 targets that address major diseases. We plan to identify multiple targets within each gene regulating pathway we explore and select those targets for drug discovery that can be useful in treating multiple diseases. We believe this strategy will allow us to enhance the clinical 29 34 potential of each pathway while simultaneously limiting our scientific and financial risk in any single gene regulation pathway or drug target. Pursue Treatment of Serious Medical Conditions that Represent Large Potential Markets. We intend to continue to focus our drug discovery and development efforts on serious diseases that represent large potential markets for our drug products. Our current program areas include cancer, inflammatory diseases, osteoporosis, cardiovascular disease, neurological disease and viral infections. In addition, the nature of our gene regulation targets makes them well suited for small molecule drugs which can be widely distributed and easily administered in pill form. Develop a Cancer and Inflammatory Disease Franchise. We have retained significant United States co-commercial or profit sharing rights in three of our current corporate collaborations. We intend to establish a United States franchise in products addressing cancer and inflammatory disease and will continue to seek to retain substantial United States co-commercial or profit sharing rights in future collaborations within these areas. Establish Corporate Collaborations. We will continue to aggressively pursue collaborations with leading pharmaceutical and biotechnology companies to fully develop and exploit our pipeline of drug targets and drug candidates. These collaborations provide us with multiple potential sources of revenue. Currently, our corporate collaborators fund significant portions of four of our six disease programs. The establishment of these collaborations allow us to diversify scientific and financial risk and benefit from our collaborators' substantial development, manufacturing and marketing resources. Typically, we intend to establish royalty-based collaborations outside of our franchise areas. OUR DRUG DEVELOPMENT PROGRAMS Our drug discovery and development programs are focused in several disease areas in which gene dysregulation plays a major role in the onset and progression of disease. These diseases include cancer, inflammatory disease, osteoporosis, cardiovascular disease, neurological disease and viral infections. CANCER PROGRAMS Cancer is a group of diseases characterized by uncontrolled growth and spread of abnormal cells in the body. Cancer results from abnormalities in the expression of genes that regulate cell proliferation, cell migration and cell death. According to the American Cancer Society, cancer is the second leading cause of death in the United States and accounted for 560,000 deaths and an estimated 1.2 million new cancer cases in 1999. The worldwide cancer drug market totaled approximately $7.8 billion in 1998. Most current anti-cancer drugs kill both cancerous and normal cells, giving rise to serious toxic side effects. We are developing new classes of drugs designed to selectively control abnormal gene regulating pathways which cause the start or spread of cancer, with the goal of creating safer and more effective cancer therapies. 30 35 We have six drug discovery and development programs focused on regulating abnormal gene expression involved in the onset and progression of cancer. We currently have two drug candidates. The first, SP8490, is for preventing and treating breast cancer and other cancers. The second, NSP6783, is for preventing or treating nerve damage caused by cancer chemotherapies. We plan to initiate preclinical studies for both candidates by mid-2000 and, assuming favorable outcomes of those studies and no delays in preclinical development, to file INDs by the end of 2000. We also have three additional cancer drug leads. CANCER PROGRAMS - --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL - ------------------ ER-a MODULATOR - Signal Preclinical development Breast, endometrial and renal SP8490 cancer, multiple myeloma - ------------------ ER-b MODULATOR Axys/Signal Lead optimization Breast, prostate, ovarian and colon cancer - ------------------ NEUROPROTECTANT - Nippon Kayaku / Preclinical development Chemotherapy-induced neuropathies NSP6783 Signal - ------------------ JNK: JNK1,2 Signal Lead optimization Lung and breast cancer, leukemia, JNKK1,2 Signal Lead optimization melanoma JIP1,2 Signal Target validation - ------------------ NF-kB: IKK1,2,3 Ares-Serono / Signal Lead optimization Glioma, lymphoma, pancreatic NIK Ares-Serono / Signal Assay development cancer, melanoma, sarcoma IKKAPI Ares-Serono / Signal Assay development IkB ligase Ares-Serono / Signal Assay development - ------------------ OTHER LIGASES: E3 ligases Signal Target validation Breast, prostate and pancreatic cancer - ------------------ TGF-b Signal Target validation Breast, prostate and pancreatic cancer - ------------------
* In the table above and the other tables in this section, the terms we use under the column entitled "Status" have the following meanings: - TARGET DISCOVERY AND TARGET VALIDATION is the identification of new disease-related genes and the gene switches that regulate them followed by a determination of which of these gene switches are the optimal drug targets for treating disease. - ASSAY DEVELOPMENT is creation of biochemical or cell-based test systems, known as "assays" or "screens," for determining specific properties of compounds which incorporate a specific drug target and are used to identify compounds which selectively and potently regulate the drug target. - SCREENING is testing libraries of organic small molecules and natural products in biochemical or cell-based assays to identify compounds which selectively and potently inhibit or induce activation of a drug target. - LEAD OPTIMIZATION indicates the application of combinatorial and computational chemistry, as well as structure-based drug design, to enhance the potency, selectivity, bioavailability, safety and other pharmaceutical properties of drug leads. - PRECLINICAL DEVELOPMENT is the evaluation of a drug lead in pharmacology, safety and other relevant tests in preparation for clinical trials. - -------------------------------------------------------------------------------- Estrogen Gene Regulation in Cancer Estrogen is a hormone that has a broad spectrum of effects on tissues in both women and men. Many of these biological effects are beneficial, including maintenance of bone density, cardiovascular and neurological protection, and the protection of organ systems from the effects of aging. In addition to estrogen's positive effects, however, the hormone also is a potent growth factor in the breast and uterus that has been demonstrated to increase significantly the risk of cancer in women. In addition, estrogen contributes to prostate cancer and in certain conditions can cause feminization in men. 31 36 Two distinct estrogen receptors exist in the body, the estrogen receptor-alpha, or ER-a, and estrogen receptor-beta, or ER-b, each of which has a distinct tissue distribution in the body. ER-a is found predominantly in bone and in cardiovascular, breast and reproductive tissue, while ER-b is the predominantly expressed estrogen receptor in the prostate and hippocampus region of the brain. Given the tissue-selective expression of ER-a and ER-b, estrogen receptor modulators can be designed to mimic the positive effects and block the negative effects of estrogen in different tissues. Drugs that modulate these receptors are termed selective estrogen receptor modulators, or SERMs. Unlike chemotherapeutic agents which often cause significant side effects, including loss of white blood cells, nerve damage, nausea and other debilitating side effects, SERMs act through different, primarily non-toxic mechanisms. Currently two SERMs are marketed for treatment of breast cancer. One of these SERMs, tamoxifen, is the most widely prescribed anti-hormonal therapy for cancer today. However, tamoxifen is associated with a number of adverse side effects, including an increased risk for uterine cancer, blood clotting and hot flashes. In addition, virtually all patients receiving tamoxifen become resistant to the drug. Despite these shortcomings, worldwide tamoxifen sales for breast cancer totaled approximately $560 million in 1999. We are using our gene regulation expertise to design new classes of ER-a and ER-b-selective SERMs with efficacy and safety profiles that we believe will be superior to those of current chemotherapies and tamoxifen. We believe these SERMs have significant potential for preventing and treating breast, endometrial, prostate, colon and other cancers whose growth is dependent on estrogen. SP8490 -- An ER-a Modulator Using our drug discovery engine and expertise in estrogen gene regulating pathways, we have discovered and are developing a series of SERMs with improved efficacy and safety in animal models when compared with tamoxifen. In animal studies, these drug leads were orally effective in preventing breast cancer and demonstrated equal or superior efficacy to tamoxifen. Additionally, these compounds displayed a superior safety profile on uterine tissue compared to tamoxifen. A potential drug candidate, SP8490, is in preclinical studies and, assuming favorable outcomes of those studies and no delays in preclinical development, we plan to file an IND by the end of 2000. ER-b Modulators We have discovered and are developing a novel series of ER-b-selective SERMs which currently are in lead optimization. These drug leads demonstrate significant in vitro anti-cancer activity in tamoxifen-resistant breast cancers and ER-b-expressing cancers such as prostate cancer. Our SERM-b drug leads represent a novel series of SERMs that, if successfully commercialized, may be useful in treating the large number of cancer patients that develop tamoxifen resistance, as well as other ER-b-positive cancers such as prostate, colon and ovarian cancer. Currently, we know of no other ER-b-selective drugs that are being marketed or that are in clinical development. In October 1999, we entered into a collaboration with Axys Pharmaceuticals to discover and develop ER-b-selective SERMs for cancer therapy. We describe this collaboration and our other collaborative arrangements below under the heading "Corporate Collaborators." NSP6783 -- A Neuroprotectant for Neuropathies Caused by Cancer Chemotherapy An estimated 350,000 cancer patients receive chemotherapy using taxol, cisplatin, carboplatin and other drugs each year in the United States to treat solid tumors of the lung, breast, ovaries and other organs. We estimate that 150,000 of these cancer patients develop nerve damage as a result of chemotherapy, known as chemotherapy-induced neuropathies. These neuropathies result in pain and/or loss of feeling in the hands and feet, reduced motor coordination and muscle strength. The present standard of care for chemotherapy-induced neuropathy provides only symptomatic relief and does not prevent or treat the underlying cause of the neuropathy. 32 37 Applying our drug discovery engine, in collaboration with Nippon Kayaku, we identified a compound we call NSP6783. In multiple animal studies, this orally active drug candidate has been shown to provide significant protection of peripheral nerves and their function in an animal model of taxol-induced neuropathy. In preclinical studies, NSP6783 has a favorable safety profile and does not diminish the anti-cancer effects of taxol or cisplatin. We are developing NSP6783 for the prevention and possible treatment of chemotherapy-induced neuropathies. NSP6783 is in preclinical studies to evaluate the safety and to profile other drug properties. Assuming favorable outcomes of those studies and no delays in preclinical development, we plan to file an IND by the end of 2000. This drug candidate is the first in a novel class of neuroprotectants to be used in conjunction with chemotherapy to prevent peripheral neuropathy. NSP6783 has the potential to prevent nerve damage and therefore may be effective in preventing or treating the underlying cause of this disorder. There presently are no approved treatments for this condition, and we know of no such drugs currently under development. We are investigating other potential clinical applications for this novel class of neuroprotectants. These include the possible treatment of diabetic neuropathy and nerve crush injury in the peripheral nervous system and the potential treatment of Parkinson's and Alzheimer's diseases in the central nervous system. In February 2000, we extended our collaboration with Nippon Kayaku to share equally, with the exception of Japan, in the development and commercialization of NSP6783 and other potential neuroprotectant agents worldwide. JNK Inhibitors for Cancer The JNK pathway controls the expression of specific sets of genes involved in cancer, including: - cytokines and growth factors that promote the growth of cancer cells; - molecules on the surface of cells that are responsible for cell-to-cell attachment and tissue-destructive enzymes that enable tumors to spread to distant sites in the body and invade normal tissues and organs, referred to as metastasis; and - factors that lead to the growth of new blood vessels and aid in establishing new tumors, referred to as angiogenic factors. We are applying our expertise in the JNK gene regulating pathway to identify novel cancer targets which play a fundamental role in tumor growth and metastasis. We are designing new classes of drugs that target abnormalities in gene regulating pathways to inhibit the transformation, growth and spread of cancer without affecting other essential gene regulating pathways. Using our drug discovery engine, we have identified potent and selective small molecule inhibitors of the JNK pathway which have demonstrated anti-proliferative activity in tumor cell lines in vitro. Additional cancer models will be used to evaluate the effects of JNK inhibitors on tumor growth and metastases. We believe drugs that selectively inhibit select targets in the JNK pathway may be highly effective in treating several cancers including lung, breast and ovarian carcinomas, myelomas and leukemias without the safety concerns of current cancer treatments. NF-kB Inhibitors for Cancer The nuclear factor kappa B, or NF-kB, pathway controls the expression of specific sets of genes involved in different stages of cancer development and progression. These include molecules on the surface of cells that allow cancer cells to migrate and attach to distant tissues, as well as specific cell survival factors that make cancer cells resistant to radiation and chemotherapy. Using our gene regulating target discovery expertise, we and our collaborators have mapped the NF-kB pathway extensively and have identified multiple drug targets in the NF-kB gene regulating pathway. We and our collaborators also have demonstrated in vitro that inhibiting key NF-kB kinase targets significantly increases the sensitivity of cancer cells to cancer chemotherapeutics. We have identified small molecule inhibitors of kinase targets in the NF-kB gene regulating pathway and plan to study these further in animal models of cancer. 33 38 In November 1997, we entered into a collaboration with Ares-Serono to discover and develop drugs that target the NF-kB pathway for the potential treatment of certain cancers. Ligase Inhibitors for Cancer We pioneered the discovery of ligase drug targets in the NF-kB and other important gene regulating pathways. Ligases represent an important new family of gene regulating targets because of their ability to precisely maintain normal levels of proteins in cells. In cancer, certain proteins, such as those that suppress the growth of tumors, are lost or diminished which causes the progression of cancer. We have developed novel drug screens to identify selective ligase inhibitors which we believe may restore normal levels of proteins the body uses to prevent the emergence of cancer and resistance to chemotherapy. TGF-b Modulators for Cancer Transforming growth factor-b, or TGF-b, controls several well-known tumor-regulating gene products, such as tumor suppressor genes, cyclins and cyclin-dependent kinases. Normal regulation of the TGF-b pathway has been shown to suppress tumor progression. In a number of cancers, the loss of normal TGF-b-regulated gene expression promotes the cancers' progression and the risk of death. The gene regulating pathway for TGF-b recently has been identified. Our scientists are applying genomic and proteomic approaches to discover novel targets which suppress TGF-b pathways. Inhibitors of these novel targets are expected to restore normal TGF-b-regulated gene expression and inhibit tumor growth. We are developing drug discovery assays for specific targets in this pathway and intend to screen our kinase inhibitor and diversity compound libraries against these targets. INFLAMMATORY DISEASE PROGRAMS The human immune system is comprised of cells and biochemical substances that 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, are responsible for protective or inflammatory responses at sites of injury and disease. Inflammatory diseases arise from the over-activation of the immune system resulting in the over-production of immune cells, inflammatory proteins 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 1998, worldwide sales of anti-arthritic and immunosuppressive drugs alone totaled approximately $4.4 billion. Many current drugs have dose-limiting side effects and only target a single disease mechanism. More importantly, although these current drugs alleviate many symptoms of disease, they generally do not target the underlying mechanisms and therefore do not effectively modify disease processes or treat the underlying disease. We are identifying drug targets in key pathways and screening for new classes of small molecule drugs that regulate inflammatory diseases at the level of gene function. For example, inflammatory proteins such as interleukin-1, or IL-1, and TNFa activate gene regulating pathways that cause an inflammatory response. The anti-TNFa protein drug Enbrel(R) has validated this cytokine pathway for treating rheumatoid arthritis; however, this drug must be administered by injection. A drug of comparable or superior efficacy that can be taken in pill form would represent formidable competition for injectable drugs such as Enbrel. Our strategy is to discover small molecule drugs that can be taken in pill form and that effectively modulate other important inflammatory pathways such as IL-1 and IL-2 in addition to TNFa. We currently are optimizing inhibitors of gene regulating targets in three distinct pathways, JNK, NF-kB and p38, and have demonstrated the efficacy of two series of drug leads in animal models of asthma and arthritis. 34 39 We have three drug discovery and development programs focused on regulating abnormal gene expression involved in the onset and progression of inflammation. These programs are directed toward 17 gene regulating targets. We currently have drug leads in each of our JNK, NF-kB and p38 programs outlined in the table below. INFLAMMATORY DISEASE PROGRAMS - --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL - ------------------ JNK: JNK1,2 Signal Lead optimization Rheumatoid arthritis, asthma, JNKK1,2 Signal Assay development allergy, multiple sclerosis, JIP1,2 Signal Target validation transplant rejection - ------------------ NF-kB: IKK1,2,3 Ares-Serono / Signal Lead optimization Assay Osteoarthritis, rheumatoid NIK Ares-Serono / Signal development arthritis, multiple sclerosis, IKKAP1 Ares-Serono / Signal Assay development inflammatory bowel disease, ARDS IkB Ligase Ares-Serono / Signal Assay development - ------------------ P38: p38-2 Signal Screening Psoriasis, rheumatoid arthritis, MKK3 Signal Assay development asthma, inflammatory bowel MKK6 Signal Lead optimization disease, ischemic disorders Tao1,2 Signal Target validation
- -------------------------------------------------------------------------------- - ------------ * Please refer to the legend located beneath the table entitled "Cancer Programs" on page 30 for an explanation of the terms used to describe the status of our programs. JNK Inhibitors for Inflammatory Diseases Activation of the JNK gene regulating pathway increases the expression of a set of inflammatory genes, including TNFa, IL-2 and gamma interferon. There are multiple types of the JNK regulatory enzyme, each of which controls the expression of genes in specific cells and in response to specific stimuli. Our researchers and collaborators have identified what we believe is the largest number of known kinase targets in the JNK pathway to date. We believe we have a dominant patent position in the JNK pathway with eight issued United States patents, four issued foreign patents and related patent applications covering JNK, its use in drug discovery and JNK inhibitors. Over-activation of JNK causes or exacerbates several inflammatory diseases, including rheumatoid arthritis, asthma and multiple sclerosis. Drugs that inhibit JNK activation are expected to selectively block the over-activation of disease-associated genes, and not affect normal cellular functions, since JNKs principally do not regulate normal gene expression. We have developed and initiated high throughput screening for JNK1, JNK2 and JNK3 inhibitors using proprietary biochemical and cell-based screens. Using our kinase-focused inhibitor library, we have identified several compounds which inhibit JNK1 and JNK2 activity with a high level of potency and specificity. In addition to significantly reducing inflammation, one of these drug leads prevents the destruction of joints in an animal model of arthritis. This drug lead also demonstrates potent disease-modifying activity in an animal model of asthma. We are currently optimizing drug leads to improve the potency, selectivity and other pharmaceutical properties of our JNK inhibitors. We are also developing additional high throughput drug screens for several other drug targets in the JNK pathway, including JNKK1 and JNKK2. NF-kB Inhibitors for Inflammatory Diseases NF-kB plays a pivotal role in inflammatory disease processes by regulating cytokine genes, such as TNFa, IL-1, IL-2, IL-6, IL-8, along with genes that code for molecules on the surface of cells and the cyclooxygenase-2 or, COX-2, inflammatory enzyme. Our researchers and collaborators have identified six drug targets that regulate NF-kB activation. Our discovery of three of these targets was reported in the journals Science, Nature and Cell. We believe drugs which inhibit NF-kB and the activation of select disease-associated genes will have potential disease modifying effects. We have been issued four United States patents and we and our collaborators have filed related patent applications for targets in this pathway. 35 40 We have developed and initiated high throughput screening for NF-kB inhibitors using proprietary biochemical and cell-based screens. We also have developed technology for profiling the effects of active compounds on a number of immune-inflammatory genes and proteins in cells and animals. Using our kinase inhibitor library, we have identified several small molecule drug leads which selectively inhibit a Kinase target on the NF-kB pathway. One of these drug leads inhibits expression of inflammatory response genes, such as TNF-a, in an animal model. We are optimizing these drug leads to enhance potency, specificity and bioavailability in order to develop an important new class of anti-inflammatory drugs. We are developing additional high throughput drug screens for other targets in the NF-kB pathway. In November 1997, we initiated a collaborative development and license agreement with Ares-Serono to discover novel NF-kB inhibitors for inflammatory and other diseases. p38 Inhibitors for Inflammatory Diseases Activation of the p38 gene regulating pathway causes the expression of multiple cytokine genes, including IL-1, IL-6, IL-8 and TNFa, which regulate the development and proliferation of cells in response to disease and tissue injury. When inappropriately activated, the p38 pathway is believed to play an important role in diseases arising from abnormal production of cytokines, including heart disease caused by harmful inflammatory events. To date, we and our academic collaborators have identified five proprietary drug targets in the p38 pathway. One of these targets is p38-2, a subtype of p38, which is highly expressed in heart and skeletal muscle and not most other tissues. We and our collaborators have been issued three United States patents for three drug targets in the p38 pathway, MKK3, MKK6 and p38-2, and we and our collaborators have filed related patent applications with regard to other potential drug targets in this pathway. In the p38 pathway, we have screened two targets using our kinase inhibitor compound library and have identified novel inhibitors which we plan to optimize as drug leads later in 2000. We also plan to initiate high throughput screening on an additional p38 pathway target during the first half of 2000. OSTEOPOROSIS AND BONE FORMATION PROGRAMS The incidence of osteoporosis and bone fractures in women is significantly increased during and following menopause. According to the National Osteoporosis Foundation, in 1999 more than 28 million people in the United States and over 75 million people in the U.S., Europe and Japan are affected by osteoporosis. Estrogen has been used for hormone replacement therapy, or HRT, for many years to prevent osteoporosis and alleviate some of the other effects of menopause. However, HRT has several negative side effects, including the increased risk of breast and uterine cancer, which make it a poor treatment option for many women. OSTEOPOROSIS AND BONE FORMATION PROGRAMS - --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL - ------------------ ER-a MODULATOR Signal Preclinical development Osteoporosis, Paget's disease - ------------------ BONE FORMATION Signal Target validation Osteoporosis, Paget's disease TARGETS - ------------------
- --------------- * Please refer to the legend located beneath the table entitled "Cancer Programs" on page 30 for an explanation of the terms used to describe the status of our programs. ER-a Modulators for Osteoporosis SERMs are designed to mimic the beneficial effects of estrogen by inhibiting bone loss in postmenopausal women, while avoiding some of estrogen's negative effects. In 1998 Eli Lilly's raloxifene became the first and only FDA-approved SERM for osteoporosis and in 1999 achieved estimated worldwide sales of $326 million. We have developed a novel series of ER-a-selective SERMs with superior efficacy and safety when compared with raloxifene in preclinical animal studies. We discovered these drug leads by applying our expertise in gene regulation to map new estrogen-regulated gene pathways. We then developed and applied 36 41 genetically modified bone cell lines, proprietary drug screens, genomic and proteomic technologies and structure-based drug design to discover and develop safer and more effective drugs in this class. In three separate animal studies, four of our drug leads were tested in comparison with estrogen and raloxifene for the ability to inhibit bone loss. In those studies, our orally administered drug leads were demonstrated to be significantly superior to raloxifene in preventing bone loss and preserving bone strength. Importantly, our drug leads also demonstrated a superior safety profile in uterine tissues following microscopic evaluation, when compared with raloxifene. An additional safety feature of our drug leads is that they do not stimulate cell proliferation in breast tissue. Our ER-a-selective SERMs also demonstrated a favorable cholesterol-lowering profile in animal models. The drug leads are well tolerated in animals and have not shown any negative effects in genetic safety tests required by the FDA. Final selection of a drug candidate for preclinical development is expected to occur this year. These drugs, if successfully developed, would provide clinicians with an alternative, non-estrogen treatment for osteoporosis that also would minimize some of the adverse effects associated with HRT, including an increased risk of breast and uterine cancer. Activators of Bone Formation Current treatments for osteoporosis limit bone loss but do not induce new bone formation. Drugs stimulating new bone formation would represent an important addition to current therapies for osteoporosis and other bone disorders. To date, no orally active drugs that induce bone formation are available for the treatment of bone diseases. Growth factor proteins known as bone morphogenetic proteins, or BMPs, stimulate bone formation through activation of bone forming cells. OP-1, also referred to as BMP7, stimulates new bone formation and is used clinically as a bone graft substitute in orthopedic and dental indications. However, because these proteins require injection, they are not good drug candidates for the osteoporosis market. By mapping the BMP gene regulating pathway, we have identified molecular targets that may be inhibited with orally administered small molecule drugs to promote new bone formation. We plan to screen our compound library against these targets later in 2000 to identify potential drug leads. CARDIOVASCULAR DISEASE PROGRAMS Cardiovascular disease, including heart attack and congestive heart failure, largely results from restricted blood flow caused by atherosclerosis and hypertension. Cardiovascular disease is the leading cause of death worldwide and results in an estimated 16.7 million annual deaths worldwide according to the World Health Organization. In the United States, approximately 58.8 million people were afflicted with cardiovascular disease, leading to an estimated one million deaths in 1996 according to the American Heart Association. In 1998, pharmaceutical sales of cardiovascular drugs exceeded $22 billion in the United States. Several classes of cardiovascular drugs have been developed to prevent and treat chronic cardiovascular disease. These drugs work by lowering the LDL, or bad cholesterol, levels in the blood stream which helps to reduce the buildup of fatty plaque deposits in blood vessels. However, many of these drugs can cause a number of serious adverse side effects and do not address the underlying cause of the disease. There is a need for new classes of cardiovascular drugs that work on the molecular mechanisms of cardiovascular disease and have improved efficacy and safety. Many cardiovascular diseases occur because of abnormal expression of genes in blood vessels and in the heart. Heart attacks can occur when the cells that line blood vessels are activated by injury or trauma. These damaged cells overproduce inflammatory proteins such as molecules on the surface of cells that are responsible for cell-to-cell attachment, growth factors and cytokines that lead to a buildup of inflammatory cells and platelets in blood vessel walls. This buildup may block normal blood flow and lead to atherosclerosis and heart attack. Many of these proteins are controlled by the NF-kB, JNK and p38 gene regulating pathways. In addition, the gradual increase of cholesterol in blood vessels may also cause atherosclerosis and heart attacks. Estrogen enhances the clearance of bad cholesterol from the blood by regulating gene expression in the liver. We have identified several selective inhibitors of gene regulating targets in the JNK, NF-kB, p38 and estrogen pathways. We have developed additional screens which use proprietary human vascular cell lines to 37 42 evaluate the potential cardioprotective effects of our drug leads. We plan to test these inhibitors in animal models of heart attack, restenosis, atherosclerosis and heart failure. CARDIOVASCULAR DISEASE PROGRAMS - --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL - ------------------ JNK: JNK1,2 Signal Lead optimization Congestive heart failure, JNKK1,2 Signal Assay development myocardial ischemia JIP1,2 Signal Target validation - ------------------ NF-kB: IKK1,2,3 Ares-Serono / Signal Lead optimization Atherosclerosis, restenosis, NIK Ares-Serono / Signal Assay development myocardial ischemia, vasculitis IKKAP1 Ares-Serono / Signal Assay development IkB ligase Ares-Serono / Signal Assay development - ------------------ P38: p38-2 Signal Screening Myocardial ischemia, restenosis MKK3 Signal Assay development MKK6 Signal Lead optimization Tao1,2 Signal Target validation - ------------------ ER-a MODULATOR Signal Preclinical development Atherosclerosis, hypercholesterolemia, restenosis - ------------------ ER-b MODULATOR Signal Lead optimization - ------------------
- ------------ * Please refer to the legend located beneath the table entitled "Cancer Programs" on page 30 for an explanation of the terms used to describe the status of our programs. JNK Inhibitors for Cardiovascular Disease Heart failure can occur when muscle cells in the heart fail due to a massive influx of inflammatory cytokines such as TNFa. As a result, the heart fails to adequately pump blood to the body. The JNK pathway is a key regulator of TNFa gene expression and protein production. This pathway becomes over-activated in cardiac tissue when the heart undergoes damage or other stress. We have identified selective and potent inhibitors of the JNK pathway that will undergo evaluation in models of cardiovascular disease. NF-kB and p38 Inhibitors for Cardiovascular Disease Restenosis, or the narrowing of blood vessels that restricts blood flow, can occur when cells that line the inside of blood vessels are over-stimulated during balloon angioplasty procedures. This often causes the over-expression of growth factor genes and subsequent over-proliferation of smooth muscle cells in the blood vessel wall leading to a re-blocking of the blood vessel. NF-kB and p38 pathways have been demonstrated to be over-activated in animal models of angioplasty-induced restenosis. We have identified several inhibitors of targets in these pathways that will be evaluated in models of cardiovascular disease. In November 1997, we entered into a collaboration with Ares-Serono to develop inhibitors of NF-kB for potential treatment of cardiovascular and other diseases. Estrogen Gene Regulation for Cardiovascular Disease We are applying multiple gene discovery technologies to identify gene regulating drugs for preventing and treating cardiovascular diseases, including our proprietary functional genomics technology known as PhaRMA(TM). We have used these technologies to identify over 75 human genes that are regulated by estrogen in human cardiovascular cells. Many of these genes are regulated by estrogen in a tissue-selective manner. A number of these genes currently are not disclosed in public gene databases and represent novel gene regulating targets. In addition, we have developed and implemented a proprietary cell-based screening platform for profiling gene expression in panels of estrogen-regulated genes in cardiovascular cells. These 38 43 advanced technologies have led to the discovery and development of new SERMs which we believe will be cardio-protective, and several of these novel SERMs are being evaluated in models of cardiovascular disease. NEUROLOGICAL DISEASE PROGRAMS The human nervous system consists of two distinct components: the central nervous system, or CNS, which includes the brain and spinal cord, and the peripheral nervous system, or PNS, which includes all nerves outside the CNS. Within the PNS, neurons transmit information such as pain to the CNS, and motor pathways then transmit these 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 chemotherapy and diabetes can cause chronic sensory or motor defects. In 1998, annual worldwide sales of drugs that act upon the various parts of the nervous system, or neuropharmaceuticals, totaled $17.8 billion, including pharmaceuticals such as anti-depressants, pain-killers, anti-anxiety drugs and anti-epileptics. Many current CNS and PNS drugs exhibit undesirable side effects. There also are disorders such as Alzheimer's disease and peripheral neuropathies for which there are no effective treatments due to a limited understanding of neurological disease processes at the level of gene function. Neuropharmaceuticals are the second largest area of research and drug development among pharmaceutical companies today and, as a result, we believe our potential to enter into collaborations in this area is significant. Our researchers and collaborators have developed a proprietary cell immortalization technology for producing cloned human neuronal cells that can be designed to mimic important features of normal and diseased neurons and can be used for drug discovery. We have engineered human neuronal and other cell lines of the CNS and, we believe, the first human sensory neuronal cell lines of the PNS. Unlike many other approaches, our cell lines are readily renewable and therefore are amenable to the application of advanced genomic technologies for target and drug discovery. For example, we have generated a library of genes associated with Alzheimer's disease using genomics in combination with our proprietary neuronal cell lines. In addition, our human CNS cell lines can be used to generate models of diseases and to identify gene regulating targets for drug discovery in the disease areas of stroke, traumatic head injury and neurological diseases. We have developed several drug leads and drug candidates in our JNK3 and neuroprotectant programs that we believe have significant potential for treating disease of the central and peripheral nervous systems. In addition, we are developing neuronal cell lines from different regions of the brain to identify new drug targets and drug candidates. NEUROLOGY DRUG PROGRAMS - --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL - ------------------ JNK3 Signal Lead optimization Epilepsy, stroke, head trauma, Parkinson's disease, Alzheimer's disease, spinal cord injury - ------------------ NEUROPROTECTANT Nippon Kayaku/Signal Lead optimization Diabetic neuropathy, neurodegenerative disease - ------------------ NOVEL TARGETS Signal Target discovery CNS and PNS disorders - ------------------
- --------------- * Please refer to the legend located beneath the table entitled "Cancer Programs" on page 30 for an explanation of the terms used to describe the status of our programs. JNK3 Inhibitors for Neurological Disease We are applying our expertise in engineering neuronal cell lines and in mapping the JNK gene regulating pathway to identify novel drug targets and drug leads for neurological diseases. JNK3 is known to be located primarily in the brain and mice engineered to be deficient in JNK3 are resistant to experimentally induced epilepsy and stroke. For these reasons, we believe JNK3 inhibitors will have therapeutic value for treating epilepsy, as well as neurodegeneration associated with Alzheimer's disease, Parkinson's disease, stroke and 39 44 head trauma. Using our high throughput screening, we have identified potent and selective inhibitors of the JNK gene regulating pathway, including the JNK3 drug target. We have demonstrated that one of our drug leads can block seizures in an animal model of epilepsy and can prevent neuronal cell damage in a cellular model of Parkinson's disease. Current efforts are focused on improving potency, selectivity and other pharmaceutical properties of our drug leads for preclinical development. We believe that JNK inhibitors offer the potential for improved drugs to treat important neurodegenerative diseases for which current therapies are inadequate. NEUROPROTECTANT PROGRAMS A number of neurological disorders are due to a progressive loss of neurons over time. This can lead to peripheral neuropathy in diabetes, motor dysfunction in Parkinson's disease and memory dysfunction in Alzheimer's disease. Small molecule drugs that prevent the death of neurons cells have the potential to treat these important disorders. We have discovered compounds, including NSP6783, that prevent the death of specific types of neurons in cellular models of neurodegenerative diseases. We plan to investigate the efficacy of our clinical candidate, NSP6783, and related compounds in animal models of neurodegenerative disease for potential clinical development. VIROLOGY PROGRAMS Viruses are microorganisms that infect cells and can cause serious disease. Worldwide, an estimated 33 million people are infected with human immunodeficiency virus, or HIV, and 170 million people are estimated to be infected with the hepatitis C virus, or HCV. Human papilloma virus, or HPV, is another viral pathogen being transmitted at an epidemic rate. HPV causes chronic, lifelong genital infection and afflicts an estimated six million people in the United States. Despite the high incidence of chronic viral infections, only a limited number of antiviral drugs have been approved to date. New classes of antiviral treatments are needed which act on novel, virus-specific gene regulating targets while overcoming problems of toxicity and viral resistance. We are applying our expertise in gene regulation to the discovery of small molecule antiviral drugs that selectively inhibit viral genes. Viruses insert their genetic material into host cells and then use the infected cells' biochemical machinery to produce new viruses. Viral transcription, translation and replication events are key steps in the production of new viruses and the resulting damage that a viral infection can cause. We believe that gene regulating antivirals may provide more potent and selective therapy due to three factors: - Viral gene switches are structurally different from those found in human cells and, therefore, potentially may be targeted with drugs to more selectively and safely inhibit the spread of the virus without interfering with normal human cellular functions. - Each virus possesses distinct gene switches that distinguish it from other viruses, facilitating the design of virus-specific therapeutics. - Drugs that target these mechanisms may be useful in treating viral infections resistant to current therapies. VIROLOGY DRUG PROGRAMS - --------------------------------------------------------------------------------
PROGRAM COMMERCIAL RIGHTS STATUS* CLINICAL POTENTIAL - ------------------ VARIOUS DuPont Screening HCV infection - ------------------ VARIOUS DuPont Screening HIV infection - ------------------ E2 Signal Screening HPV infection - ------------------
- ------------ * Please refer to the legend located beneath the table entitled "Cancer Programs" on page 30 for an explanation of the terms used to describe the status of our programs. 40 45 Our virology program is directed toward four viral gene regulating targets: two regulatory factors for HCV, a transcription factor for HIV and the E2 transcription factor for HPV. We and our collaborators have validated each of these targets in vitro. We have developed a proprietary viral infection screen for identifying novel inhibitors of HPV gene activation. We have developed target-specific screens for small molecule HCV and HIV inhibitors as part of our three-year collaboration with DuPont Pharmaceuticals initiated in December 1997, and compounds with selective antiviral activity have been identified and are entering lead optimization. In December 1999, DuPont Pharmaceuticals paid us a $1 million equity milestone for the successful development of three novel high throughput screening drug discovery screens for HCV and HIV antivirals. [Graphic depicting Signal's discovery engine for gene regulating targets and drugs. The top portion of the graphic depicts Signal's target discovery engine, consisting of cellular molecular and genomic technologies. The middle portion of the graphic depicts Signal's drug discovery engine, consisting of proprietary screens and compound libraries. The bottom portion of the graphic depicts the profiling of Signal's drug candidates in specific disease models in preparation for clinical development.] 41 46 ENGINE FOR DISCOVERING GENE REGULATING TARGETS We are developing and applying advanced cellular, molecular and genomic technologies to discover clinically important targets that are the focus of our drug discovery programs and corporate collaborations. These discovery technologies include: Proprietary Human Cell Lines. We have developed a proprietary technology to immortalize and engineer human cells for use in our target and drug discovery programs. These cell lines are designed to include the relevant genes and related pathways involved in both normal and abnormal cellular functions. We use proprietary human cell lines to develop in vitro models of important disease processes, including bone metabolism, cardiovascular and neurodegenerative disease. We then use these human cell lines to identify and validate novel disease-related genes and specific drug targets in gene regulating pathways and in screens for drug discovery. Functional Genomics and Proteomics. We apply functional genomics and proteomics to determine the role specific genes and their protein products play in health and disease. We have implemented advanced genomic technologies to accelerate the identification and prioritization of gene regulating disease targets. These proprietary methods are designed to identify genes in cells or tissues that are expressed under disease conditions in comparison to normal conditions and include differential gene display, subtraction hybridization and gene chip arrays. We have developed and filed a patent for our proprietary PhaRMA(TM) genomics system, which is a technology to rapidly determine the differences in gene expression between normal and diseased tissue and to evaluate the effects of drug candidates on relevant genes within a cell or tissue. To map the gene regulating pathways involved in specific diseases, we are developing capabilities that integrate protein separation and analysis. This includes mass spectrometry, a highly sensitive analytical method to determine the unique weight of individual proteins, for identification of potential drug targets that regulate specific disease pathways. We use these gene and protein discovery tools, in combination with our proprietary cell lines, to generate a more comprehensive profile of gene regulating pathways involved in diseases and to facilitate the rapid identification of novel and specific therapeutic targets. For example, we are applying functional genomics technologies to identify and characterize the role of genomic targets and their regulatory pathways in cancer, inflammation, bone metabolism, cardiovascular and neurological diseases. Pathway Mapping and Target Identification. We apply cellular, molecular and genomic 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. We then use genomics and proteomics to identify and characterize specific enzymes or other targets in a pathway that regulate the activation of these transcription factors. When novel gene regulating enzymes or other targets are identified, we apply advanced computer programs 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, we use antisense, which is a complementary piece of genetic material used to inactivate a gene of interest, mutant enzymes, which are modified forms of a protein used to determine its function in cells, animals in which the gene has been inactivated, antibodies and other techniques to validate the role of the target in specific disease processes and to determine 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. 42 47 [DIAGRAM] ENGINE FOR DISCOVERING AND DEVELOPING GENE REGULATING DRUGS Once key gene regulating drug targets are identified, we use our advanced drug discovery engine to rapidly discover and optimize drugs active on these targets. Our drug discovery engine permits the target-directed screening of diverse and focused compound libraries in a wide range of high throughput screening assays. We optimize drug leads by integrating medicinal chemistry with computational chemistry and combinatorial chemistry, which is the rapid creation of large compound libraries. We further optimize drug leads using technologies for profiling the effects of drug leads on specific gene regulating targets in cellular pathways. These drug discovery activities are coordinated using computer programs and databases to collect and analyze chemical and biological data. This integrated information facilitates library design, primary and secondary screening and the subsequent design and synthesis of optimized drug candidates for preclinical and clinical development. 43 48 Assay Development. We develop and use proprietary biochemical and cell-based assays to screen for compounds that regulate gene expression in a target- and cell-specific manner. Our researchers have designed modular systems for developing biochemical and cell-based assays, enabling us to substitute different drug targets into standardized assay formats for use in various discovery programs. We develop and use biochemical assays to screen compounds for activity on specific targets. These biochemical assays are designed to mimic the functional activity of a drug target in its native cellular environment. Our cell-based assays facilitate the identification of compounds that modulate gene expression through distinct pathways and in specific cell types. Active compounds identified in these primary assays are rapidly qualified in a series of secondary pharmacological assays that 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 production, toxicity to cells, potency and target selectivity. We have developed 29 drug discovery assays and are continuing to develop additional high throughput screening assays. High Throughput Screening. We use automated, high-volume drug discovery systems, known as high throughput screening, or HTS, systems for rapid, target-specific screening of diverse compound libraries. These robotic systems enhance the precision, reproducibility and integration of chemical and biological data. Our screening library currently consists of more than 300,000 distinct compounds, which include small molecules, natural products and compounds derived from combinatorial chemistry. We have the capacity to screen approximately 40,000 compounds per week, including an average of 10,000 compounds against each of four distinct classes of targets such as transcription factors, kinases, ligases and viral targets, using three different detection technologies. We also employ computer information systems to ensure that data obtained from screening programs is used efficiently to drive the drug discovery process. Our Kinase Inhibitor Library. Based on our extensive knowledge of the three dimensional structures of gene regulating targets, we have designed a large, proprietary collection of compounds focused on kinase-binding small molecules. This library currently consists of approximately 17,000 distinct drug-like compounds, and we plan to continue expanding this proprietary kinase-focused library. To date we have screened the library against six kinase gene regulating targets, and have successfully identified inhibitors with attractive pharmaceutical properties for each of these targets. When screened against new gene regulating targets, we believe our kinase inhibitor library will quickly yield quality drug leads for further optimization. Optimization and Preclinical Development of Drug Candidates. We develop drug candidates by integrating our chemistry and pharmacology expertise. We use traditional medicinal chemistry approaches in conjunction with combinatorial and computational chemistry and structure-based drug design to optimize potential drug candidates. We apply combinatorial chemistry techniques to accelerate the generation of potent and selective drug candidates that are evaluated in pharmacological models of disease. We further expedite the drug optimization process by employing structure-based drug design techniques, which are techniques that use computer models of drug targets to design drug candidates that interact more precisely with a target. Our scientists have designed computer-generated three-dimensional models of JNK2, JNK3, and ER-a and ER-b. These structure-based drug design efforts have resulted in new series of drug leads and drug candidates with enhanced potency and selectivity in animal models of disease. Throughout the drug optimization process our chemists are guided by results from efficacy, drug absorption, distribution, metabolism and safety studies conducted by our pharmacology and preclinical development group. CORPORATE COLLABORATORS Collaborative arrangements with pharmaceutical and biotechnology companies are an integral part of our business strategy. As of December 31, 1999, we had received approximately $54.3 million in upfront fees, research and development funding, milestone payments and equity investments from our past and current collaborators. We had a collaboration with Organon, which expired in July 1999, and a collaboration with Tanabe, which was terminated in March 1998. In connection with the termination of our collaboration with Tanabe, we licensed exclusive worldwide rights for a drug lead to Tanabe. In addition, the research phase of our collaboration with Roche Bioscience expired in August 1999, and Roche has exclusively licensed two 44 49 immortalized PNS cell lines from us for use in drug discovery for pain, incontinence and peripheral vascular disease. NIPPON KAYAKU In February 1998, we entered into a collaborative agreement with Nippon Kayaku under which Nippon Kayaku agreed to fund specified research at our facility for two years. Under the agreement, we and Nippon Kayaku agreed to 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 PNS and CNS. We agreed to perform combinatorial chemistry and use our proprietary human neuronal cell lines to further optimize the compound and characterize its mechanism of action prior to the start of clinical studies. As of December 31, 1999, Nippon Kayaku had paid us $4.3 million to support research and development efforts under the collaboration. Each party also is obligated to pay the other royalties on future product sales arising from the collaboration. In February 2000, following the initial research phase of the collaboration, we entered into a joint agreement with Nippon Kayaku to develop and commercialize neuroprotectant drugs for PNS and CNS disorders. This agreement, which superseded the collaboration agreement described above, provides for the parties to share equally the costs of development and commercialization of these drugs and the revenues, if any, generated from these drugs worldwide, with the exception of Japan. Nippon Kayaku has sole responsibility for development and commercialization of these drugs for PNS and CNS disorders in Japan and is obligated to pay us royalties on sales of any such products in Japan. If either we or Nippon Kayaku willfully reduce our participation in and contribution to the joint development and commercialization activities under the agreement with respect to a collaborative project or geographical area, then that party will lose its co-commercialization rights with respect to that project or area. Instead, the party reducing its participation will be entitled to royalty payments from the commercializing party based on sales of products either that from that project or that are made in that geographical area. Under the agreement, the parties granted each other the right to independently develop and commercialize products discovered as part of the collaboration for indications other than PNS and CNS disorders, subject to royalty payment obligations. The parties also granted each other the right to independently develop and commercialize, for any indication, compounds discovered by the collaboration but not selected as research leads or development candidates, subject to royalty payment obligations. ARES-SERONO In November 1997, we entered into a collaborative agreement with Ares-Serono, under which Ares-Serono agreed to fund specified research for an initial three-year period and which contained provisions for extensions to the initial research term as further 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 diseases. The original agreement granted Ares-Serono exclusive rights to these compounds in all countries of the world except Asia. In April 1999, Ares-Serono expanded the collaboration to include Asia by making a $2.0 million license payment to us and agreeing to pay us milestones and royalties for products commercialized in Asia. Under the original agreement, Ares-Serono S.A. purchased approximately $10.1 million of our Series E and Series F preferred stock. Ares-Serono also agreed to provide us with annual research and development support. In addition, Ares-Serono is obligated to make payments to us based on the achievement of specified research and development milestones and to pay us royalties on future sales of products licensed under the collaboration. As of December 31, 1999, Ares-Serono had paid us $7.0 million in research and development support. Under an exclusive license that we granted to Ares-Serono, Ares-Serono will be responsible for preclinical and clinical development of drug candidates and the development of any drugs arising from the collaboration in all countries of the world. We have co-promotion rights for all products marketed in the United States, which are 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, 45 50 with respect to products arising from the collaboration. If we exercise our co-promotion rights, we will forego royalties in exchange for a share of product revenue and we will be obligated to reimburse Ares-Serono for our share of development costs out of a portion of revenue. Under the original agreement, following the expiration of the initial three-year research term, Ares-Serono's research support obligations were to continue for additional three-year periods, unless terminated by Ares-Serono by written notice given to us at least six months prior to the end of the first three-year term or any subsequent three year term. In February 2000, the parties amended the agreement to effectively extend the initial three-year research term by one year and to provide Ares-Serono with the right to terminate the collaborative research by written notice given to us at least three months prior to the end of this one-year extension or any subsequent one-year extension. Ares-Serono may also terminate the agreement upon six months' notice any time after the end of the initial three-year term. AXYS In October 1999, we entered into a collaborative agreement with Axys Pharmaceuticals, under which Axys agreed to fund specified research at our facility for two years. The agreement may be extended for an additional year at Axys' option. Our collaboration with Axys is focused on the discovery and development of ER-b-selective SERMs for cancer therapy. We have rights for all indications outside of cancer. Axys has exclusive worldwide development and marketing rights to our ER-b-selective SERMs for the treatment of cancer. Axys will provide payments to us in the form of research funding at a level approximating our cost of this program, research milestones and royalties. We may exercise a profit-share option in the United States and possibly other territories at a predetermined point during development in lieu of royalties on product sales. If we exercise this right, we will share equally in the profits in the United States on product sales by Axys but will be responsible for an equal share of the remaining development and commercialization costs in the United States. Either party may terminate this agreement in the event a material breach by the other party remains uncured for 90 days. As of December 31, 1999, Axys had paid us $2.0 million in license fees and $316,000 in research funding. DUPONT PHARMACEUTICALS In December 1997, we entered into a collaborative agreement with DuPont Pharmaceuticals, under which DuPont Pharmaceuticals agreed to fund specified research at our facility for three years. DuPont Pharmaceuticals has the option to extend the research term for up to three additional years. The DuPont Pharmaceuticals collaboration is focused on identifying compounds for the treatment or prevention of HCV and HIV infections, and we have granted DuPont Pharmaceuticals worldwide exclusive rights to these compounds. Under this collaboration, we and DuPont Pharmaceuticals are responsible for developing target-specific screening assays and are jointly responsible for identifying lead compounds. DuPont Pharmaceuticals is solely responsible for lead optimization and the worldwide development and commercialization of any drugs arising from the collaboration. DuPont Pharmaceuticals agreed to provide us with annual research and development support at a level approximating our cost of these programs. DuPont Pharmaceuticals also is obligated to make payments to us upon the achievement of specified research and development milestones and to pay us royalties on any future product sales arising from the collaboration. This agreement may be terminated by either party upon 60 days written notice upon a material breach that remains uncured or upon the bankruptcy of the other party. DuPont Pharmaceuticals paid us a license fee of $1.0 million and, through December 31, 1999, had paid us $3.6 million to support research and development efforts. In December 1999, DuPont Pharmaceuticals purchased 144,354 shares of our Series F-1 preferred stock for an aggregate purchase price of $1.0 million, under terms specified in the original agreement in December 1997. This represented a milestone payment for our successful development and validation of three new antiviral drug discovery assays, each of which is designed to identify small molecule inhibitors of key HCV and HIV viral targets. In addition, DuPont Pharmaceuticals will purchase $2.0 million of shares of our common stock in a private transaction concurrent with the closing of this offering at the initial public offering price. 46 51 LICENSE AGREEMENTS We have established a number of license agreements with academic institutions. Our principal license agreements are: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA In October 1993, we entered into a license agreement with The Regents of the University of California, as amended in June 1997 and February 1998, under which we obtained a worldwide exclusive license for the JNK gene regulating enzyme based on the research of Dr. Michael Karin, one of our scientific founders and advisors. The license also covers methods for the production and screening of nerve cells. In February 1998, we also 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, we paid initial license fees and extension payments and issued shares of our common stock to The Regents, and are obligated to make specified royalty and milestone payments. The term of the license remains in effect for the life of the last-to-expire patent covered under each agreement. THE UNIVERSITY OF MASSACHUSETTS In October 1996 and 1997, we entered into worldwide exclusive license agreements with the University of Massachusetts. Under the license agreements, we have exclusive rights under patent applications and nonexclusive worldwide rights under unpatented know-how to develop drugs targeting JNK and three intracellular gene regulating proteins in the p38 pathway, MKK3, MKK4 and MKK6, based on the research of Dr. Roger J. Davis, one of our scientific advisors. Upon entering into both of the license agreements, we paid a license fee and issued shares of our common stock to the University of Massachusetts and are obligated to make 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. PATENTS AND PROPRIETARY RIGHTS We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. Accordingly, we seek patent protection for our proprietary technology, targets and potential products. As of December 31, 1999, we owned or had licensed 29 issued United States patents, 2 notices of allowance from the United States Patent and Trademark Office, 9 corresponding issued foreign patents and 35 pending United States patent applications. In addition, as of that date, we owned or had licensed 7 corresponding international filings under the Patent Cooperation Treaty and 43 pending foreign national patent applications. Our policy is to file patent applications and to protect technology, inventions and improvements to inventions that are commercially important to the development of our business. We seek United States and international patent protection for the molecular targets we discover, as well as therapeutic products and processes, drug discovery technologies and other inventions. Our commercial success will depend in part on obtaining this patent protection. We also intend to seek patent protection or rely upon trade secret rights to protect other technologies that may be used to discover and characterize molecular targets and that may be used to develop novel drugs. We seek protection, in part, through confidentiality and proprietary information agreements. We have developed proprietary technology for use in molecular target discovery, regulatory pathway identification and assay design and, in addition to our issued patents, have filed a number of patent applications in these areas. Also, an increasing percentage of our recent patent applications have been related to potential product candidates, or compounds, that we have discovered. We are aware of one issued United States patent relating to specific methods for regulating gene expression. We believe that we have not infringed, and are not currently infringing, the claims of the patent. Nonetheless, we may in the future have to prove we are not infringing the patent or be required to obtain a license to the patent, and we do not know whether such a license will be available on commercially 47 52 reasonable terms, or at all. We are also aware of a United States patent which has issued to a third party claiming subject matter relating to the NF-kB pathway which appears to overlap with technology claimed in some of our pending NF-kB patent applications. We believe that one or more interference proceedings will be initiated by the U.S. Patent and Trademark Office to determine priority of invention for this subject matter. While we cannot predict the outcome of any such proceedings, in the event we do not prevail we believe we can use alternative methods for our NF-kB drug discovery program for which we have issued United States patents that are not claimed by the subject matter of the third party patents. COMPETITION We face, and will continue to face, intense competition from pharmaceutical and biotechnology companies and other commercial enterprises, as well as numerous academic and research institutions and governmental agencies. Other companies are pursuing the same and similar technologies, including the discovery of targets that regulate genes. Many of our competitors and potential competitors have substantially greater advantages in the following areas: - capital resources; - research and development resources; - manufacturing; - sales and marketing; and - production facilities. Additionally, many of our competitors have significantly greater experience than we do in the following: - undertaking target and drug discovery; - preclinical product development; - testing and clinical trials of potential pharmaceutical products; and - obtaining FDA and other regulatory clearances. Smaller companies also may prove to be significant competitors, particularly through proprietary research discoveries and collaborative arrangements with large pharmaceutical and established biotechnology companies. Many of our competitors have significant products that have been approved or are in development and operate large, well funded research and development programs. We also face competition from academic institutions, governmental agencies and other public and private research organizations in developing drugs and in recruiting and retaining highly qualified scientific and management personnel. Our competitors, either alone or with their collaborative partners, may succeed in developing technologies or drugs that are more effective, safer, more affordable or more easily administered and may achieve patent protection or commercialize drugs sooner than us. Developments by others may render our product candidates or our technologies obsolete. Our failure to compete effectively could have a material adverse effect on our business. GOVERNMENT REGULATION The manufacturing and marketing of our potential products and our ongoing research and development activities are subject to extensive regulation by numerous governmental authorities in the United States and other countries. Before marketing in the United States, any drug developed by us must undergo rigorous preclinical testing and clinical trials and an extensive regulatory clearance process implemented by the FDA under the federal Food, Drug, and Cosmetic Act. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, clearance, advertising, promotion, sale and distribution of biopharmaceutical products. None of our product candidates has received marketing 48 53 clearance in the United States or any foreign market. The regulatory review and clearance process, which includes preclinical testing and clinical trials of each product candidate, is lengthy, expensive and uncertain. Securing FDA clearance requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish a product candidate's safety and efficacy. The process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance, and may involve ongoing requirements for post-marketing studies. Before commencing clinical investigations in humans, we must submit to, and receive clearance from, the FDA of an Investigational New Drug application. We expect to rely on some of our corporate collaborators to file INDs and generally direct the regulatory review process for some of our products. Clinical testing must meet requirements for institutional review board oversight, informed consent and good clinical practices. Clinical testing must be conducted under FDA oversight. Before receiving FDA clearance to market a product, we must demonstrate that the product is safe and effective on the patient population that will be treated. If regulatory clearance of a product is granted, this clearance will be limited to those disease states and conditions for which the product is useful, as demonstrated through clinical trials. Marketing or promoting a drug for an unapproved indication is generally prohibited. Furthermore, clearance may entail ongoing requirements for post-marketing studies. Even if this regulatory clearance is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA. Discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on this product or manufacturer, including costly recalls or withdrawal of the product from the market. The length of time necessary to complete clinical trials varies significantly and may be difficult to predict. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory clearances. Additional factors that can cause delay or termination of our clinical trials, or the costs of these trials to increase, include: - slow patient enrollment due to the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the study or other factors; - inadequately trained or insufficient personnel at the study site to assist in overseeing and monitoring clinical trials; - delays in approvals from a study site's review board; - longer treatment time required to demonstrate effectiveness or determine the appropriate product dose; - lack of sufficient supplies of the product candidate; adverse medical events or side effects in treated patients; and - lack of effectiveness of the product candidate being tested. In addition, information obtained from preclinical testing and clinical trials is susceptible to varying interpretations which could delay, limit or prevent us from obtaining regulatory clearance of any potential drug. In addition, delays or rejection may be encountered based upon changes in FDA policy for drug clearance during the period of product development and FDA regulatory review of each submitted new drug application, or NDA, or product license application, or PLA. Similar delays or rejection also may be encountered in foreign countries. We cannot assure you that regulatory clearance will be obtained for any potential products developed by us or our collaborators. Moreover, regulatory clearance may entail limitations on the indicated uses of a drug. Further, even if regulatory clearance 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. Any drug is likely to produce some toxicities or undesirable side effects in animals and in humans when administered at sufficiently high doses and/or for sufficiently long periods of time. Unacceptable toxicities or side effects may occur at any dose level at any time in the course of studies in animals designed to identify unacceptable effects of a drug candidate, known as toxicological studies, or clinical trials of our potential 49 54 products. The appearance of any unacceptable toxicity or side effect could cause us or regulatory authorities to interrupt, limit, delay or abort the development of any of our product candidates and could ultimately prevent their clearance by the FDA or foreign regulatory authorities for any or all targeted indications. Outside the United States, our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Union registration procedures are available to companies wishing to market a product in more than one European Union member state. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, a marketing authorization will be granted. This foreign regulatory approval process involves all of the risks associated with FDA clearance discussed above. Violations by us of regulatory requirements at any stage of drug development, including preclinical testing and clinical trials, the regulatory review process or post-clearance, may result in various adverse consequences including the following: - a delay by the FDA or other applicable regulatory authority in completing regulatory review of a potential product; - the FDA or other authority's refusal to grant marketing clearance for a potential product, - required withdrawal of a drug from the market; and - the imposition of criminal penalties against us. Neither we nor our collaborators have submitted any IND applications for any potential product of ours. We cannot assure you that we or our collaborators will be able to obtain FDA or other applicable regulatory authority clearance for any potential products. If we do not obtain the required regulatory authorizations or the scope of authorization we request, it will delay or preclude us or our collaborators from marketing our or our collaborators' products and limit the commercial use of the potential products. MANUFACTURING To date, we have not manufactured any products for preclinical, clinical or commercial purposes and do not have any manufacturing facilities. We intend to use third-party contract manufacturers or our 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 we are unable to secure such outside manufacturing capabilities, we will not be able to conduct preclinical product development, clinical trials or commercialize our potential products as planned. Even if we were able to establish our own internal manufacturing capability, doing so would require the expenditure of significant resources which could have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that we or any outside manufacturers can produce potential products of suitable quality in sufficient quantity in a cost-effective manner, if at all. We and our contract manufacturers also are required to comply with the applicable FDA and other applicable domestic and foreign regulatory authorities' current good manufacturing practice regulations. Good manufacturing practice regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA. These facilities must be approved before we can use them in commercial manufacturing of our products. We or our contract manufacturers may not be able to comply with the applicable good manufacturing practice requirements and other FDA or other applicable domestic and foreign regulatory requirements. OTHER THIRD PARTY SERVICES In addition to manufacturing arrangements with third parties, we have also contracted with third parties for the performance of preclinical studies, including studies regarding the biological activity, safety, 50 55 absorption, metabolism and elimination of our drug candidates, and we expect to continue to contract with third parties for these and similar services. We also expect that we will contract with third parties to conduct all clinical trials, if any, of our drug candidates. There are multiple companies capable of performing these services, and, accordingly, we do not expect to be dependent on any single company for these services. EMPLOYEES As of December 31, 1999, we had 87 full-time employees, including 38 with Ph.D. degrees. Of our workforce, 69 employees are engaged in research and development and 18 are engaged in business development, finance and administration. We have assembled a group of experienced scientists and managers skilled in each phase of target and drug discovery. We also retain outside consultants. None of our employees are covered by collective bargaining arrangements, and our management considers its relationships with our employees to be good. FACILITIES We currently lease 25,000 square feet of laboratory and office space at 5555 Oberlin Drive, San Diego, California. Our lease for this facility expires on January 31, 2001, with an option to renew for two additional periods of three years each. We also lease 11,000 square feet of laboratory and office space at 5626 Oberlin Drive and 9,500 square feet of office space at 5627 Oberlin Drive, San Diego, California. Our leases for these facilities expires on December 31, 2003. We believe that our existing facilities are adequate to meet our business requirements for the near-term and that additional space will be available on commercially reasonable terms, if required. LEGAL PROCEEDINGS We are not a party to any legal proceedings at this time. SCIENTIFIC ADVISORY BOARD Our scientific advisory board consists of our five scientific founders, as well as other individuals with expertise in the fields of kinase biology, immunology, cytokine biology, virology and synthetic chemistry. The scientific advisory board generally advises us concerning long-term scientific planning, research and development, and also evaluates our research programs, recommends personnel to us and advises us on specific scientific and technical issues. The scientific advisory board meets at least once per year, and some individual scientific advisors consult with and meet informally with us on a more frequent basis. Some of our scientific advisors own shares of our common stock, and we have entered into consulting agreements with all of our scientific advisors. None of our scientific advisors is employed by us, and any or all of our 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 us. Accordingly, these persons are expected to devote only a small portion of their time to us. The members of our scientific advisory board are: SCIENTIFIC FOUNDERS Tony Hunter, Ph.D., is a Professor at The Salk Institute and 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-kB. 51 56 Inder Verma, Ph.D., is Chairman of our 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-kB gene regulation. 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. Dr. Heinemann is the recipient of the Bristol-Myers Squibb Distinguished Achievement Award in Neuroscience Research. He is considered one of the foremost experts in the field of receptor neurobiology and is a member of the National Academy of Sciences. OTHER SCIENTIFIC ADVISORY BOARD MEMBERS 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. 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. 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-kB transcription factors. Dr. Rao is a recipient of the Leukemia Society of America Scholar Award. 52 57 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth information regarding our current executive officers, directors and key employees as of January 31, 2000:
NAME AGE POSITION ---- --- -------- Alan J. Lewis, Ph.D. ................... 54 President, Chief Executive Officer and Director David W. Anderson, Ph.D. ............... 47 Senior Vice President, Chief Scientific Officer Bradley B. Gordon....................... 46 Senior Vice President Finance, Chief Financial Officer and Corporate Secretary Douglas E. Richards..................... 37 Vice President, Corporate Development Shripad S. Bhagwat, Ph.D. .............. 44 Senior Director of Drug Discovery Anthony M. Manning, Ph.D. .............. 38 Senior Director of Target Biology and Preclinical Development John P. Walker.......................... 51 Chairman of the Board Harry F. Hixson, Ph.D.(2)............... 61 Director Patrick F. Latterell(1)(2).............. 41 Director Gary L. Neil, Ph.D.(1).................. 59 Director Arnold Oronsky, Ph.D.(1)(2)............. 59 Director
- ------------------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee Alan J. Lewis, Ph.D. has served as our Chief Executive Officer and Director since 1996 and as our President since 1994. Prior to joining us, Dr. Lewis worked for 15 years at the Wyeth-Ayerst Research division of American Home Products Corporation, a pharmaceutical company, where he served as Vice President of Research from 1990 to 1994. At Wyeth-Ayerst, Dr. Lewis was responsible for drug discovery 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. David W. Anderson, Ph.D. has served as our Chief Scientific Officer since October 1999 and as our Vice President of Drug Discovery and Preclinical Development from 1994 to October 1999. Prior to joining us, Dr. Anderson spent six years at Johnson & Johnson, a healthcare company, most recently as Director of Drug Discovery at the R.W. Johnson Pharmaceutical Research Institute, where he assisted in the development of two drug products, Procrit(TM) and Leustatin(TM). He also led teams which filed three INDs in the areas of cancer and inflammatory diseases. Prior to his tenure with Johnson & Johnson, Dr. Anderson was one of the first senior scientists and group leaders in immunology and inflammation at Monsanto. Dr. Anderson holds a Ph.D. in Medical Microbiology and Immunology from the University of Missouri-Columbia. He conducted post-doctoral training at the Webb-Waring Lung Institute and served as an Institute Fellow of the Eleanor Roosevelt Institute for Cancer Research both located at the University of Colorado Health Science Center. Bradley B. Gordon has served as our Vice President Finance, Chief Financial Officer and Corporate Secretary since 1994. For the seven years prior to joining us, 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. Douglas E. Richards has served as our Vice President, Corporate Development since May 1998. Before joining us, Mr. Richards served as Director of Biotechnology Licensing at Bristol-Myers Squibb. While at 53 58 Bristol-Myers Squibb, from 1995 to 1998, Mr. Richards was responsible for completing a number of major collaborations with biotechnology companies with a potential value of well over two-hundred million dollars. Between 1992 and 1995, Mr. Richards served in the corporate development department at Gensia, where he was responsible for corporate partnering and technology in-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. Shripad Bhagwat, Ph.D. has served as our Senior Director of Drug Discovery since 1999 and was our Director of Medicinal Chemistry from May 1998 to 1999. Dr. Bhagwat has fifteen years of research experience in medicinal chemistry and drug discovery in the pharmaceutical industry. Prior to joining us in 1998, Dr. Bhagwat was Senior Group Leader, Neuroscience Research at Abbott Laboratories for four years with responsibility for managing the medicinal chemistry activities for two lead optimization programs, including one drug candidate in clinical development. From 1985 through 1994 Dr. Bhagwat was employed at Ciba-Geigy Corp. where he managed several medicinal chemistry programs in the area of cardiovascular, atherosclerosis and antiviral research. 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. Anthony M. Manning has served as our Senior Director, Target Biology & Preclinical Development since November 1999. Dr. Manning joined Signal in July 1996 as Director, Inflammation and Immunology. Before joining us, Dr. Manning served as Senior Research Scientist at Pharmacia & Upjohn. While at Pharmacia & Upjohn, from 1992 to 1996, Dr. Manning was a Drug Discovery Program Team Leader in the inflammation area. Dr. Manning completed a Fogarty International Center NIH Fellowship in Human Molecular Genetics at Baylor College of Medicine and a Masonic Fellowship in Pediatrics at the University of Otago, New Zealand. Dr. Manning received a Ph.D. in Biochemistry from the University of Otago, New Zealand. John P. Walker has served as our Chairman of the Board since 1996 and has served as a consultant to us since June 1995. Mr. Walker is currently Chairman, Chief Executive Officer and a director of Axys Pharmaceuticals, Inc., a public biopharmaceutical company. From 1993 to year end 1997, he was President and Chief Executive Officer of Arris Pharmaceutical Corporation, a predecessor corporation of Axys. Prior to his association with Arris, Mr. Walker was the Chairman and Chief Executive Officer of Vitaphore Corporation, a biomaterials company which was sold to Union Carbide in 1990, and for a period of 15 years was an executive with American Hospital Supply Corporation, most recently serving as President of the Hospital Company. Mr. Walker also serves as Chairman of the Board of Directors of Microcide Corporation and as a director of Geron Corporation and the Biotechnology Industry Organization. Harry F. Hixson, Ph.D. has served as one of our directors since 1993. He is currently the Chairman of the Board of Directors and the Chief Executive Officer of Elitra Pharmaceuticals, Inc., a privately-held biopharmaceutical company. Dr. Hixson was employed by Amgen Inc. from 1985 to 1991, where he last served as President, Chief Operations Officer and a director. 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 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 as one of our directors since 1993, as Chairman of the Board from 1993 to 1996, and as our 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. Prior to Venrock Mr. Latterell was a General Partner with Rothschild Ventures Inc. and an executive with Syntex Pharmaceuticals. Mr. Latterell currently is a director of Vical, Inc. Oratec Interventions, Inc. and several private biomedical companies. Mr. Latterell holds an M.B.A. from the Stanford University Graduate School of Business. Gary L. Neil, Ph.D. has served as one of our directors since January 2000. Dr. Neil is President, Chief Executive Officer and a director of Crescendo Pharmaceuticals Corporation, a pharmaceutical development and commercialization company, which he joined in 1997. Dr. Neil was a director and the President and Chief Executive Officer of Therapeutic Discovery Corporation from 1993 until September 1997. Prior to joining Therapeutic Discovery Corporation, from 1989 to 1993, Dr. Neil was with the Wyeth-Ayerst Research division of Wyeth Laboratories, Inc., a subsidiary of American Home Products Corporation, a large 54 59 pharmaceutical company. At Wyeth-Ayerst, among other positions, Dr. Neil served as Executive Vice President and was responsible for Wyeth-Ayerst's worldwide research and development activities. Prior to that time, Dr. Neil served for 23 years in various scientific and management positions with the Upjohn Company. Dr. Neil is a director of Allergan Specialty Therapeutics, Inc. and Geron Corporation, each of which is a publicly held corporation. Arnold Oronsky, Ph.D. has served as one of our directors 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 been 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 our restated certificate, our 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 our board of directors for the remainder of the full term. Dr. Hixson and Dr. Oronsky serve as Class I directors, whose term will expire at the first annual meeting of stockholders following the closing of this offering. Mr. Walker and Mr. Latterell serve as Class II directors, whose term will expire at the second annual meeting of stockholders following the closing of this offering. Dr. Lewis and Dr. Neil 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 of our directors or executive officers. COMMITTEES OF THE BOARD OF DIRECTORS The Compensation Committee consists of Dr. Hixson, Mr. Latterell and Dr. Oronsky. The Compensation Committee makes recommendations regarding our 2000 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 our employees and consultants. The Audit Committee consists of Mr. Latterell, Dr. Neil and Dr. Oronsky. The Audit Committee is composed of three independent directors who make 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 our independent auditors and reviews and evaluates our audit and control functions. DIRECTOR COMPENSATION Our 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 expenses in connection with attendance at board and committee meetings. Notwithstanding the foregoing, Mr. Walker, the Chairman of the Board of Directors, currently receives $1,000 compensation for each day of on-site activities and each meeting of the board of directors that he attends under a consulting agreement dated April 1, 1996. In 1997, each non-employee director also received options to purchase 25,000 shares of common stock. All directors are eligible to participate in our 2000 Equity Incentive Plan. Non-employee directors receive automatic grants of options under our Non-Employee Directors' Stock Option Plan as described below. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of our executive officers 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 our board of directors or Compensation Committee. See "Certain Transactions" for a description of transactions between us and entities affiliated with members of our Compensation Committee. 55 60 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation that was earned during 1999 to our Chief Executive Officer and each of the other executive officers who earned more than $100,000 during 1999. All option grants were made under our stock option plans. In accordance with the rules of the Securities and Exchange Commission, the compensation described in this table does not include medical, group life insurance or other benefits which are available generally to all of our salaried employees and certain perquisites and other personal benefits received which do not exceed the lesser of $50,000 or 10% of any officer's salary and bonus disclosed in this table. SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM COMPENSATION COMPENSATION AWARDS --------------------- SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) --------------------------- --------- -------- --------------------- Alan J. Lewis, Ph.D. ............................. $300,593 $54,000 -- President, Chief Executive Officer and Director David W. Anderson, Ph.D. ......................... 230,125 32,000 -- Senior Vice President, Drug Development Bradley B. Gordon................................. 176,588 27,000 25,000 Senior Vice President Finance, Chief Financial Officer and Corporate Secretary Douglas E. Richards............................... 181,253 27,000 -- Vice President, Corporate Development
EMPLOYMENT AGREEMENTS AND INDEBTEDNESS OF MANAGEMENT We entered into an employment letter agreement with Alan J. Lewis, dated December 8, 1993, providing for an annual salary, subject to adjustment from time to time, a signing bonus of $50,000, additional bonuses and options subject to specified performance milestones, assistance with home financing, and an opportunity to acquire 225,000 shares of common stock under our stock option plan. The term of the employment letter agreement was for one year, renewable annually. We entered into an employment letter agreement with David W. Anderson, dated March 4, 1994, providing for an annual salary, subject to adjustment from time to time, a signing bonus of $25,000, and an opportunity to acquire 100,000 shares of common stock under our stock option plan. The employment letter agreement indicates that Dr. Anderson's employment is terminable at will by either party. We entered into an employment letter agreement with Bradley B. Gordon, dated August 18, 1994, providing for an annual salary, subject to adjustment from time to time, plus bonuses subject to unspecified performance milestones and an opportunity to acquire 75,000 shares of common stock under our stock option plan. The employment letter agreement indicates that Mr. Gordon's employment is terminable at will by either party. We entered into an employment letter agreement with Douglas E. Richards, dated May 18, 1998, providing for an annual salary, subject to adjustment from time to time, plus bonuses subject to unspecified performance milestones and an opportunity to acquire 112,500 shares of common stock under our stock option plan. Mr. Richards' employment agreement also provided for a loan, which we describe below, and reimbursement of specified expenses incurred by Mr. Richards in connection with his family's relocation to San Diego, California. If we and Mr. Richards mutually agree to terminate his employment with us, or if we terminate his employment for any reason, the employment letter agreement obligates us to pay him severance payments in an amount equal to six months of his then current salary and to continue his benefits during such time. The employment letter agreement indicates that Mr. Richards' employment is terminable at will by either party. 56 61 In June 1994, we loaned $250,000 to Alan J. Lewis, our President and Chief Executive Officer and a director, to assist with the purchase of a residence in connection with Dr. Lewis' relocation to San Diego, California. Under the terms of a Promissory Note dated June 14, 1994, as amended on May 14, 1998 and October 27, 1999, the principal amount of the loan plus accrued interest shall be amortized over a period of five years following June 14, 2002, with monthly payments commencing in July 2002. The principal amount of the loan will be interest-free for eight years from the date of the Promissory Note, and thereafter will accrue interest at the per annum rate of 7.52%, compounded annually. 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 our common stock held by him (plus all cash and stock dividends attributable to such shares) as security for the loan. As of December 31, 1999, the total amount outstanding under this loan was $250,000. In May 1998, we loaned $62,000 to Alan J. Lewis in connection with the exercise of options to purchase 225,000 shares of our common stock. Under the terms of a promissory note delivered to us 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. Under a stock pledge agreement entered into on the same date, Dr. Lewis pledged all present and future shares of our common stock held by him, plus all cash and stock dividends attributable to such shares, as security for the loan. As of December 31, 1999, the total amount outstanding under this loan was $62,000. In August 1998, we loaned $60,000 to Douglas E. Richards, our Vice President of Corporate Development, to assist Mr. Richards with his relocation to San Diego, California. Under the terms of a promissory note dated August 1998, the principal amount of this loan, together with accrued interest at the rate of 4.83% per year, will be due and payable one year from the date of termination of Mr. Richards' employment with us for any reason. Provided he remains in continuous employment with us, we will forgive the principal amount of the loan in three increments of $20,000 on June 8, 2000, June 8, 2001 and June 8, 2002. We also entered into a security agreement with Mr. Richards under which he pledged all shares of our common stock now or in the future held by him, plus all cash and stock dividends attributable to those shares, as security for the loan. As of December 31, 1999, the total amount outstanding under this loan was $60,000. 2000 EQUITY INCENTIVE PLAN We adopted our 1993 Stock Option Plan, 1993 Founders' Stock Option Plan and 1997 Stock Option Plan and amended, restated and retitled these plans in February 2000 as the 2000 Equity Incentive Plan. Outstanding options will continue to be governed by the original terms of those grants. We have reserved an aggregate of 3,500,000 shares of common stock (including the shares subject to options that were outstanding under our prior plans) for issuance under the exercise of stock awards granted to employees, directors and consultants under the 2000 Equity Incentive Plan. The 2000 Equity Incentive Plan will terminate in February 2010, unless sooner terminated by the board. The 2000 Equity Incentive Plan permits the granting of options intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, to employees, including officers and employee directors, and options that do not so qualify to employees, directors and consultants, including non-employee directors. In addition, the 2000 Equity Incentive Plan permits the granting of stock bonuses and rights to purchase restricted stock. No person is eligible to be granted options covering more than 750,000 shares of common stock in any calendar year. The 2000 Equity Incentive Plan is administered by the board or a committee appointed by the board. Subject to the limitations set forth in the 2000 Equity Incentive 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 upon exercise and, subject to some restrictions, to specify other terms of stock awards. 57 62 The maximum term of options granted under the 2000 Equity Incentive 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 may not exceed $100,000, or the options or portion thereof which exceed such limit, according to the order in which they are granted, will be treated as nonstatutory stock options. Options granted under the 2000 Equity Incentive Plan generally are non-transferable and expire three months after the termination of an optionee's service to us. In general, if an optionee is permanently disabled or dies during his or her service to us, 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 2000 Equity Incentive Plan is determined by the board of directors in accordance with the guidelines set forth in the 2000 Equity Incentive 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 2000 Equity Incentive 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 our 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 2000 Equity Incentive Plan will 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 of the common stock on the date of grant. Stock bonuses and restricted stock purchase agreements awarded under the 2000 Equity Incentive Plan are generally non-transferable. Under the 2000 Equity Incentive 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 to offer optionees the opportunity to replace outstanding options with new options for the same or a different number of shares. Upon a change in control of our company, all outstanding stock awards under the 2000 Equity Incentive 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. The information in this paragraph is presented as though the February 2000 amendment, restatement and retitling of our 1993 Stock Option Plan, 1993 Founders' Stock Option Plan and 1997 Stock Option Plan into the 2000 Equity Incentive Plan had already occurred as of December 31, 1999. As of December 31, 1999, we had issued 1,165,399 shares of common stock, net of repurchases of 64,559, upon the exercise of options granted under the 2000 Equity Incentive Plan, and had granted additional options to purchase an aggregate of 1,493,607 shares of common stock. Since December 31, 1999, we have granted options to purchase an aggregate of 589,375 additional shares of common stock. As of February 23, 2000, 1,417,018 shares of common stock remained available for future grants under the 2000 Equity Incentive Plan. 58 63 The following table sets forth summary information regarding the option grants made to our Chief Executive Officer and each of our executive officers who earned more than $100,000 during 1999: OPTION GRANTS IN YEAR ENDED 1999
INDIVIDUAL GRANTS POTENTIAL ------------------------------------- REALIZABLE VALUE PERCENT OF AT ASSUMED TOTAL ANNUAL RATES OF NUMBER OF OPTIONS STOCK PRICE SECURITIES GRANTED APPRECIATION FOR UNDERLYING TO EXERCISE OPTION TERM OPTIONS EMPLOYEES PRICE EXPIRATION -------------------- NAME GRANTED IN 1999 PER SHARE DATE 5% 10% ---- ---------- ---------- --------- ---------- -------- -------- Alan J. Lewis.................... -- --% $ -- -- $ -- $ -- David W. Anderson................ -- -- -- -- -- -- Bradley B. Gordon................ 25,000 14.3 1.00 1/19/09 506,121 772,228 Douglas E. Richards.............. -- -- -- -- -- --
Twenty-five percent of the options listed in the table above vest on the first anniversary of the grant date and the remaining options vest thereafter in 36 equal monthly installments. The board of directors has the right to accelerate the vesting of these options. The term of the options is 10 years. The exercise price of the options listed in the table above is equal to the fair market value of our common stock on the date of grant, as determined by the board of directors. Because there has been no public market for our common stock, in determining the fair market value, the board gives consideration to a number of factors, including the following: - the share price in our most recent round of preferred stock financing; - the material differences between the rights, preferences and privileges of the most-recently issued series of preferred stock and the rights of the common stock; - the stage of development of our company, our research and development programs and our collaborative agreements; - the valuations of other companies in our industry at similar stages of development; and - other factors that the board deems relevant. In view of the variety of factors considered by the board in determining the fair market value of our common stock on any given date, the board does not believe it is practicable to quantify or otherwise assign relative weight to the specific factors considered in determining fair market value. You should note the disparity between the exercise price of the options in the table above and the assumed public offering price. Because of this disparity, we have used the assumed public offering price to compute the potential realizable option values in the table above. 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 therefor 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. 59 64 The following table sets forth summary information regarding the number and value of options exercised during 1999 and held as of December 31, 1999 for our Chief Executive Officer and each of the other executive officers who earned more than $100,000 in 1999: AGGREGATED 1999 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 ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- ----------- ------------- ----------- ------------- Alan J. Lewis.......... -- $ -- 37,500 -- $ 504,000 -- David W. Anderson...... -- -- 70,000 -- 945,700 -- Bradley B. Gordon...... -- -- 165,000 -- 2,227,600 -- Douglas E. Richards.... -- -- 112,500 -- 1,462,500 --
The values of unexercised in-the-money options at year-end in the table above were determined based on an assumed initial public offering price of $14.00 per share minus the per share exercise price multiplied by the number of shares. All stock options that we have granted are immediately exercisable for shares of restricted common stock, subject to our right of repurchase under a vesting schedule. At year-end, Dr. Lewis held 39,532 shares and 19,532 exercisable options remaining subject to a vesting schedule; Dr. Anderson held 34,929 exercisable options remaining subject to a vesting schedule; Mr. Gordon held 58,855 exercisable options remaining subject to a vesting schedule; and Mr. Richards held 67,969 exercisable options remaining subject to a vesting schedule. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN In February 2000, we adopted our Non-Employee Directors' Stock Option Plan to provide for the automatic grant of options to purchase shares of common stock to our non-employee directors. 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 upon exercise of options granted under the Directors' Plan is 250,000. Under the terms of the Directors' Plan: - 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 - on the date of each annual meeting of stockholders after the effective date of this offering, other than any such annual meeting held in 2000, each person other than the Chairman of the Board who is serving as a non-employee director, and 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, and the Chairman of the Board, provided he is serving as a non-employee director and was a non-employee director prior to such annual meeting, automatically will be granted an option to purchase 7,500 shares of common stock. No option 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 a change in control of our company. 60 65 EMPLOYEE STOCK PURCHASE PLAN In February 2000, we adopted our Employee Stock Purchase Plan covering an aggregate of 500,000 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, 2001. Unless otherwise determined by the board, employees are eligible to participate in the Purchase Plan only if they are employed by us or our subsidiary designated by the board for at least 20 hours per week and are customarily employed by us or our subsidiary 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 under 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 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 us. In the event of a merger, reorganization, consolidation or liquidation involving our 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. LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION Our bylaws provide that we shall indemnify our directors and executive officers and may indemnify our other officers, employees and other agents to the fullest extent permitted by Delaware law, except with respect to certain proceedings initiated by such persons. We are also empowered under our bylaws to enter into indemnification contracts with our directors and executive officers and to purchase insurance on behalf of any person we are required or permitted to indemnify. Under this provision, we have entered into indemnification agreements with each of our directors and executive officers. In addition, our restated certificate provides that no director will be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to us or our stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - under Section 174 of the Delaware General Corporation Law; or - 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 our stockholders of the restated certificate to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our 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 66 CERTAIN TRANSACTIONS The following is a description of transactions since January 1, 1997, to which we have 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 our capital stock 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 1999, we sold in a private placement 144,354 shares of Series F-1 preferred stock to DuPont Pharmaceuticals in exchange for an aggregate purchase price of $1,000,000, under a stock purchase agreement dated December 26, 1997 and concurrent with a collaborative research and license agreement dated December 26, 1997. Upon the closing of this offering, each share of Series F-1 preferred stock will automatically convert into one share of common stock. Note 5 of notes to financial statements describes the Series F-1 preferred stock. In December 1997, we sold in a private placement 1,361,256 shares of Series F preferred stock to Ares-Serono, a five percent holder of our capital stock, in exchange for an aggregate purchase price of $8,200,001, under a Series F preferred stock purchase agreement dated November 25, 1997. Upon the closing of this offering, each share of Series F preferred stock will automatically convert into one share of common stock. Note 5 of notes to financial statements describes the Series F preferred stock. In addition, on November 25, 1997, we 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 us a license fee and is obligated to provide us with annual research and development support, make payments to us based on the achievement of specified research and development milestones, and to pay us royalties on any future product sales arising from the collaboration. In September 1997, we sold in a private placement 3,227,740 shares of Series E preferred stock in exchange for an aggregate purchase price of $11,999,997, under a Series E preferred stock purchase agreement dated September 9, 1997. Upon the closing of this offering, each share of Series E preferred stock will automatically convert into one share of common stock. Note 5 of notes to financial statements describes the Series E preferred stock. The following directors and beneficial owners of more than five percent of our common stock (assuming the conversion of all shares of preferred stock into common stock) acquired beneficial ownership of Series E preferred stock under the Series E Agreement:
NUMBER DIRECTORS/5% STOCKHOLDERS OF SHARES ------------------------- --------- Patrick F. Latterell/Venrock Associates..................... 50,546 Accel Partners.............................................. 50,546 Kleiner Perkins Caufield & Byers............................ 50,546 Arnold Oronsky/InterWest Partners........................... 39,652 Oxford Bioscience Partners.................................. 26,434 U.S. Venture Partners....................................... 26,434 Ares-Serono S.A............................................. 493,151 Lombard Odier Immunology Fund............................... 785,340
We have entered into other agreements in connection with the Series E and Series F Agreements. Under one of these agreements, some of our stockholders acquired registration rights. See "Description of Capital Stock -- Registration Rights." Further, our stockholders and we agreed to restrictions on the issuance and transfer of shares of our capital stock, and to voting rights relating to the election of directors, all of which restrictions and voting rights are not applicable to and will terminate upon the closing of this offering. In October 1999, we entered into a collaborative agreement with Axys Pharmaceuticals. See "Business -- Corporate Collaborators." John P. Walker, our Chairman of the Board of Directors, is the Chairman, Chief Executive Officer and a director of Axys Pharmaceuticals. We have granted options to some of our directors and executive officers. We have made loans to some of our executive officers. For a description of these loans, please see the section entitled "Management -- Employment Agreements and Indebtedness of Management." We have also entered into an indemnification agreement with each of our directors and executive officers. 62 67 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of common stock as of January 31, 2000 by: - each person who is known by us to own beneficially more than five percent of our common stock; - each of our current directors, our Chief Executive Officer and our other executive officers who earned more than $100,000 during 1999; and - all directors and executive officers as a group. 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 stockholders named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Percentage ownership is based on 14,114,552 shares of common stock outstanding as of January 31, 2000, together with applicable options and warrants for each stockholder.
SHARES ISSUABLE PERCENTAGE OF UPON EXERCISE OF SHARES OPTIONS THAT VEST BENEFICIALLY OWNED SHARES WITHIN 60 DAYS ------------------- BENEFICIALLY OF JANUARY 31, BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED 2000 OFFERING OFFERING ------------------------ ------------ ----------------- -------- -------- Ares-Serono S.A.................................. 1,854,407 -- 13.1% 9.6% 15bis Chemin des Mines 1202 Geneva, Switzerland Patrick F. Latterell(1).......................... 1,491,333 -- 10.6 7.7 Venrock Associates 30 Rockefeller Plaza, Room 5508 New York, New York 10112 Accel Partners(2)................................ 1,466,327 -- 10.4 7.6 428 University Avenue Palo Alto, California 94301 Kleiner Perkins Caufield & Byers................. 1,416,331 -- 10.0 7.4 2750 Sand Hill Road Menlo Park, California 94025 Arnold Oronsky, Ph.D.(3)......................... 1,129,309 18,229 8.0 5.9 InterWest Partners 3000 Sand Hill Road, Bldg. 3, Suite 255 Menlo Park, California 94025 Lombard Odier & Cie.............................. 785,340 -- 5.6 4.1 11, rue de la Corraterie 1204 Geneva, Switzerland Oxford Bioscience Partners(4).................... 740,719 -- 5.2 3.8 650 Town Center Drive, Suite 180 Costa Mesa, California 92626 U.S. Venture Partners(5)......................... 740,719 -- 5.2 3.8 2180 Sand Hill Road, Suite 300 Menlo Park, California 94025 Alan J. Lewis, Ph.D.............................. 375,000 20,312 2.7 * Harry F. Hixson, Ph.D.(6)........................ 192,989 18,229 1.4 1.0 David W. Anderson, Ph.D.......................... 170,000 39,228 1.2 * Bradley B. Gordon................................ 165,000 116,977 1.2 *
63 68
SHARES ISSUABLE PERCENTAGE OF UPON EXERCISE OF SHARES OPTIONS THAT VEST BENEFICIALLY OWNED SHARES WITHIN 60 DAYS ------------------- BENEFICIALLY OF JANUARY 31, BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED 2000 OFFERING OFFERING ------------------------ ------------ ----------------- -------- -------- John P. Walker(7)................................ 75,000 -- * * Douglas E. Richards.............................. 51,562 51,562 * * All directors and executive officers as a group (9 persons).................................... 3,554,210 246,537 25.0 18.2
- ------------------------- * Represents beneficial ownership of less than one percent. (1) Includes 999,204 shares held by Venrock Associates and 473,379 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. (2) Includes the following shares held by the following affiliated entities: - 1,227,321 shares held by Accel IV L.P.; - 54,252 shares held by Accel Investors '93 L.P.; - 26,393 shares held by Accel Keiretsu L.P.; - 117,307 shares held by Accel Japan L.P.; - 32,257 shares held by Ellmore C. Patterson Partners; and - 8,797 shares held by Prosper Partners. (3) Includes 1,104,136 shares held by InterWest Partners V and 6,944 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. (4) Includes the following shares held by the following affiliated entities: - 463,885 shares held by Oxford Bioscience Partners L.P.; - 148,144 shares held by Oxford Bioscience Partners (Adjunct) L.P.; and - 128,690 shares held by Oxford Bioscience Partners (Bermuda) Limited Partnership. (5) Includes: - 640,723 shares held by U.S. Venture Partners IV, L.P.; - 77,775 shares held by Second Ventures II, L.P.; and - 22,221 shares held by USVP Entrepreneur Partners II, L.P. (6) Includes 192,989 shares held by the Harry F. Hixson, Jr. Separate Property Trust Dated December 15, 1995, of which Dr. Hixson is the sole trustee. (7) Includes 75,000 shares held by the Walker Living Trust Dated March 3, 1995, of which Mr. Walker is the sole trustee. 64 69 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 50,000,000 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 December 31, 1999, there were 14,093,899 shares of common stock outstanding that were held of record by approximately 123 stockholders, after giving effect to the conversion of all outstanding shares of preferred stock into 12,246,296 shares of common stock. Based upon the number of shares outstanding as of December 31, 1999, there will be 19,236,756 shares of common stock outstanding after giving effect to the sale of the shares of common stock offered by this prospectus and the sale of 142,857 shares of common stock to DuPont Pharmaceuticals at an assumed initial public offering price of $14.00 per share. 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 Signal, 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 12,246,296 shares of common stock. See note 5 of notes to financial statements for a description of the currently outstanding preferred stock. Following the conversion, our 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. We have no present plans to issue any shares of preferred stock. WARRANTS As of December 31, 1999, there were warrants outstanding to purchase an aggregate of 125,000 shares of Series C-1 preferred stock at an exercise price of $4.20 per share, which will convert into warrants to purchase 125,000 shares of common stock at an exercise price of $4.20 per share upon the closing of this offering. The warrant also contains a net issuance provision which allows the warrant holder to convert the warrant into a specified number of shares in a cashless exercise. REGISTRATION RIGHTS After this offering, the holders of 12,246,296 shares of common stock will be entitled to rights with respect to the registration of such shares under the Securities Act, under an amended and restated investor 65 70 rights agreement dated September 9, 1997, as amended on November 25, 1997. Under the terms of the investors' rights agreement, if we propose to register any of our securities under the Securities Act, either for our 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 limitations, to include shares in the offering. Commencing with the date that is 180 days after this offering, the holders may also require us to file a registration statement under the Securities Act with respect to their shares, and we are required to use our best efforts to effect to such registration. Furthermore, the holders may require us to register their shares on a registration statement on Form S-3 when such form becomes available to us. Such registration rights terminate on the seventh anniversary of the effective date of this offering. The holder of a warrant to purchase 125,000 shares of Series C-1 preferred stock, granted November 23, 1996, will be entitled, upon exercise of such warrant, to notice whenever we propose to register any of our 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 8,662 shares of common stock purchased under two restricted stock purchase agreements dated October 26, 1993 and February 18, 1998, respectively, will be entitled, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, to notice of such registration and, subject to limitations, to include such shares in the offering. In addition, such holder may obtain an additional 47,500 shares of common stock upon the attainment of specified regulatory milestones whereby such additional shares would be entitled to the same registration rights as the 8,662 shares currently held. After this offering, a holder of 15,000 shares of common stock purchased under two restricted stock purchase agreements dated October 31, 1996 and December 7, 1997, respectively, will be entitled, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, to notice of such registration and, subject to limitations, to include such shares in the offering. In addition, such holder may obtain an additional 11,250 shares of common stock upon the attainment of specified regulatory milestones whereby such additional shares would be entitled to the same registration rights as the 15,000 shares currently held. Generally, we are 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 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 SPECIFIC CHARTER PROVISIONS We are governed by the provisions of Section 203 of the Delaware General Corporation Law. 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. Our 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 us 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. Our restated certificate provides that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or 66 71 special meeting of stockholders and may not be effected by any consent in writing. In addition, our bylaws provide that special meetings of the stockholders may be called only by the Chairman of the Board of Directors, by the Chief Executive Officer, by the board of directors upon a resolution adopted by a majority of the total number of authorized directors, or by the holders of 10% of the outstanding voting stock. Our 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 our restated certificate and bylaws could delay or discourage transactions involving an actual or potential change in control of Signal or our 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 our current management or approve transactions that stockholders may deem to be in their best interests and, therefore, could adversely affect the price of our common stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services. 67 72 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our 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 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 our ability to raise equity capital in the future. Upon completion of this offering, and the sale of shares to DuPont at an aggregate purchase price of $2.0 million, we will have 19,236,756 shares of common stock outstanding, assuming no exercise of currently outstanding options or warrants. Of these shares, the 5,000,000 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 our "affiliates" as that term is used under the Securities Act and the rules and regulations promulgated thereunder. The remaining 14,236,756 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: - no restricted shares will be eligible for immediate sale on the effective date of this offering; - 12,101,942 restricted shares, plus approximately 1,184,609 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 - 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 15,568,152 shares of common stock have the right in specified circumstances to require us to register their shares under the Securities Act for resale to the public beginning 180 days from the effective date of this offering. If those 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 common stock. If we were required to include in a registration that we initiated shares held by such holders upon the exercise of their piggyback registration rights, such sales may have an adverse effect on our ability to raise needed capital. In addition, we expect to file a registration statement on Form S-8 registering shares of common stock subject to outstanding stock options or reserved for issuance under our stock option plans. We expect to file this registration statement as soon as practicable after the effective date of this offering. Shares registered under this 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 us 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 Signal, 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 one percent of the then outstanding shares of common stock or the average weekly trading volume of the common stock on 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 under Rule 144 are subject to requirements relating to the manner of sale, notice, and the availability of current public information about us. A person (or persons whose shares are aggregated) who was not an affiliate of Signal 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. 68 73 An employee, officer or director of or consultant to Signal who purchased or was awarded shares or options to purchase shares under 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. 69 74 UNDERWRITING The underwriters name below, acting through their representatives, FleetBoston Robertson Stephens Inc., Chase Securities Inc. and CIBC World Markets Corp., have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock set forth opposite their names below. The underwriters are committed to purchase and pay for all of these shares if any are purchased.
NUMBER OF UNDERWRITER SHARES ----------- --------- FleetBoston Robertson Stephens Inc. ........................ Chase Securities Inc. ...................................... CIBC World Markets Corp. ................................... --------- Total..................................................... 5,000,000 =========
The underwriters' representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession of not more than $ per share, of which $ may be reallowed to other dealers. After the completion of this offering, the initial public offering price, concession and reallowance to dealers may be reduced by the underwriters' representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. Over-Allotment Option We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 750,000 additional shares of common stock at the same price per share as we will receive for the 5,000,000 shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise such option, each of the underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of such additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 5,000,000 shares offered hereby. If purchased, such additional shares will be sold by the underwriters on the same terms as those on which the 5,000,000 shares are being sold. We will be obligated, under the option, to sell shares to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the shares of common stock offered hereby. If this option is exercised in full, the total public offering price, underwriting discounts and commissions and proceeds to us will be $80,500,000, $5,635,000 and $74,865,000, respectively. The following table summarizes the compensation to be paid to the underwriters by us:
TOTAL ---------------------------- WITHOUT WITH OVER- PER SHARE OVER-ALLOTMENT ALLOTMENT --------- -------------- ---------- Underwriting discounts and commissions payable by us... $0.98 $4,900,000 $5,635,000
We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $850,000. Indemnity We have agreed to indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933 and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect thereof. 70 75 Lock-up Agreements Our directors and executive officers, have agreed to the underwriters' representatives that, for a period of 180 days after the date to this prospectus, they will not offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any option to purchase any shares of common stock or any securities convertible into, or exchangeable for, or any rights to purchase or acquire, shares of common stock, now owned or hereafter acquired directly by such holders or with respect to which they have the power to disposition, without the prior written consent of FleetBoston Robertson Stephens Inc., which may, in its sole discretion and at any time or from time to time, without notice, release all or any portion of the shares subject to the lock-up agreements. Future Sales We have agreed that, for a period of 180 days after the date of this prospectus, we will not without prior written consent of FleetBoston Robertson Stephens Inc., issue, sell contract to sell or otherwise dispose of any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, the issuance of common stock upon the exercise of outstanding options and our grant of options to purchase shares of common stock under existing stock option or stock purchase plans. Directed Share Program The underwriters have reserved up to five percent of the common stock to be issued by us and offered for sale in this offering, at the initial public offering price, to directors, officers, employees, business associates and persons otherwise connected to us. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed 5% of the total number of shares offered. Listing We have applied to list our common stock on the Nasdaq National Market under the symbol "SGNL." No Prior Public Market Prior to this offering, there has been no public market for our common stock. The initial public offering price for the common stock will be determined by negotiation between us and the representatives. Among the factors to be considered in determining the initial public offering price are the prevailing market and economic conditions, our revenues and earnings, market valuations of other companies engaged in activities similar to ours, estimates of our business potential and prospects, the present state of our business operations, our management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors. A pricing committee of our board of directors will establish the initial public offering price following such negotiations. Stabilization The underwriters' representatives have advised us that, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A 71 76 "syndicate covering transaction" is a bid for or the purchase of the common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the underwriters' representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by such underwriter or syndicate member is purchased by underwriters' representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The underwriters' representatives have advised us that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. For further information with respect to Signal and the common stock offered by this prospectus, we refer you to the registration statement and the exhibits and schedules filed as part of the registration statement. You may read and copy any document we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's website at http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC's public reference rooms and the website of the SEC referred to above. LEGAL MATTERS Cooley Godward LLP, San Diego, California, will pass upon the validity of the common stock offered by this prospectus for us. Brobeck, Phleger & Harrison LLP, San Diego, California, will pass upon legal matters for the underwriters. EXPERTS The financial statements of Signal Pharmaceuticals, Inc. as of December 31, 1998 and 1999, and for each of the years in the three-year period ended December 31, 1999, have been included herein and in the registration statement, of which this prospectus is a part, in reliance upon the report of 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 said firm as experts in accounting and auditing. 72 77 SIGNAL PHARMACEUTICALS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-4 Statements of Stockholders' Equity.......................... F-5 Statements of Cash Flows.................................... F-6 Notes to Financial Statements............................... F-7
F-1 78 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Signal Pharmaceuticals, Inc. We have audited the accompanying balance sheets of Signal Pharmaceuticals, Inc. as of December 31, 1998 and 1999, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 1999, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP San Diego, California February 4, 2000, except for Note 7, as to which the date is , 2000. - -------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon the completion of the restatement of the capital accounts described in Note 7 to the financial statements. /s/ ERNST & YOUNG LLP March 21, 2000 F-2 79 SIGNAL PHARMACEUTICALS, INC. BALANCE SHEETS
PRO FORMA STOCKHOLDERS' DECEMBER 31, EQUITY AT ---------------------------- DECEMBER 31, 1998 1999 1999 ------------ ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 6,496,363 $ 6,613,834 Short-term investments.................................... 6,456,226 2,806,093 Grant revenue receivable.................................. 147,248 108,959 Other current assets...................................... 487,234 427,394 ------------ ------------ Total current assets.................................... 13,587,071 9,956,280 Property and equipment, net................................. 4,497,541 3,405,147 Licensed technology, net.................................... 916,668 583,338 Deposits and other assets................................... 223,520 202,605 Notes receivable from officers.............................. 333,419 391,495 ------------ ------------ Total assets............................................ $ 19,558,219 $ 14,538,865 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 461,967 $ 896,260 Accrued liabilities....................................... 872,484 522,454 Current portion of promissory note........................ 1,000,080 396,817 Current portion of obligations under capital leases and equipment notes payable................................. 432,122 730,765 Current portion of deferred revenue under collaborative agreements.............................................. 1,697,775 3,449,790 ------------ ------------ Total current liabilities............................... 4,464,428 5,996,086 Promissory note, net of current portion..................... 349,674 -- Obligations under capital leases and equipment notes payable, net of current portion........................... 2,110,651 1,805,297 Deferred revenue under collaborative agreements, net of current portion........................................... 333,324 650,002 Deferred rent............................................... 174,705 104,918 Commitments Stockholders' equity: Convertible Preferred Stock, $.001 par value; 12,371,319 shares authorized; 12,101,942 and 12,246,296 shares issued and outstanding at December 31, 1998 and 1999, respectively; liquidation preference -- $40,909,587 and $41,909,587 at December 31, 1998 and 1999, respectively (5,000,000 shares authorized, no shares issued and outstanding pro forma).................................. 12,102 12,246 $ -- Common stock, $.001 par value; 17,644,354 shares authorized; 1,766,769 and 1,847,603 shares issued and outstanding at December 31, 1998 and 1999, respectively (50,000,000 shares authorized, 14,093,899 shares issued and outstanding pro forma).............................. 1,766 1,847 14,093 Additional paid-in capital................................ 42,225,684 45,112,167 45,112,167 Deferred compensation..................................... (922,892) (1,272,014) (1,272,014) Notes receivable from stockholders........................ (95,600) (95,600) (95,600) Accumulated other comprehensive income.................... 6,226 -- -- Accumulated deficit....................................... (29,101,849) (37,776,084) (37,776,084) ------------ ------------ ------------ Total stockholders' equity.............................. 12,125,437 5,982,562 $ 5,982,562 ------------ ------------ ============ Total liabilities and stockholders' equity.............. $ 19,558,219 $ 14,538,865 ============ ============
SEE ACCOMPANYING NOTES. F-3 80 SIGNAL PHARMACEUTICALS, INC. STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1998 1999 ----------- ----------- ----------- Revenue under collaborative agreements: Related party...................................... $ 250,000 $ 3,000,000 $ 4,525,000 Unrelated parties.................................. 7,065,356 12,027,064 6,695,715 Grant income......................................... 264,257 387,178 527,610 ----------- ----------- ----------- Total Revenue................................... 7,579,613 15,414,242 11,748,325 ----------- ----------- ----------- Expenses: Research and development........................... 10,337,318 15,572,627 16,747,627 General and administrative......................... 2,791,084 4,798,262 3,010,975 ----------- ----------- ----------- Total Expenses.................................. 13,128,402 20,370,889 19,758,602 ----------- ----------- ----------- Loss from operations................................. (5,548,789) (4,956,647) (8,010,277) Interest income...................................... 325,529 1,052,854 607,413 Interest expense..................................... (516,709) (452,609) (452,884) ----------- ----------- ----------- Net loss............................................. (5,739,969) (4,356,402) (7,855,748) Inputed dividend on preferred stock.................. -- -- (818,487) ----------- ----------- ----------- Net loss applicable to common shareholders........... $(5,739,969) $(4,356,402) $(8,674,235) =========== =========== =========== Historical net loss per share applicable to common shareholders, basic and diluted.................... $ (5.65) $ (3.31) $ (5.29) =========== =========== =========== Weighted average shares outstanding, basic and diluted............................................ 1,016,182 1,318,027 1,641,020 =========== =========== =========== Pro forma net loss per share applicable to common shareholders, basic and diluted.................... $ (0.63) =========== Pro forma weighted average shares outstanding, basic and diluted........................................ 13,752,454 ===========
SEE ACCOMPANYING NOTES. F-4 81 SIGNAL PHARMACEUTICALS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK RECEIVABLE -------------------- ------------------ ADDITIONAL DEFERRED FROM SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL COMPENSATION STOCKHOLDERS ---------- ------- --------- ------ --------------- ------------ ------------ Balance at December 31, 1996..... 7,396,646 $ 7,397 1,044,046 $1,044 $20,509,387 $ -- $ -- Issuance of Series D preferred stock........................ 116,300 116 -- -- (116) -- -- Issuance of Series E preferred stock........................ 3,227,740 3,228 -- -- 10,973,903 -- -- Issuance of Series F preferred stock........................ 1,361,256 1,361 -- -- 8,160,719 -- -- Issuance of common stock, net of repurchases............... -- -- 273,111 273 84,563 -- -- Issuance of common stock for technology and services...... -- -- 11,250 11 14,589 -- -- Deferred compensation.......... -- -- -- -- 615,855 (615,855) -- Amortization of deferred compensation................. -- -- -- -- -- 104,345 -- Net loss....................... -- -- -- -- -- -- -- Unrealized gain on available for sale securities.......... -- -- -- -- -- -- -- Comprehensive loss............. -- -- -- -- -- -- -- ---------- ------- --------- ------ ----------- ----------- -------- Balance at December 31, 1997..... 12,101,942 12,102 1,328,407 1,328 40,358,900 (511,510) -- Issuance of common stock, net of repurchases............... -- -- 305,862 305 120,747 -- (95,600) Issuance of common stock for technology................... -- -- 132,500 133 726,867 -- -- Deferred compensation.......... -- -- -- -- 1,019,170 (1,019,170) -- Amortization of deferred compensation................. -- -- -- -- -- 607,788 -- Net loss....................... -- -- -- -- -- -- -- Unrealized loss on available for sale securities.......... -- -- -- -- -- -- -- Comprehensive loss............. -- -- -- -- -- -- -- ---------- ------- --------- ------ ----------- ----------- -------- Balance at December 31, 1998..... 12,101,942 12,102 1,766,769 1,766 42,225,684 (922,892) (95,600) Issuance of Series F-1 preferred stock.............. 144,354 144 -- -- 992,738 -- -- Issuance of common stock, net of repurchases............... -- -- 80,122 80 26,097 -- -- Deferred compensation.......... -- -- -- -- 1,024,244 (1,024,244) -- Amortization of deferred compensation................. -- -- -- -- -- 675,122 -- Issuance of common stock and options for services......... -- -- 712 1 24,917 -- -- Imputed dividend on Series F-1 preferred stock.............. -- -- -- -- 818,487 -- -- Net loss....................... -- -- -- -- -- -- -- Unrealized loss on available for sale securities.......... -- -- -- -- -- -- -- Comprehensive loss............. -- -- -- -- -- -- -- ---------- ------- --------- ------ ----------- ----------- -------- Balance at December 31, 1999..... 12,246,296 $12,246 1,847,603 $1,847 $45,112,167 $(1,272,014) $(95,600) ========== ======= ========= ====== =========== =========== ======== ACCUMULATED OTHER TOTAL COMPREHENSIVE ACCUMULATED STOCKHOLDERS' INCOME (LOSS) DEFICIT EQUITY ----------------- ------------ ------------- Balance at December 31, 1996..... $ -- $(19,005,478) $ 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............... -- -- 84,836 Issuance of common stock for technology and services...... -- -- 14,600 Deferred compensation.......... -- -- -- Amortization of deferred compensation................. -- -- 104,345 Net loss....................... -- (5,739,969) (5,739,969) Unrealized gain on available for sale securities.......... 48,341 -- 48,341 ----------- Comprehensive loss............. -- -- (5,691,628) -------- ------------ ----------- Balance at December 31, 1997..... 48,341 (24,745,447) 15,163,714 Issuance of common stock, net of repurchases............... -- -- 25,452 Issuance of common stock for technology................... -- -- 727,000 Deferred compensation.......... -- -- -- Amortization of deferred compensation................. -- -- 607,788 Net loss....................... -- (4,356,402) (4,356,402) Unrealized loss on available for sale securities.......... (42,115) -- (42,115) ----------- Comprehensive loss............. -- -- (4,398,517) -------- ------------ ----------- Balance at December 31, 1998..... 6,226 (29,101,849) 12,125,437 Issuance of Series F-1 preferred stock.............. -- -- 992,882 Issuance of common stock, net of repurchases............... -- -- 26,177 Deferred compensation.......... -- -- -- Amortization of deferred compensation................. -- -- 675,122 Issuance of common stock and options for services......... -- -- 24,918 Imputed dividend on Series F-1 preferred stock.............. -- (818,487) -- Net loss....................... -- (7,855,748) (7,855,748) Unrealized loss on available for sale securities.......... (6,226) -- (6,226) ----------- Comprehensive loss............. -- -- (7,861,974) -------- ------------ ----------- Balance at December 31, 1999..... $ -- $(37,776,084) $ 5,982,562 ======== ============ ===========
SEE ACCOMPANYING NOTES. F-5 82 SIGNAL PHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------------------- 1997 1998 1999 ------------ ------------ ------------ OPERATING ACTIVITIES Net loss.................................................... $ (5,739,969) $ (4,356,402) $ (7,855,748) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization........................... 879,327 1,498,312 1,711,501 Amortization of interest expense related to warrants.... 47,142 47,142 47,142 Amortization of deferred compensation................... 104,345 607,788 675,122 Amortization of purchased technology.................... -- 83,332 333,330 Common stock and stock options issued for technology and services.............................................. 14,600 7,000 24,918 Deferred revenue under collaborative agreements......... 1,363,134 (2,334,111) 2,068,693 Deferred rent........................................... 10,316 96,538 (69,787) Changes in operating assets and liabilities: Other current assets.................................. 246,997 (354,667) 98,129 Accounts payable...................................... (158,004) 193,253 434,293 Accrued liabilities................................... 895,120 (335,235) (350,030) ------------ ------------ ------------ Net cash flows used for operating activities....... (2,336,992) (4,847,050) (2,882,437) ------------ ------------ ------------ INVESTING ACTIVITIES Purchases of short-term investments......................... (12,081,165) (15,585,368) (11,642,049) Maturities of short-term investments........................ -- 21,216,533 15,285,956 Purchases of property and equipment......................... (630,220) (1,400,252) (92,979) Purchase of technology...................................... -- (280,000) -- Other assets................................................ 341,038 (117,501) (37,161) ------------ ------------ ------------ Net cash flows provided by (used for) investing activities....................................... (12,370,347) 3,833,412 3,513,767 ------------ ------------ ------------ FINANCING ACTIVITIES Principal payments on obligations under capital leases, equipment notes payable and promissory note............... (1,239,935) (1,251,920) (1,532,918) Issuance of preferred stock, net............................ 19,139,211 -- 992,882 Issuance of common stock, net............................... 84,836 25,452 26,177 ------------ ------------ ------------ Net cash flows provided by (used for) financing activities....................................... 17,984,112 (1,226,468) (513,859) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents............ 3,276,773 (2,240,106) 117,471 Cash and cash equivalents at beginning of year.............. 5,459,696 8,736,469 6,496,363 ------------ ------------ ------------ Cash and cash equivalents at end of year.................... $ 8,736,469 $ 6,496,363 $ 6,613,834 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................... $ 469,565 $ 395,462 $ 452,884 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations entered into for equipment........ $ 221,507 $ 2,343,033 $ 526,128 ============ ============ ============ Issuance of common stock for technology..................... $ -- $ 720,000 $ -- ============ ============ ============ Issuance of common stock for promissory notes from stockholders.............................................. $ -- $ 95,600 $ -- ============ ============ ============ Comprehensive income (loss) on investments.................. $ 48,341 $ (42,115) $ (6,226) ============ ============ ============ Deferred compensation related to stock options.............. $ 615,855 $ 1,019,170 $ 1,024,244 ============ ============ ============ Imputed dividend on Series F-1 preferred stock.............. $ -- $ -- $ 818,487 ============ ============ ============
SEE ACCOMPANYING NOTES. F-6 83 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS ACTIVITY Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated drug discovery and development company focused on identifying new classes of small molecule drugs that regulate disease-associated genes. Utilizing biological information from the field of human genomics, the Company applies advanced cellular, molecular and genomic technologies to map gene regulating pathways in cells and to identify proprietary molecular targets that control genes and result in disease. Signal is advancing the application of genomics beyond identifying and elucidating the function 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. 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. Pursuant to Company policy, the Company has historically held the investments to maturity. However, the Company has the ability to sell these investments before maturity and has therefore classified the investments as available for sale. The Company has not experienced any significant losses on its investments. F-7 84 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FINANCIAL INSTRUMENTS The fair value of the financial instruments approximates their carrying value. 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. LICENSED TECHNOLOGY Licensed technology is stated at cost and depreciated over the estimated useful life of three years using the straight-line method. The licensed technology is reported net of accumulated amortization of $83,332 and $416,662 as of December 31, 1998 and 1999, respectively. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, the Company will value the asset at fair value. While the Company's current and historical operating and cash flow losses are indicators of impairment, the Company believes the future cash flows to be received from the long-lived assets will exceed the assets' carrying value, and accordingly the Company has not recognized any impairment losses through December 31, 1999. REVENUE RECOGNITION Contract revenue is recognized ratably over the period during which the research is conducted, which approximates the actual costs incurred to perform the research services. Up-front license fees received under these agreements are recorded as deferred revenue and recognized ratably over the initial term of the contract. If the initial term of the agreement is subsequently modified by the collaborator, the period over which the up-front license fee is recognized is modified accordingly on a prospective basis. 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 to date are refundable regardless of the outcome of the project. Grant revenue is recognized in accordance with the terms of the grant and as services are performed, which generally equals the related research and development expense. Axys Pharmaceutical ("Axys") is a related party, as the chief executive officer of Axys serves on the Board of Directors of the Company. Therefore, revenues of $625,000 recognized in 1999 from Axys are classified as related party revenue. Ares Serono S.A. ("Ares") is a related party, based on its ownership interest in the Company. Therefore, revenues of $3,000,000 and $3,900,000 recognized from Ares in 1998 and 1999, respectively, are classified as related party revenue. The Company does not have the right or the obligation to repurchase any of the rights provided to Ares, or to refund any research payments received from Ares under the collaboration, nor does it intend to do so. F-8 85 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Company's revenue is concentrated among a small number of customers, as follows:
YEAR ENDED DECEMBER 31, -------------------- 1997 1998 1999 ---- ---- ---- DuPont..................................................... -- 12% 20% Ares ...................................................... * 19% 33% Roche Bioscience........................................... 21% * * Organon.................................................... 34% 19% 13% Nippon Kayaku.............................................. -- 12% 20% Tanabe..................................................... 39% 27% -- Axys....................................................... -- -- *
* Amount earned represents less than 10% of revenues for the year. The Company's revenue under collaborative agreements is derived from the following:
YEARS ENDED DECEMBER 31, -------------------------------------- 1997 1998 1999 ---------- ----------- ----------- License fees from collaborative agreements................................ $ 724,992 $ 3,139,566 $ 1,858,332 Research and development revenues under collaborative agreements.................. 6,590,364 11,887,498 9,362,383 ---------- ----------- ----------- Total revenue under collaborative agreements............................. $7,315,356 $15,027,064 $11,220,715 ========== =========== ===========
RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. SOFTWARE COSTS Purchased software is capitalized at cost and amortized over the estimated useful life, generally three years. The Company has no significant internally-developed software. STOCK-BASED COMPENSATION As permitted by SFAS 123, Accounting for Stock-Based Compensation, 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. When the exercise price of the employee or director stock options is less than the fair value of the underlying stock on the grant date, the Company records deferred compensation for the difference and amortizes this amount to expense in accordance with FASB Interpretation No. 28 ("FIN 28") over the vesting period of the options. Options or stock awards issued to non-employees and consultants are recorded at their fair value as determined in accordance with SFAS No. 123 and EITF 96-18 and recognized over the related service period. F-9 86 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) COMPREHENSIVE INCOME (LOSS) In accordance with SFAS No. 130, Reporting Comprehensive Income, unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, are included in other comprehensive income (loss). SEGMENT REPORTING SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, requires the use of a management approach in identifying and disclosing financial information about segments of an enterprise. Management has determined that the Company operates in one business segment. NET LOSS PER SHARE In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin (or SAB) No. 98, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and common equivalent shares outstanding during the period. Potentially dilutive securities composed of incremental common shares issuable upon the exercise of stock options and warrants, and common shares issuable on conversion of preferred stock, were excluded from historical diluted loss per share because of their anti-dilutive effect. Under the provisions of SAB No. 98, common shares issued for nominal consideration, if any, would be included in the per share calculations as if they were outstanding for all periods presented. No common shares have been issued for nominal consideration. Pro forma net loss per share has been computed as described above and also gives effect to common equivalent shares arising from preferred stock that will automatically convert upon the closing of the initial public offering contemplated by this prospectus (using the as-if converted method from the original date of issuance). UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY Unaudited pro forma stockholders' equity at December 31, 1999 reflects the conversion of the convertible preferred stock into 12,246,296 shares of common stock. NEW ACCOUNTING PRONOUNCEMENTS The Company expects to adopt SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of the SFAS No. 133 will have a significant effect on its results of operations or financial position. F-10 87 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. BALANCE SHEET INFORMATION INVESTMENTS The following is a summary of the Company's cash, cash equivalents and short-term investments, all of which mature within one year of the balance sheet date:
DECEMBER 31, 1998 DECEMBER 31, 1999 -------------------------------------- ------------------------------------ GROSS GROSS UNREALIZED ESTIMATED UNREALIZED ESTIMATED COST GAINS FAIR VALUE COST GAINS FAIR VALUE ----------- ---------- ----------- ---------- ---------- ---------- Cash................... $ 6,496,363 $ -- $ 6,496,363 $4,636,426 $-- $4,636,426 Corporate debt securities........... 6,450,000 6,226 6,456,226 4,783,501 -- 4,783,501 ----------- ------ ----------- ---------- --- ---------- $12,946,363 $6,226 $12,952,589 $9,419,927 $-- $9,419,927 =========== ====== =========== ========== === ==========
There were no gross realized gains or losses on sales of available-for-sale securities for the years ended December 31, 1998 and 1999. The gross unrealized gains of $6,226 and $0 in 1998 and 1999, respectively, are reflected as a separate component of stockholders' equity. The unrealized gain had no cash effect and therefore is not reflected in the statement of cash flows. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, -------------------------- 1998 1999 ----------- ----------- Machinery and equipment............................... $ 4,818,472 $ 5,328,565 Office furniture and equipment........................ 1,597,943 1,655,263 Leasehold improvements................................ 1,915,689 1,967,383 ----------- ----------- 8,332,104 8,951,211 Less accumulated depreciation and amortization........ (3,834,563) (5,546,064) ----------- ----------- $ 4,497,541 $ 3,405,147 =========== ===========
DEPOSITS AND OTHER ASSETS Deposits and other assets consist of the following:
DECEMBER 31, -------------------- 1998 1999 -------- -------- Deposits.................................................. $ 73,520 $ 52,605 Restricted cash........................................... 150,000 150,000 -------- -------- $223,520 $202,605 ======== ========
3. COMMITMENTS LEASES The Company leases its office and research facilities under three 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 lease, the F-11 88 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Company has an outstanding letter of credit for $150,000 in favor of the lessor, which is fully collateralized by cash. Accordingly, such cash is classified as restricted in the balance sheet. In addition, the Company leases certain machinery and equipment and office furniture under capital leases with three year terms and options to extend the lease term to five years. 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. In conjunction with the issuance of the promissory note, the Company issued the creditor a warrant to purchase 125,000 shares of Series C-1 Preferred Stock at a price of $4.20 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 was 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. Annual future minimum lease and equipment note payments as of December 31, 1999 are as follows:
OBLIGATIONS UNDER CAPITAL LEASES AND OPERATING EQUIPMENT YEAR ENDING DECEMBER 31, LEASES NOTES PAYABLE ------------------------ ---------- ------------- 2000................................................... $ 935,032 $ 964,616 2001................................................... 430,502 967,662 2002................................................... 432,295 857,701 2003................................................... 443,370 61,861 ---------- ---------- Total minimum lease and equipment note payments... $2,241,199 2,851,840 ========== Less amount representing interest........................... (315,778) ---------- Present value of remaining minimum capital lease and equipment lease line payments............................. 2,536,062 Less amount due in one year................................. (730,765) ---------- Long-term portion of obligations under capital leases and equipment notes payable................................... $1,805,297 ==========
Rent expense for equipment and facility leases was $784,337, $809,028 and $771,302 for the years ended December 31, 1997, 1998 and 1999, respectively. Cost and accumulated depreciation of equipment under capital leases and equipment notes payable were as follows:
ACCUMULATED COST DEPRECIATION ---------- ------------ December 31, 1998...................................... $2,943,246 $ 594,452 December 31, 1999...................................... $3,458,659 $1,213,886
F-12 89 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. SPONSORED RESEARCH AND LICENSE AGREEMENTS In connection with certain license agreements, the Company paid fees of $196,333 and $87,000 for the years ended December 31, 1998 and 1999, respectively, which were charged to research and development. In addition, the Company paid $280,000 in cash and issued 120,000 shares of common stock related to a license agreement with the University of Massachusetts in 1998. The Company determined the value of the common shares issued as $720,000 and capitalized the total consideration of $1.0 million as licensed technology. The Company has future commitments to pay up to an additional $4,100,000 to the licensees based on the achievement of certain milestones, as well as royalties upon commercial sales, if any, of certain products. Such fees or milestone payments may also involve the issuance of up to 30,000 shares of common stock, which would be recorded at the fair value at the date of issuance. Axys On October 15, 1999, the Company entered into a two-year collaborative research and license agreement with Axys to develop and commercialize certain compounds for use in the prevention and/or treatment of certain human diseases. The Company received an initial non-refundable license fee of $2,000,000 and will receive additional payments based on the achievement of certain program milestones, as well as royalties upon commercial sales of certain products, if any. We may exercise a profit share option in the United States and possibly other territories at a predetermined point during development in lieu of royalties on product sales. In addition, Axys has agreed to pay the Company certain amounts for the full time equivalent personnel working on the research. Nippon Kayaku In February 1998, the Company entered into a two-year collaborative research and license agreement with Nippon Kayaku to 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. Nippon Kayaku has agreed to pay the Company certain amounts for the full-time equivalent personnel working on the research. Each party is obligated to pay the other royalties on future product sales arising from the collaboration. In February 2000, following the initial research phase of the collaboration, the Company executed an interim agreement with Nippon Kayaku under which the Company agreed to enter into a joint agreement to develop and commercialize neuroprotectant drugs for PNS and CNS disorders. Dupont On December 26, 1997, the Company entered into a three-year collaborative research and license agreement with DuPont Pharmaceuticals ("DuPont") to develop and commercialize novel products for the treatment and prevention of human immunodeficiency virus and hepatitis C virus infection. The Company received an initial non-refundable license fee of $1,000,000 and will receive additional payments based on the achievement of certain program milestones, as well as royalties upon commercial sales of certain products, if any. In addition, DuPont has agreed to pay the Company certain amounts for the full time equivalent personnel working on the research. Due to the Company's achievement of a certain milestone in 1999, DuPont purchased 144,354 shares of Series F-1 Preferred Stock for total cash proceeds of $1,000,000. In accordance with EITF 98-5 the Company recognized an imputed dividend of $818,487 to reflect a beneficial conversion feature on these preferred shares. Pursuant to the collaborative research agreement, DuPont is also obligated to purchase $2,000,000 of common stock in a private transaction concurrent with the initial public offering of common stock by the Company and at the public offering price per common share. F-13 90 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Ares-Serono On November 25, 1997, the Company entered into a three-year collaborative research, development and license agreement with Ares to perform research within the field of the modulation of NF-kB. The Company will receive payments based on the achievement of certain program milestones, as well as royalties upon commercial sales of certain products, if any. In addition, Ares has agreed to pay the Company certain amounts for the full time equivalent personnel working on the research. In conjunction with the license agreement, Ares purchased 1,361,256 shares of the Company's Series F Preferred Stock at $6.02 per share for a total of $8,194,761. Roche Bioscience On August 26, 1996, the Company entered into a three-year collaborative research agreement with Roche Bioscience ("Roche") to conduct a joint research program to develop human and rat nociceptive and/or sensory neuronal cell lines. The Company received an initial non-refundable license fee of $500,000 and will receive additional payments based on the achievement of certain program milestones. In addition, Roche has paid the Company certain amounts for the full time equivalent personnel working on the research. In 1999, the Company and Roche agreed to conclude their collaboration; therefore, the Company has no future performance obligations under this collaboration. Organon On July 30, 1996, the Company entered into a three-year collaborative research agreement with N.V. Organon ("Organon") to assist Organon in the discovery and development of tissue-specific, estrogen-regulated genes. The Company received an initial non-refundable license fee of $1,000,000 and will receive additional payments based on the achievement of certain program milestones, as well as royalties upon commercial sales of certain products, if any. In addition, Organon has paid the Company certain amounts for the full time equivalent personnel performing the research. In 1999, the Company and Organon agreed to conclude their collaboration; therefore, the Company has no future performance obligations under this 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 inflammatory disease and osteoporosis. In connection with the collaboration, Tanabe paid Signal an initial $1,000,000 non-refundable license fee and reimbursed Signal for research and development costs. Tanabe also purchased 250,000 shares of Signal's Series D Preferred Stock at $8.00 per share. Pursuant to certain anti-dilution provisions of the Series D Preferred Stock agreement triggered by the sale of shares of the Company's Series E Preferred Stock at $3.82 per share, the Company issued an additional 116,300 shares of Series D Preferred Stock to Tanabe during 1997. 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. 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 non-refundable fee of $1,800,000 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 royalties on any future product sales. Signal has no future performance obligations under this collaboration. F-14 91 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK A summary of the convertible preferred stock at December 31, 1999 is as follows:
SHARES ISSUED PREFERENCE IN AND OUTSTANDING LIQUIDATION --------------- ------------- Series A........................................... 1,313,438 $ 2,626,892 Series B........................................... 1,437,498 3,450,000 Series C........................................... 4,395,710 12,308,005 Series D........................................... 366,300 2,000,000 Series E........................................... 3,227,740 12,329,929 Series F........................................... 1,361,256 8,194,761 Series F-1......................................... 144,354 1,000,000 ---------- ----------- 12,246,296 $41,909,587 ========== ===========
Each of the shares of Series A, B, C, D, E, F and F-1 preferred stock is convertible on a one-for-one basis, at the option of the holder, into shares of the Company's common stock. Therefore, 12,246,296 shares of common stock 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 $15,000,000 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 as a group are entitled to elect four directors to the Board of Directors, and in all other matters 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 $.16, $.19, $.22, $.64, $.32, $.48 and $.55 per share of Series A, B, C, D, E, F and F-1 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, 1999, 128,911 shares were subject to repurchase by the Company. STOCK OPTION PLANS In June 1993, the Company adopted the 1993 Founders' Stock Option Plan (the "Founders' Plan"), under which 275,000 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 market value on the date of grant, and the exercise price of nonstatutory stock options may be no less than 85% of the fair market value on the date of grant. 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, at the original purchase price, in the event of termination of employment or engagement. F-15 92 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) In November 1993, the Company adopted the 1993 Stock Option Plan, under which 225,000 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 500,000 and 525,000 shares, respectively, of the Company's common stock to be reserved for issuance upon exercise of options granted by the Company under the 1993 Stock Option Plan. In June 1997, the Company adopted the 1997 Stock Option Plan, under which 500,000 shares of common stock were reserved for issuance upon exercise of options granted by the Company. In February 1998, the Company authorized an additional 1,000,000 shares of the Company's common stock to 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. A summary of the Company's stock option activity and related information for the years ended December 31 follows:
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------- 1997 1998 1999 --------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- --------- --------- --------- --------- --------- Outstanding at beginning of year... 795,650 $.25 1,084,244 $.40 1,632,097 $ .67 Granted............................ 623,343 $.55 993,750 $.85 175,100 $1.00 Exercised.......................... (277,044) $.31 (356,651) $.38 (80,997) $ .30 Cancelled.......................... (57,705) $.32 (89,246) $.61 (232,593) $ .75 --------- --------- --------- Outstanding at end of year......... 1,084,244 $.40 1,632,097 $.67 1,493,607 $ .72 ========= ========= ========= Vested options at end of year...... 250,532 $.58 269,825 $.25 682,703 $ .64 ========= ========= =========
Exercise prices for options outstanding as of December 31, 1999 ranged from $.20 to $1.00. The weighted average remaining contractual life of those options is 6.8 years. The weighted-average fair value of options granted in 1997, 1998 and 1999, using the minimum value pricing model, was $.14, $.22 and $.22, respectively. As of December 31, 1999, options for 365,994 common shares were available for future grant. The Company recorded $615,855, $1,019,170 and $1,024,244 of deferred compensation for options granted during the years ended December 31, 1997, 1998 and 1999, respectively, representing the difference between the option exercise price and the estimated fair value of the underlying stock for financial statement presentation purposes. The Company is amortizing the deferred compensation over the vesting period of the options. The Company recorded $104,355, $607,788 and $675,122 of compensation expense during the years ended December 31, 1997, 1998 and 1999, respectively. 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 these options was estimated at the date of grant using the minimum value pricing model with the following weighted-average assumptions for 1997, 1998 and 1999: risk-free interest rate of 6%, dividend yield of 0%; and an expected life of four 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 F-16 93 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the related options. The adjusted pro forma net loss for the years ended December 31, 1997, 1998 and 1999 was $5,757,845, $4,384,804 and $7,913,695, respectively. The adjusted pro forma net loss per share, basic and diluted, for the years ended December 31, 1997, 1998 and 1999 was $5.67, $3.33 and $4.82, respectively. The effects are not likely to be representative of the effects on pro forma net loss in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996. COMMON SHARES RESERVED FOR FUTURE ISSUANCE At December 31, 1999, the Company has reserved shares of common stock for future issuance as follows: Conversion of convertible preferred stock................... 12,246,296 Stock option plans.......................................... 1,859,601 Warrants.................................................... 125,000 ---------- 14,230,897 ==========
6. INCOME TAXES Significant components of the Company's deferred tax assets as of December 31, 1998 and 1999 are shown below. A valuation allowance of $15,290,000, of which $2,779,000 is related to 1999, has been recognized as of December 31, 1999 to offset the deferred tax assets as realization of such assets is uncertain.
DECEMBER 31, ---------------------------- 1998 1999 DEFERRED TAX ASSETS: ------------ ------------ Capitalized research expenses........................... $ 965,000 $ 921,000 Net operating loss carryforwards........................ 9,276,000 11,389,000 Research and development credits........................ 1,458,000 1,877,000 Depreciation............................................ 57,000 952,000 Other, net.............................................. 755,000 151,000 ------------ ------------ Total deferred tax assets............................... 12,511,000 15,290,000 Valuation allowance for deferred tax assets............. (12,511,000) (15,290,000) ------------ ------------ Net deferred taxes...................................... $ -- $ -- ============ ============
At December 31, 1999, the Company has federal and California net operating loss carryforwards of approximately $30,621,000 and $11,680,000, 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 prior to 1997. The federal tax loss carryforwards will begin expiring in 2007, unless previously utilized. The California tax loss carryforwards will continue to expire in 2000 (approximately $1,035,000 expired in 1999). The Company also has federal and California research and development tax credit carryforwards of approximately $1,368,000 and $783,000, respectively, which will begin expiring in 2008 unless previously utilized. F-17 94 SIGNAL PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Pursuant to Sections 382 and 383 of the Internal Revenue Code, the annual use of the Company's net operating loss and credit carryforwards may be limited if a cumulative change in ownership (as defined) of more than 50% occurs within a three-year testing period. 7. SUBSEQUENT EVENT In January 2000, 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. The Board of Directors also approved (subject to stockholder 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 12,371,319 to 5,000,000 and the authorized shares of Common Stock from 17,644,354 to 50,000,000; will reincorporate the Company in Delaware; will effect a 1 for 2 stock split of the Preferred and Common Stock; will adopt a 2000 Equity Incentive Plan, which will amend the 1993 Stock Option Plans and the 1997 Stock Option Plan; increase the share reserve of the 2000 Equity Incentive Plan to 3,500,000 shares; adopt the 2000 Non-Employee Directors' Stock Option Plan with 250,000 shares reserved; and adopt the 2000 Employee Stock Purchase Plan with 500,000 shares reserved. The financial statements and accompanying notes have been retroactively restated to reflect the effect of the reverse split and reincorporation in Delaware. F-18 95 [INSIDE BACK COVER ARTWORK] OUR DISCOVERY ENGINE FOR GENE REGULATING TARGETS AND DRUGS [Graphic depicting Signal's discovery engine for gene regulating targets and drugs. The top portion of the graphic depicts Signal's target discovery engine, consisting of cellular molecular and genomic technologies. The middle portion of the graphic depicts Signal's drug discovery engine, consisting of proprietary screens and compound libraries. The bottom portion of the graphic depicts the profiling of Signal's drug candidates in specific disease models in preparation for clinical development.] Target Discovery Engine: We are developing and applying advanced cellular, molecular, and genomic technologies to discover new gene regulating targets. Drug Discovery Engine: Using our proprietary screens and compound libraries, we identify and optimize drug leads which control disease processes at the level of gene function. Drug Development: We profile the ability of our drug candidates to selectively control gene regulation pathways in specific disease models in preparation for clinical development. We currently have no drugs in clinical development. 96 [SIGNAL LOGO] 97 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. [INTERNATIONAL] SUBJECT TO COMPLETION, DATED MARCH 22, 2000 [SIGNAL LOGO] 5,000,000 SHARES COMMON STOCK Signal Pharmaceuticals, Inc. is offering 5,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "SGNL." We anticipate that the initial public offering price will be between $13.00 and $15.00 per share. As part of our collaboration agreement with DuPont Pharmaceuticals Company, DuPont Pharmaceuticals has agreed to purchase $2.0 million of our common stock in a private transaction concurrent with the closing of this offering at the initial public offering price. ------------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------------
PER SHARE TOTAL ---------- ---------- Public Offering Price....................................... $ $ Underwriting Discounts and Commissions...................... $ $ Proceeds to Signal Pharmaceuticals, Inc. ................... $ $
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Signal Pharmaceuticals, Inc. has granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of common stock to cover over-allotments. ------------------------------ ROBERTSON STEPHENS INTERNATIONAL CHASE H&Q CIBC WORLD MARKETS THE DATE OF THIS PROSPECTUS IS , 2000. 98 UNDERWRITING The underwriters name below, acting through their representatives, FleetBoston Robertson Stephens Inc., Chase Securities Inc. and CIBC World Markets Corp., have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock set forth opposite their names below. The underwriters are committed to purchase and pay for all of these shares if any are purchased.
NUMBER OF UNDERWRITER SHARES ----------- --------- FleetBoston Robertson Stephens Inc. ........................ Chase Securities Inc. ...................................... CIBC World Markets Corp. ...................................
INTERNATIONAL UNDERWRITER ------------------------- FleetBoston Robertson Stephens International Limited........ Chase Manhattan International Limited....................... CIBC World Markets Inc. .................................... --------- Total..................................................... 5,000,000 =========
The underwriters' representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession of not more than $ per share, of which $ may be reallowed to other dealers. After the completion of this offering, the initial public offering price, concession and reallowance to dealers may be reduced by the underwriters' representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. Over-Allotment Option We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 750,000 additional shares of common stock at the same price per share as we will receive for the 5,000,000 shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise such option, each of the underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of such additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 5,000,000 shares offered hereby. If purchased, such additional shares will be sold by the underwriters on the same terms as those on which the 5,000,000 shares are being sold. We will be obligated, under the option, to sell shares to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the shares of common stock offered hereby. If this option is exercised in full, the total public offering price, underwriting discounts and commissions and proceeds to us will be $80,500,000, $5,635,000 and $74,865,000, respectively. The following table summarizes the compensation to be paid to the underwriters by us:
TOTAL ---------------------------- WITHOUT WITH OVER- PER SHARE OVER-ALLOTMENT ALLOTMENT --------- -------------- ---------- Underwriting discounts and commissions payable by us... $0.98 $4,900,000 $5,635,000
We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $850,000. 99 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........................................ $ 22,770 NASD filing fee............................................. 8,550 Nasdaq Stock Market Listing Application fee................. 95,000 Blue sky qualification fees and expenses.................... 5,000 Printing and engraving expenses............................. 125,000 Legal fees and expenses..................................... 450,000 Accounting fees and expenses................................ 120,000 Transfer agent and registrar fees........................... 15,000 Miscellaneous............................................... 8,680 -------- Total..................................................... $850,000 ========
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. 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 II-1 100 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, 1997, the Registrant has sold and issued the following unregistered securities (after giving effect to the 1-for-2 stock split to be effected prior to the completion of this offering): 1. On September 9, 11 and 12, 1997, the Company sold an aggregate of 3,227,740 shares of Series E Preferred Stock at a price of $3.82 per share to the following purchasers: Accel Investors '93 L.P., (1,870 shares), Accel IV L.P. (42,307 shares), Accel Japan L.P. (4,044) shares), Accel Keiretsu L.P. (910 shares), Ares-Serono S.A. (493,151 shares), Bayview Investors Ltd. (30,408 shares), Biocentive (261,780 shares), Ellmore C. Patterson Partners (1,112 shares), Finsbury Worldwide Pharmaceutical Trust, plc (261,780 shares), Hambrecht & Quist LLC (21,596 shares), Harry F. Hixson, Jr. Separate Property Trust, Dated December 15, 1995 (11,010 shares), InterWest Investors V (248 shares), InterWest Partners V (39,404 shares), Kleiner Perkins Caufield & Byers VI (50,546 shares), Lehman Brothers (43,193 shares), Lombard Odier & Cie (785,340 shares), Neuroscience Partners Limited Partnership (261,780 shares), New York Life Insurance Company (392,670 shares), Oxford Bioscience Partners (Adjunct) L.P. (5,287 shares), Oxford Bioscience Partners (Bermuda) L.P. (4,592 shares), Oxford Bioscience Partners, L.P. (16,555 shares), Pharma/wHealth (261,780 shares), Prosper Partners (303 shares), Robertson, Stephens & Company LLC (21,596 shares), Second Ventures II, L.P. (2,775 shares), The Health Care and Biotechnology Venture Fund (130,890 shares), U.S. Venture Partners IV, L.P. (22,866 shares), USVP Entrepreneur Partners II, L.P. (793 shares), Venrock Associates (21,735 shares), Venrock Associates II, L.P. (28,811 shares), and Vertical Fund Associates, L.P. (6,608 shares). 2. On December 1, 1997, the Company sold 1,361,256 shares of Series F Preferred Stock at a price of $6.02 per share to Ares-Serono, S.A. 3. On December 8, 1997, the Company issued 10,000 shares of Common Stock, valued at $.56 per share, to the University of Massachusetts. 4. On December 31, 1997, the Company issued 1,250 shares of Common Stock, valued at $7.20 per share, to Dr. David J. Baylink under a consulting agreement. 5. On January 14, 1998, the Company issued 2,499 shares of Common Stock, valued at $.56 per share, to The Regents of the University of California. 6. On March 8, 1998, the Company issued 12,497 shares of Common Stock in the aggregate, valued at $.56 per share, to five scientists affiliated with The Regents of the University of California. 7. On December 7, 1999, the Company sold 144,354 shares of Series F-1 Preferred Stock for an aggregate purchase price of $1,000,000 to DuPont Pharmaceuticals Company. 8. As of February 16, 2000, the Company had granted options to purchase an aggregate of 3,844,168, including options subsequently cancelled that then became available for new option grants, shares of its Common Stock to directors, employees and consultants under its 2000 Equity Incentive Plan. The exercise prices for such options range from $0.20 to $2.50 per share. As of February 16, 2000, the Company had issued an aggregate of 1,352,432 shares of its Common Stock upon the exercise of stock options under its 2000 Equity Incentive Plan. II-2 101 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 under 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. 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.(1) 3.2 Bylaws effective prior to reincorporation of the Company in Delaware.(1) 3.3 Certificate of Incorporation of the Company's Delaware subsidiary.(1) 3.4 Form of Amended and Restated Certificate of Incorporation, to be filed and become effective prior to the effectiveness of this Registration Statement.(1) 3.5 Form of Second Amended and Restated Certificate of Incorporation, to be filed and become effective upon completion of the offering.(1) 3.6 Form of Bylaws to become effective prior to the effectiveness of this Registration Statement.(1) 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.(1) 10.2 Form of Indemnity Agreement entered into between the Registrant and its directors and officers.(1) 10.3 Registrant's 2000 Equity Incentive Plan. 10.4 Form of Incentive and Nonstatutory Stock Option Agreements under the 2000 Equity Incentive Plan.(1) 10.5 Registrant's Employee Stock Purchase Plan and related offering document.(1) 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.(1) 10.8 Registrant's Employees Retirement Investment Plan and Trust, effective as of January 1, 1998.(1) 10.9 Amended and Restated Investors' Rights Agreement, dated September 9, 1997, entered into between the Registrant and certain of its stockholders.(1) 10.10 Amendment to the Amended and Restated Investors' Rights Agreement dated November 25, 1997, entered into between the Registrant and certain of its stockholders.(1) 10.11 Loan and Security Agreement, dated November 22, 1996, entered into between the Registrant and MMC/GATX Partnership No. 1.(1) 10.12 Warrant to Purchase shares of Series C-1 Preferred Stock, issued by the Registrant to MMC/ GATX Partnership No. 1.(1) 10.13 Secured Promissory Note, dated December 2, 1996, issued by the Registrant to MMC/ GATX Partnership No. 1.(1) 10.14 Series E Preferred Stock Purchase Agreement, dated September 9, 1997, between the Registrant and certain of its stockholders.(1) 10.15 Series F Preferred Stock Purchase Agreement, dated November 25, 1997, between the Registrant and Ares-Serono S.A.(1)
II-3 102
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.16 Promissory Note, dated June 14, 1994, as amended on May 14, 1998 and October 27, 1999, issued to the Registrant by Alan J. Lewis.(1) 10.17 Security Agreement, dated June 14, 1994, entered into between the Registrant to Alan J. Lewis.(1) 10.18 Employment letter agreement, dated December 8, 1993, between the Registrant and Alan J. Lewis.(1) 10.19 Employment letter agreement, dated March 4, 1994, between the Registrant and David W. Anderson.(1) 10.20 Employment letter agreement, dated August 18, 1994, between the Registrant and Bradley B. Gordon.(1) 10.21 Consulting Agreement, dated April 1, 1996, between the Registrant and John P. Walker.(1) 10.22 Lease, dated April 30, 1993, as amended, between the Registrant and Sorrento Valley Business Park.(1) 10.23 Master Lease Agreement, dated July 8, 1993, between the Registrant and E.I. DuPont de Nemours & Co.(1) 10.24 Master Equipment Lease, dated September 1, 1993, between the Registrant and Phoenix Leasing Incorporated.(1) 10.25 Master Lease Agreement, dated January 1, 1998, between the Registrant and Transamerica Business Credit Corporation.(1) 10.26 Lease, dated January 1, 1998, between the Registrant and Sorrento Valley Business Park.(1) 10.27* Exclusive License Agreement, dated October 26, 1993, between the Registrant and The Regents of the University of California.(1) 10.28* First Amendment to Exclusive License Agreement, dated June 22, 1997, between the Registrant and The Regents of the University of California.(1) 10.29* Second Amendment to Exclusive License Agreement, dated February 2, 1998, between the Registrant and The Regents of the University of California.(1) 10.30* Restricted Stock Purchase Agreement, dated October 26, 1993, between the Registrant and the Regents of the University of California.(1) 10.31* License Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California.(1) 10.32* Restricted Stock Purchase Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California.(1) 10.33* Collaborative Development and Licensing Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd.(1) 10.34* Amendment to Collaborative Development and Licensing Agreement, dated March 31, 1998, between the Registrant and Tanabe Seiyaku Co., Ltd.(1) 10.35 Stock Purchase Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd.(1) 10.36* Agreement dated July 30, 1996, between the Registrant and N.V. Organon.(1) 10.37* First Amendment to Agreement, dated January 30, 1998, between the Registrant and N.V. Organon.(1) 10.38* Exclusive License Agreement, dated October 1996, between the Registrant and the University of Massachusetts.(1) 10.39* Restricted Stock Purchase Agreement, dated October 31, 1996, between the Registrant and the University of Massachusetts.(1) 10.40* License Agreement, dated October 28, 1997, between the Registrant and the University of Massachusetts.(1) 10.41* Restricted Stock Purchase Agreement, dated December 8, 1997, between the Registrant and the University of Massachusetts.(1) 10.42* Research, Development and License Agreement, dated November 25, 1997, between the Registrant and Ares Trading S.A.(1)
II-4 103
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.43* Collaborative Research and License Agreement, dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company.(1) 10.44* Stock Purchase Agreement dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company. 10.45* Joint Development and Commercialization Agreement, dated February 9, 2000, between the Registrant and Nippon Kayaku Co., Ltd. 10.46 Promissory Note, dated May 8, 1998, issued to the Registrant by Alan J. Lewis. (1) 10.47* Collaborative Research and License Agreement, dated October 15, 1999, between the Registrant and Axys Pharmaceuticals, Inc.(1) 10.48 Lease, dated December 28, 1999, between the Registrant and HUB Properties Trust.(1) 10.49* First Amendment to Research, Development and License Agreement, dated February 1999, between the Registrant and Ares Trading S.A.(1) 10.50 Second Amendment to Research, Development and License Agreement, dated February 18, 2000, between the Registrant and Ares Trading S.A. 10.51 Employment Agreement, dated May 18, 1998, between the Registrant and Douglas E. Richards.(1) 10.52 Promissory Note, dated August 1998, issued to the Registrant by Douglas E. Richards.(1) 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. Reference is made to page II-7. 27.1 Financial Data Schedule.
- ------------------------- * 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. + To be filed by amendment. (1) Previously filed. (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. 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. II-5 104 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-6 105 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, County of San Diego, State of California, on the 22nd day of March, 2000. SIGNAL PHARMACEUTICALS, INC. By: /s/ BRADLEY B. GORDON ------------------------------------ Bradley B. Gordon Senior Vice President Finance, Chief Financial Officer and Corporate Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ALAN J. LEWIS President, Chief Executive Officer March 22, 2000 - ----------------------------------- and Director Alan J. Lewis, Ph.D. (Principal Executive Officer) /s/ BRADLEY B. GORDON Senior Vice President, Finance, March 22, 2000 - ----------------------------------- Chief Financial Officer and Bradley B. Gordon Secretary (Principal Financial and Accounting Officer) * Chairman of the Board March 22, 2000 - ----------------------------------- John P. Walker * Director March 22, 2000 - ----------------------------------- Harry F. Hixson, Ph.D. * Director March 22, 2000 - ----------------------------------- Patrick F. Latterell * Director March 22, 2000 - ----------------------------------- Gary L. Neil, Ph.D. * Director March 22, 2000 - ----------------------------------- Arnold Oronsky, Ph.D. *By: /s/ BRADLEY B. GORDON - ----------------------------------- Bradley B. Gordon Attorney-in-fact
II-7 106 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.(1) 3.2 Bylaws effective prior to reincorporation of the Company in Delaware.(1) 3.3 Certificate of Incorporation of the Company's Delaware subsidiary.(1) 3.4 Form of Amended and Restated Certificate of Incorporation, to be filed and become effective prior to the effectiveness of this Registration Statement.(1) 3.5 Form of Second Amended and Restated Certificate of Incorporation, to be filed and become effective upon completion of the offering.(1) 3.6 Form of Bylaws to become effective prior to the effectiveness of this Registration Statement.(1) 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.(1) 10.2 Form of Indemnity Agreement entered into between the Registrant and its directors and officers.(1) 10.3 Registrant's 2000 Equity Incentive Plan. 10.4 Form of Incentive and Nonstatutory Stock Option Agreements under the 2000 Equity Incentive Plan.(1) 10.5 Registrant's Employee Stock Purchase Plan and related offering document.(1) 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.(1) 10.8 Registrant's Employees Retirement Investment Plan and Trust, effective as of January 1, 1998.(1) 10.9 Amended and Restated Investors' Rights Agreement, dated September 9, 1997, entered into between the Registrant and certain of its stockholders.(1) 10.10 Amendment to the Amended and Restated Investors' Rights Agreement dated November 25, 1997, entered into between the Registrant and certain of its stockholders.(1) 10.11 Loan and Security Agreement, dated November 22, 1996, entered into between the Registrant and MMC/GATX Partnership No. 1.(1) 10.12 Warrant to Purchase shares of Series C-1 Preferred Stock, issued by the Registrant to MMC/ GATX Partnership No. 1.(1) 10.13 Secured Promissory Note, dated December 2, 1996, issued by the Registrant to MMC/ GATX Partnership No. 1.(1) 10.14 Series E Preferred Stock Purchase Agreement, dated September 9, 1997, between the Registrant and certain of its stockholders.(1) 10.15 Series F Preferred Stock Purchase Agreement, dated November 25, 1997, between the Registrant and Ares-Serono S.A.(1) 10.16 Promissory Note, dated June 14, 1994, as amended on May 14, 1998 and October 27, 1999, issued to the Registrant by Alan J. Lewis.(1) 10.17 Security Agreement, dated June 14, 1994, entered into between the Registrant to Alan J. Lewis.(1) 10.18 Employment letter agreement, dated December 8, 1993, between the Registrant and Alan J. Lewis.(1) 10.19 Employment letter agreement, dated March 4, 1994, between the Registrant and David W. Anderson.(1) 10.20 Employment letter agreement, dated August 18, 1994, between the Registrant and Bradley B. Gordon.(1)
107
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.21 Consulting Agreement, dated April 1, 1996, between the Registrant and John P. Walker.(1) 10.22 Lease, dated April 30, 1993, as amended, between the Registrant and Sorrento Valley Business Park.(1) 10.23 Master Lease Agreement, dated July 8, 1993, between the Registrant and E.I. Dupont de Nemours & Co.(1) 10.24 Master Equipment Lease, dated September 1, 1993, between the Registrant and Phoenix Leasing Incorporated.(1) 10.25 Master Lease Agreement, dated January 1, 1998, between the Registrant and Transamerica Business Credit Corporation.(1) 10.26 Lease, dated January 1, 1998, between the Registrant and Sorrento Valley Business Park.(1) 10.27* Exclusive License Agreement, dated October 26, 1993, between the Registrant and The Regents of the University of California.(1) 10.28* First Amendment to Exclusive License Agreement, dated June 22, 1997, between the Registrant and The Regents of the University of California.(1) 10.29* Second Amendment to Exclusive License Agreement, dated February 2, 1998, between the Registrant and The Regents of the University of California.(1) 10.30* Restricted Stock Purchase Agreement, dated October 26, 1993, between the Registrant and the Regents of the University of California.(1) 10.31* License Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California.(1) 10.32* Restricted Stock Purchase Agreement, dated February 18, 1998, between the Registrant and The Regents of the University of California.(1) 10.33* Collaborative Development and Licensing Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd.(1) 10.34* Amendment to Collaborative Development and Licensing Agreement, dated March 31, 1998, between the Registrant and Tanabe Seiyaku Co., Ltd.(1) 10.35 Stock Purchase Agreement, dated March 31, 1996, between the Registrant and Tanabe Seiyaku Co., Ltd.(1) 10.36* Agreement dated July 30, 1996, between the Registrant and N.V. Organon.(1) 10.37* First Amendment to Agreement, dated January 30, 1998, between the Registrant and N.V. Organon.(1) 10.38* Exclusive License Agreement, dated October 1996, between the Registrant and the University of Massachusetts.(1) 10.39* Restricted Stock Purchase Agreement, dated October 31, 1996, between the Registrant and the University of Massachusetts.(1) 10.40* License Agreement, dated October 28, 1997, between the Registrant and the University of Massachusetts.(1) 10.41* Restricted Stock Purchase Agreement, dated December 8, 1997, between the Registrant and the University of Massachusetts.(1) 10.42* Research, Development and License Agreement, dated November 25, 1997, between the Registrant and Ares Trading S.A.(1) 10.43* Collaborative Research and License Agreement, dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company.(1) 10.44* Stock Purchase Agreement dated December 26, 1997, between the Registrant and The DuPont Merck Pharmaceutical Company. 10.45* Joint Development and Commercialization Agreement, dated February 9, 2000, between the Registrant and Nippon Kayaku Co., Ltd. 10.46 Promissory Note, dated May 8, 1998, issued to the Registrant by Alan J. Lewis.(1) 10.47* Collaborative Research and License Agreement, dated October 15, 1999, between the Registrant and Axys Pharmaceuticals, Inc.(1) 10.48 Lease, dated December 28, 1999, between the Registrant and HUB Properties Trust.(1)
108
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.49* First Amendment to Research, Development and License Agreement, dated February 1999, between the Registrant and Ares Trading S.A.(1) 10.50* Second Amendment to Research, Development and License Agreement, dated February 18, 2000, between the Registrant and Ares Trading S.A. 10.51 Employment Agreement, dated May 18, 1998, between the Registrant and Douglas E. Richards.(1) 10.52 Promissory Note, dated May 18, 1998, between the Registrant and Douglas E. Richards.(1) 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. Reference is made to page II-7. 27.1 Financial Data Schedule.
- ------------------------- * 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. + To be filed by amendment. (1) Previously filed. EX-10.3 2 MATERIAL CONTRACT 1 EXHIBIT 10.3 SIGNAL PHARMACEUTICALS, INC. 2000 EQUITY INCENTIVE PLAN ADOPTED FEBRUARY 16, 2000 APPROVED BY STOCKHOLDERS _______________, 2000 TERMINATION DATE: FEBRUARY 15, 2010 1. PURPOSES. (a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock Awards are the Employees, Directors and Consultants of the Company and its Affiliates. (b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to acquire restricted stock. (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (d) PRIOR PLANS. On February 16, 2000 (the "Effective Date"), the Company amended and restated both its 1993 Founders' Stock Option Plan, its 1993 Stock Option Plan, and its 1997 Stock Option Plan into this 2000 Equity Incentive Plan (the "Prior Plans"). The terms of options granted prior to the Effective Date are not affected by the terms of this Plan. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a committee of one or more members of the Board appointed by the Board in accordance with subsection 3(c). (e) "COMMON STOCK" means the common stock of the Company. (f) "COMPANY" means SIGNAL PHARMACEUTICALS, INC., a Delaware corporation. 1. 2 (g) "CONSULTANT" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors who are not compensated by the Company for their services as Directors or Directors who are merely paid a director's fee by the Company for their services as Directors. (h) "CONTINUOUS SERVICE" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (i) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (j) "DIRECTOR" means a member of the Board of Directors of the Company. (k) "DISABILITY" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (l) "EMPLOYEE" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (n) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. 2. 3 (o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (r) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan. (t) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (u) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (v) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (w) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (x) "PLAN" means this SIGNAL PHARMACEUTICALS, INC. 2000 Equity Incentive Plan. (y) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (z) "SECURITIES ACT" means the Securities Act of 1933, as amended. 3. 4 (aa) "STOCK AWARD" means any right granted under the Plan, including an Option, a stock bonus and a right to acquire restricted stock. (bb) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (cc) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 12. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) DELEGATION TO COMMITTEE. (i) GENERAL. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the 4. 5 Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At such time as the Common Stock is publicly traded, in the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such authority, the Board or the Committee may (1) delegate to a committee of one or more members of the Board who are not Outside Directors the authority to grant Stock Awards to eligible persons who are either (a) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award or (b) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or) (2) delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. (d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11 relating to adjustments upon changes in Common Stock, the Common Stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate 3,500,000 shares (after giving effect to any reverse stock split effected on or prior to the Effective Date and following adoption hereof, by way of reincorporation of the Company or otherwise (the "Reverse Split")) of the Common Stock. This share reserve shall be comprised of (i) shares subject to options granted under the 1993 Stock Option Plan, the 1993 Founders' Stock Option Plan, and the 1997 Stock Option Plan which are outstanding as of the Effective Date, plus (ii) the shares available for grant under the 1993 Stock Option Plan, the 1993 Founders' Stock Option Plan and the 1997 Stock Option Plan as of the Effective Date plus (iii) an additional approximately 1,500,000 shares (after giving effect to the Reverse Split) of common stock. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. 5. 6 (b) TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11 relating to adjustments upon changes in the shares of Common Stock, no Employee shall be eligible to be granted Options covering more than seven hundred fifty thousand (750,000) shares of Common Stock during any calendar year. (d) CONSULTANTS. (i) A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Company determines both (i) that such grant (A) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (B) does not require registration under the Securities Act in order to comply with the requirements of the Securities Act, if applicable, and (ii) that such grant complies with the securities laws of all other relevant jurisdictions. (ii) Form S-8 generally is available to consultants and advisors only if (i) they are natural persons; (ii) they provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parent; and (iii) the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer's securities. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. Subject to the provisions of subsection 5(b) regarding Ten Percent Stockholders, no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set 6. 7 forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (d) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common Stock, (2) according to a deferred payment or other similar arrangement with the Optionholder or (3) in any other form of legal consideration that may be acceptable to the Board. Unless otherwise specifically provided in the Option, the purchase price of Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock Option shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. 7. 8 (g) VESTING GENERALLY. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised. (h) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (i) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (j) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (k) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within the period ending on the earlier of (1) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement) or (2) the expiration of the term of such Option as set forth in the Option 8. 9 Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. (l) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. The Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option. (m) RE-LOAD OPTIONS. (i) Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Unless otherwise specifically provided in the Option, the Optionholder shall not surrender shares of Common Stock acquired, directly or indirectly from the Company, unless such shares have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). (ii) Any such Re-Load Option shall (1) provide for a number of shares of Common Stock equal to the number of shares of Common Stock surrendered as part or all of the exercise price of such Option; (2) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (3) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan. (iii) Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on the exercisability of Incentive Stock Options described in subsection 9(d) and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares of Common Stock under subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options under subsection 5(c) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. 9. 10 (a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) CONSIDERATION. A stock bonus may be awarded in consideration for past services actually rendered to the Company or an Affiliate for its benefit. (ii) VESTING. Shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a Participant's Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the stock bonus agreement. (iv) TRANSFERABILITY. Rights to acquire shares of Common Stock under the stock bonus agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the stock bonus agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the stock bonus agreement remains subject to the terms of the stock bonus agreement. (b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement. The purchase price shall not be less than eighty-five percent (85%) of the Common Stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. (ii) CONSIDERATION. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. 10. 11 (iii) VESTING. Shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement. (v) TRANSFERABILITY. Rights to acquire shares of Common Stock under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement. 8. COVENANTS OF THE COMPANY. (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such 11. 12 Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) INVESTMENT ASSURANCES. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of 12. 13 Common Stock under the Stock Award, provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company owned and unencumbered shares of Common Stock. 11. ADJUSTMENTS UPON CHANGES IN STOCK. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common Stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then all outstanding Stock Awards shall terminate immediately prior to such event. (c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE MERGER. In the event of (i) a sale, lease or other disposition of all or substantially all of the assets of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation or (iii) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then any surviving corporation or acquiring corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar stock awards (including an award to acquire the same consideration paid to the stockholders in the transaction described in this subsection 11(c) for those outstanding under the Plan. In the event any surviving corporation or acquiring corporation refuses to assume such Stock Awards or to substitute similar stock awards for those outstanding under the Plan, then with respect to Stock Awards held by Participants whose Continuous Service has not terminated, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full, and the Stock Awards shall terminate if not exercised (if applicable) at or prior to such event. With respect to any other Stock Awards outstanding under the Plan, such Stock Awards shall terminate if not exercised (if applicable) prior to such event. 12. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11 relating to adjustments upon changes in Common Stock, no amendment shall be effective unless approved by the stockholders of the 13. 14 Company to the extent stockholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. (e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Award shall be exercised (or, in the case of a stock bonus, shall be granted) unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 15. CHOICE OF LAW. The law of the State of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. 14. EX-10.6 3 MATERIAL CONTRACT 1 EXHIBIT 10.6 SIGNAL PHARMACEUTICALS, INC. 2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN ADOPTED ON FEBRUARY 16, 2000 APPROVED BY STOCKHOLDERS _______________, 2000 EFFECTIVE DATE: _______________, 2000 TERMINATION DATE: NONE 1. PURPOSES. (a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive Options are the Non-Employee Directors of the Company. (b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a means by which Non-Employee Directors may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Nonstatutory Stock Options. (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of its Non-Employee Directors, to secure and retain the services of new Non-Employee Directors and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "ANNUAL GRANT" means an Option granted annually to all Non-Employee Directors who meet the specified criteria specified in subsection 6(b) of the Plan. (c) "ANNUAL MEETING" means the annual meeting of the stockholders of the Company. (d) "BOARD" means the Board of Directors of the Company. (e) "CODE" means the Internal Revenue Code of 1986, as amended. (f) "COMMON STOCK" means the common stock of the Company. (g) "COMPANY" means SIGNAL PHARMACEUTICALS, INC., a Delaware corporation. (h) "CONSULTANT" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the 1. 2 term "Consultant" shall not include either Directors of the Company who are not compensated by the Company for their services as Directors or Directors of the Company who are merely paid a director's fee by the Company for their services as Directors. (i) "CONTINUOUS SERVICE" means that the Optionholder's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Optionholder's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionholder renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Optionholder renders such service, provided that there is no interruption or termination of the Optionholder's Continuous Service. For example, a change in status from a Non-Employee Director of the Company to a Consultant of an Affiliate or an Employee of the Company will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (j) "DIRECTOR" means a member of the Board of Directors of the Company. (k) "DISABILITY" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (l) "EMPLOYEE" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (n) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (o) "INITIAL GRANT" means an Option granted to a Non-Employee Director who meets the criteria specified in subsection 6(a) of the Plan. (p) "IPO DATE" means the effective date of the initial public offering of the Common Stock. 2. 3 (q) "NON-EMPLOYEE DIRECTOR" means a Director who is not an Employee. (r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (s) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (t) "OPTION" means a Nonstatutory Stock Option granted pursuant to the Plan. (u) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (v) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (w) "PLAN" means this SIGNAL PHARMACEUTICALS, INC. 2000 Non-Employee Directors' Stock Option Plan. (x) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (y) "SECURITIES ACT" means the Securities Act of 1933, as amended. 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine the provisions of each Option to the extent not specified in the Plan. (ii) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or an Option as provided in Section 12. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company that are not in conflict with the provisions of the Plan. 3. 4 (c) DELEGATION TO COMMITTEE. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11 relating to adjustments upon changes in the Common Stock, the Common Stock that may be issued pursuant to Options shall not exceed in the aggregate two hundred fifty thousand (250,000) shares of Common Stock. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Option shall revert to and again become available for issuance under the Plan. (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. The Options as set forth in section 6 automatically shall be granted under the Plan to all Non-Employee Directors. 6. NON-DISCRETIONARY GRANTS. (a) INITIAL GRANTS. Without any further action of the Board, each Non-Employee Director shall be granted an Initial Grant as follows: After the IPO Date, each person who is elected or appointed for the first time to be a Non-Employee Director automatically shall, upon the date of his or her initial election or appointment to be a Non-Employee Director by the Board or stockholders of the Company, be granted an Initial Grant to purchase twenty thousand (20,000) shares of Common Stock on the terms and conditions set forth herein. (b) ANNUAL GRANTS. Without any further action of the Board, a Non-Employee Director shall be granted an Annual Grant as follows: On the day following each Annual Meeting commencing with the Annual Meeting in 2000, (i) each person (other than the Chairman of the Board of Directors of the Company) who is a Non-Employee Director and has been a Non-Employee Director for at least six (6) months automatically shall be granted an 4. 5 Annual Grant to purchase five thousand (5,000) shares of Common Stock on the terms and conditions set forth herein, and (ii) the Chairman of the Board of Directors of the Company (provided such Chairman of the Board is a Non-Employee Director and has been a Non-Employee Director for at least six (6) months) automatically shall be granted an Annual Grant to purchase seven thousand five hundred (7,500) shares of Common Stock on the terms and conditions set forth herein. 7. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as required by the Plan. Each Option shall contain such additional terms and conditions, not inconsistent with the Plan, as the Board shall deem appropriate. Each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) EXERCISE PRICE. The exercise price of each Option shall be one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option may be paid, to the extent permitted by applicable statutes and regulations, in any combination of the following methods: (i) By cash or check. (ii) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that the Optionholder has held for the period required to avoid a charge to the Company's reported earnings (generally six months) or that the Optionholder did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes shall include delivery to the Company of the Optionholder's attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, the Optionholder may not exercise the Option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. (iii) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of 5. 6 irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. (d) TRANSFERABILITY. An Option shall not be transferable except by will or by the laws of descent and distribution and to such further extent as permitted by the Rule as to Use of Form S-8 specified in the General Instructions of the Form S-8 Registration Statement under the Securities Act, and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (e) EXERCISE SCHEDULE. The Option shall be exercisable as the shares of Common Stock subject to the Opton vest. (f) EARLY EXERCISE. Notwithstanding the foregoing, the option may, but need not, include a provision whereby the optionholder may elect at any time while providing Continuous Service as a Non-Employee Director or employee of or consultant to the Company or any Affiliate to exercise the option as to any part of all of the shares subject to the option prior to the full vesting of the option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. The Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option. (g) VESTING SCHEDULE. Options shall vest as follows: (i) Initial Grants shall provide for vesting of one thousand two hundred fifty (1,250) of the shares of Common Stock subject to the Option at the end of each three- (3-) month period after the date of the grant of the Option over a period of four (4) years. (ii) Annual Grants shall vest in equal monthly installments after the date of the grant of the Option over a period of one (1) year. (h) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service, or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (i) EXTENSION OF TERMINATION DATE. If the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 7(a) or (ii) the 6. 7 expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (j) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date six (6) months following such termination or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (k) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the three-month period after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise the Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Optionholder's death, but only within the period ending on the earlier of (1) the date six (6) months following the date of death or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. 8. COVENANTS OF THE COMPANY. (a) AVAILABILITY OF SHARES. During the terms of the Options, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Options. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Options and to issue and sell shares of Common Stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Option or any stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Options unless and until such authority is obtained. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Options shall constitute general funds of the Company. 10. MISCELLANEOUS. (a) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Option unless and 7. 8 until such Optionholder has satisfied all requirements for exercise of the Option pursuant to its terms. (b) NO SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Optionholder any right to continue to serve the Company as a Non-Employee Director or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (c) INVESTMENT ASSURANCES. The Company may require an Optionholder, as a condition of exercising or acquiring stock under any Option, (i) to give written assurances satisfactory to the Company as to the Optionholder's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (ii) to give written assurances satisfactory to the Company stating that the Optionholder is acquiring the stock subject to the Option for the Optionholder's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (iii) the issuance of the shares upon the exercise or acquisition of stock under the Option has been registered under a then currently effective registration statement under the Securities Act or (iv) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (d) WITHHOLDING OBLIGATIONS. The Optionholder may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under an Option by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Optionholder by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the Optionholder as a result of the exercise or acquisition of stock under the Option, provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company owned and unencumbered shares of the Common Stock. 11. ADJUSTMENTS UPON CHANGES IN STOCK. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock subject to the Plan, or subject to any Option, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of 8. 9 shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject both to the Plan pursuant to subsection 4(a) and to the nondiscretionary Options specified in Section 5, and the outstanding Options will be appropriately adjusted in the class(es) and number of securities and price per share of stock subject to such outstanding Options. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then all outstanding Options shall terminate immediately prior to such event. (c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE MERGER. In the event of (i) a sale, lease or other disposition of all or substantially all of the assets of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation or (iii) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then with respect to Options held by Optionholders whose Continuous Service has not terminated, the vesting of such Options (and, if applicable, the time during which such Options may be exercised) shall be accelerated in full, and the Options shall terminate if not exercised at or prior to such event. With respect to any other Options outstanding under the Plan, such Options shall terminate if not exercised prior to such event. (d) CHANGE IN CONTROL--SECURITIES ACQUISITION. In the event of an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or an Affiliate) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of Directors and provided that such acquisition is not a result of, and does not constitute a transaction described in, subsection 11(c) hereof, then with respect to Options held by Optionholders whose Continuous Service has not terminated, the vesting of such Options and any shares of Common Stock acquired under such Options (and, if applicable, the time during which such Options may be exercised) shall be accelerated in full. 12. AMENDMENT OF THE PLAN AND OPTIONS. (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of Rule 16b-3 or any Nasdaq or securities exchange listing requirements. 9. 10 (b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit any other amendment to the Plan for stockholder approval. (c) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. (d) AMENDMENT OF OPTIONS. The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. No Options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Option granted while the Plan is in effect except with the written consent of the Optionholder. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective on the IPO Date, but no Option shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 15. CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Plan shall be governed by the law of the State of California, without regard to such state's conflict of laws rules. 10. EX-10.44 4 STOCK PURCHASE AGREEMENT DATED 12/26/97 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406. EXHIBIT 10.44 STOCK PURCHASE AGREEMENT BETWEEN SIGNAL PHARMACEUTICALS, INC. AND THE DUPONT MERCK PHARMACEUTICAL COMPANY 2 SIGNAL PHARMACEUTICALS, INC. STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of December __, 1997 by and between SIGNAL PHARMACEUTICALS, INC., a California corporation with its principal office at 5555 Oberlin Drive, San Diego, CA 92121 ("SIGNAL") and THE DUPONT MERCK PHARMACEUTICAL COMPANY, a Delaware general partnership with its principal office at DuPont Merck Plaza, Centre Road - Walnut Run, Wilmington, DE 19805 ("DPM"). RECITALS WHEREAS, SIGNAL and DPM have entered into that certain Collaborative Research and License Agreement of even date herewith (the "Collaboration Agreement"); and WHEREAS, in connection with, and as a condition of DPM entering into, the Collaboration Agreement, SIGNAL desires to sell to DPM, and DPM desires to purchase from SIGNAL, shares of SIGNAL's capital stock, on the terms and subject to the conditions set forth in this Agreement. 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. PURCHASE AND SALE OF SHARES. 1.1 PURCHASE AND SALE OF MILESTONE SHARES. Subject to the terms and conditions hereof, upon SIGNAL's achievement of the milestone set forth in Section 5.4.2 of the Collaboration Agreement (the "Milestone Closing Event"), DPM shall purchase from SIGNAL, and SIGNAL shall issue and sell to DPM, shares of SIGNAL's Preferred Stock (unless an IPO, as described below, has been completed, in which case such stock shall be Common Stock) having an aggregate value of One Million Dollars ($1,000,000) (the "Milestone Shares") at a purchase price (the "Milestone Share Price") which is equal to [***]; provided, however, that if such Milestone Closing Event occurs more than six (6) months following an equity purchase as described in (i) and (ii), then DPM will purchase the Milestone Shares at a 1. ***Confidential Treatment Requested 3 [***] and provided further, that in the event that SIGNAL has completed an initial public offering of its Common Stock (the "IPO") as of the Milestone Closing Event, the Milestone Shares shall be purchased at a Milestone Share Price equal to the average closing price per share for Common Stock of SIGNAL on the Nasdaq National Market (or any other national securities exchange on which the Common Stock of SIGNAL is then traded) for the thirty (30) trading days immediately preceding the Milestone Closing Date (as defined below). The rights, preferences and privileges of any SIGNAL Preferred Stock that may be issued to DPM under this Section 1.1 would be substantially the same as SIGNAL's Series D Preferred Stock, except that the applicable provisions regarding dividends, liquidation preference and conversion would reflect the original issue price of the shares issued to DPM. 1.2 PURCHASE AND SALE OF IPO SHARES. Subject to the terms and conditions hereof, in the event that, at any time during the Research Term (as such term is defined in the Collaboration Agreement), SIGNAL completes its IPO in which SIGNAL realizes aggregate net proceeds in excess of $15 million, DPM shall purchase from SIGNAL, and SIGNAL shall issue and sell to DPM, shares of SIGNAL's Common Stock having an aggregate value of Two Million Dollars ($2,000,000) (the "IPO Shares") to be issued and sold in a private placement to close simultaneously with the completion of the IPO at the price per share to the public in the IPO. 2. CLOSING DATE; DELIVERY. 2.1 MILESTONE CLOSING. Subject to the terms of Section 5, the closing of the sale and purchase of the Milestone Shares under this Agreement (the "Milestone Closing") shall be held on the date specified by the parties within thirty (30) days after the Milestone Closing Event (the "Milestone Closing Date") at the offices of Cooley Godward LLP ("Cooley Godward"), 4365 Executive Drive, Suite 1100, San Diego, California, or at such time and place as SIGNAL and DPM may agree. 2.2 IPO CLOSING. Subject to the terms of Section 5, the closing of the sale and purchase of the IPO Shares under this Agreement (the "IPO Closing") shall be held at the time and date of the completion of the IPO (the "IPO Closing Date") at the offices of Cooley Godward, 4365 Executive Drive, Suite 1100, San Diego, California, or at such time and place as SIGNAL and DPM may agree. 2.3 DELIVERY. At the IPO Closing and, if applicable, the Milestone Closing, subject to the terms and conditions hereof, SIGNAL shall deliver to DPM a stock certificate, registered in the name of DPM, representing, respectively, the IPO Shares and the Milestone Shares, dated as of the IPO Closing Date and the Milestone Closing Date, respectively, against payment of the purchase price therefor by wire transfer, unless other means of payment shall have been agreed upon by SIGNAL and DPM. 2. ***Confidential Treatment Requested 4 3. REPRESENTATIONS AND WARRANTIES OF SIGNAL. Subject to and except as disclosed by SIGNAL in the Schedule of Exceptions attached hereto as Exhibit A, SIGNAL hereby represents and warrants to DPM as follows: 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. SIGNAL is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. SIGNAL is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 3.2 AUTHORIZATION. All corporate action on the part of SIGNAL, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement has been taken. SIGNAL has the requisite corporate power to enter into this Agreement and carry out and perform its obligations under the terms of this Agreement. At the IPO Closing and the Milestone Closing, SIGNAL will have the requisite corporate power to sell the IPO Shares and the Milestone Shares, respectively, to be sold at each such Closing. 3.3 DUE EXECUTION. This Agreement has been duly authorized, executed and delivered by SIGNAL and, upon due execution and delivery by DPM, this Agreement will be a valid and binding agreement of SIGNAL, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by equitable principles. 3.4 NO CONFLICT WITH OTHER INSTRUMENTS. The execution, delivery and performance of this Agreement will not result in any violation of, be in conflict with, or constitute a default under, with or without the passage of time or the giving of notice: (a) any provision of SIGNAL's Articles of Incorporation, as amended, or Bylaws; (b) any provision of any judgment, decree or order to which SIGNAL is a party or by which it is bound; (c) any material contract or agreement to which SIGNAL is a party or by which it is bound; or (d) any statute, rule or governmental regulation applicable to SIGNAL. 3.5 ARTICLES OF INCORPORATION; BYLAWS. SIGNAL has delivered to DPM true, correct and complete copies of the Articles of Incorporation and Bylaws of SIGNAL, as in effect on the date hereof. 3.6 CAPITALIZATION. (a) The authorized capital stock of SIGNAL consists, or will consist prior to the Milestone Closing, of: 3. 5 (i) 24,453,931 shares of Preferred Stock (the "Preferred Stock"), of which 2,626,892 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, of which 2,875,000 shares have been designated Series B Preferred Stock, all of which are issued and outstanding, of which 8,791,433 shares have been designated Series C Preferred Stock, of which 8,791,432 are issued and outstanding, of which 250,000 shares have been designated Series C-1 Preferred Stock, all of which are subject to issued and outstanding warrants, of which 732,601 shares have been designated Series D Preferred Stock, all of which are issued and outstanding, of which 6,455,493 shares have been designated Series E Preferred Stock, all of which are issued and outstanding, and of which 2,722,513 shares have been designated Series F Preferred Stock, all of which are issued and outstanding. The rights, privileges and preferences of the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock will be as stated in the Company's Amended and Restated Articles of Incorporation. (ii) 35,000,000 shares of common stock ("Common Stock"), of which 2,481,014 shares are issued and outstanding. (iii) Except for (A) the conversion privileges of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series C-1 Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock, (B) 2,500,000 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Stock Option Plan, of which 1,428,225 shares are subject to outstanding options and of which 1,015,014 shares are issued and outstanding, (C) 550,000 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Founders' Stock Option Plan, 159,000 of which are subject to outstanding options and of which 373,000 shares are issued and outstanding, and (D) 1,000,000 shares of Common Stock reserved for issuance pursuant to the Company's 1997 Stock Option Plan, of which 774,870 shares are subject to outstanding options and 2,500 of which are issued and outstanding, there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding, and, to the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. (b) In the event of an IPO, SIGNAL will update the capitalization information set forth in subsection (a) above. 3.7 VALID ISSUANCE OF SHARES. The IPO Shares, and the Milestone Shares, when issued, sold and delivered in accordance with the terms hereof for the consideration set forth herein, will be duly authorized, validly issued, fully paid and nonassessable and, 4. 6 based in part upon the representations of DPM in this Agreement, will be issued in compliance with all applicable federal and state securities laws. 3.8 ABSENCE OF LITIGATION. There is no action, suit, proceeding nor, to the best of its knowledge, any investigation pending or currently threatened against SIGNAL that questions the validity of this Agreement or the Collaboration Agreement. 3.9 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, local or provincial governmental authority on the part of SIGNAL is required in connection with the consummation of the transactions contemplated by this Agreement, except for notices required or permitted to be filed with certain state and federal securities commissions after the IPO Closing and the Milestone Closing, which notices will be filed on a timely basis. 3.10 FINANCIAL INFORMATION. SIGNAL has provided to DPM audited financial statements (balance sheet and statement of operations) of SIGNAL as of and for the year ended December 31, 1996, and unaudited financial statements as of and for the nine-month period ended September 30, 1997 ("Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly represent the financial position and operational results of SIGNAL as of the dates thereof. 4. REPRESENTATIONS AND WARRANTIES OF DPM. DPM hereby represents and warrants to SIGNAL as follows: 4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. DPM is a general partnership duly formed and validly existing under the laws of the State of Delaware and has all requisite partnership power and authority to carry on its business as now conducted and as proposed to be conducted. DPM is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 4.2 AUTHORIZATION. DPM has the requisite partnership power to enter into this Agreement, to carry out and perform its obligations under the terms of this Agreement and, at the IPO Closing and the Milestone Closing, will have the requisite partnership power to purchase the IPO Shares and the Milestone Shares, respectively, to be purchased at each such Closing. 4.3 DUE EXECUTION. This Agreement has been duly authorized, executed and delivered by DPM, and, upon due execution and delivery by SIGNAL, this Agreement will be a valid and binding agreement of DPM, enforceable in accordance with its terms, 5. 7 except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by equitable principles. 4.4 INVESTMENT REPRESENTATIONS. (a) DPM is acquiring the IPO Shares and the Milestone Shares for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). By executing this Agreement, DPM further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the IPO Shares or the Milestone Shares. (b) DPM understands that (x) the IPO Shares and the Milestone Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, that such securities must be held by it indefinitely and that DPM must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration; (y) each certificate representing the IPO Shares and the Milestone Shares will be endorsed with the following legends: (i) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. (ii) Any legend required to be placed thereon under applicable state securities laws; and (z) SIGNAL will instruct any transfer agent not to register the transfer of either the IPO Shares (or any portion thereof) or the Milestone Shares (or any portion thereof) unless the conditions specified in the foregoing legends are satisfied, until such time as a transfer is made, pursuant to the terms of this Agreement, and in compliance with Rule 144 or pursuant to a registration statement or, if the opinion of counsel referred to above is to the further effect that such legend is not required in order to establish compliance with any provisions of the Securities Act or this Agreement. (c) DPM has been furnished with all information it considers necessary or appropriate for deciding whether to purchase the IPO Shares and the Milestone Shares. DPM has been afforded the opportunity to ask questions and receive answers from 6. 8 SIGNAL regarding the terms and conditions of the offering of the IPO Shares and the Milestone Shares. (d) DPM is an investor in securities of companies in the development stage and acknowledges that it can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the IPO Shares and the Milestone Shares. (e) DPM is an "accredited investor" as such term is defined in Rule 501 of the General Rules and Regulations prescribed by the Securities and Exchange Commission pursuant to the Securities Act, and DPM was not formed for the specific purpose of acquiring the IPO Shares or the Milestone Shares. 5. CONDITIONS TO CLOSING. 5.1 CONDITIONS TO OBLIGATIONS OF DPM AT CLOSING. DPM's obligation to purchase the IPO Shares at the IPO Closing and the Milestone Shares at the Milestone Closing is subject to the fulfillment to DPM's satisfaction, on or prior to the IPO Closing or the Milestone Closing, as applicable, of all of the following conditions, any of which may be waived by DPM: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by SIGNAL in Section 3 hereof, as modified by the Schedule of Exceptions, shall be true and correct in all material respects on the dates of the IPO Closing or the Milestone Closing, as applicable, with the same force and effect as if they had been made on and as of said dates; provided, however, that the Schedule of Exceptions and the representations and warranties shall be modified as required to reflect changes occurring between the date hereof and the date of the IPO Closing or Milestone Closing, as applicable; provided, further, that, in the event that any modification to the Schedule of Exceptions or the representations and warranties (excluding the representations and warranties set forth in Sections 3.6, 3.8 and 3.10) necessary to make such representations and warranties true and correct in all material respects on the date of the IPO Closing and the Milestone Closing shall be indicative of a materials adverse change in the business, financial condition, operations, property or affairs of SIGNAL, the condition to closing set forth in this Section 5.1(a) shall be deemed to be unsatisfied and DPM shall have no obligation to purchase the IPO Shares or the Milestone Shares, as the case may be. SIGNAL shall have performed and complied with all obligations and conditions herein required to be performed or complied with by it on or prior to the IPO Closing or the Milestone Closing, as applicable. A certificate duly executed by an officer of SIGNAL, to the effect of the foregoing, shall be delivered to DPM on the IPO Closing or the Milestone Closing, as applicable. 7. 9 (b) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings of SIGNAL in connection with the transactions contemplated at the IPO Closing or Milestone Closing, as applicable, and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to DPM, and DPM shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. (c) OPINION OF SIGNAL'S COUNSEL. DPM shall have received an opinion dated as of the IPO Closing Date or the Milestone Closing Date, as applicable from Cooley Godward LLP, counsel to SIGNAL, in the form attached hereto as Exhibit B. 5.2 CONDITIONS TO OBLIGATIONS OF SIGNAL. SIGNAL's obligation to issue and sell the IPO Shares at the IPO Closing and, if applicable, the Milestone Shares at the Milestone Closing is subject to the fulfillment to SIGNAL's satisfaction, on or prior to the IPO Closing or the Milestone Closing, as applicable, of the following conditions, any of which may be waived by SIGNAL: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by DPM in Section 4 hereof shall be true and correct in all material respects on the dates of the IPO Closing and the Milestone Closing, as applicable, with the same force and effect as if they had been made on and as of said dates; provided, however, that the representations and warranties shall be modified as required to reflect changes occurring between the date hereof and the date of the IPO Closing or Milestone Closing, as applicable; provided, further, that, in the event that any modification to the representations and warranties necessary to make the representations and warranties true and correct in all material respects on the dates of the IPO Closing and the Milestone Closing shall be indicative of a material adverse change in the ability of DPM to consummate the transactions contemplated hereby, the condition to closing set forth in this Section 5.2(a) shall be deemed to be unsatisfied and SIGNAL shall have no obligation to issue and sell the IPO Shares or the Milestone Shares, as the case may be. DPM shall have performed and complied with all obligations and conditions herein required to be performed or complied with by it on or prior to the IPO Closing or the Milestone Closing, as applicable. A certificate duly executed by an officer of DPM, to the effect of the foregoing, shall be delivered to SIGNAL on the IPO Closing or the Milestone Closing, as applicable. (b) PROCEEDINGS AND DOCUMENTS. All partnership and other proceedings of DPM in connection with the transactions contemplated at the IPO Closing or Milestone Closing, as applicable, and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to SIGNAL, and 8. 10 SIGNAL shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. (c) PAYMENT OF PURCHASE PRICE. DPM shall have tendered delivery of the purchase price for the IPO Shares specified in Section 1.2 at the IPO Closing or the purchase price for the Milestone Shares specified in Section 1.1 at the Milestone Closing by wire transfer to account number 4734-943186 at Wells Fargo Bank, 401 B Street, Suite 2201, San Diego, California 92101 (ABA# 121000248) or such other account as SIGNAL shall indicate by written notice to DPM. 6. ADDITIONAL AGREEMENTS. 6.1 STANDSTILL PROVISION. From and after the date of the first to occur of the IPO Closing or the Milestone Closing, DPM shall not, and shall cause its affiliates not to, in any manner, singly or as part of a partnership, limited partnership, syndicate or other "Group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act")), directly or indirectly, acquire, or offer or agree to acquire, record ownership or beneficial ownership of any shares of capital stock of SIGNAL, any securities convertible into or exchangeable for capital stock or any other right to acquire capital stock from SIGNAL or any other person, without the prior written consent of SIGNAL; provided, however, that this clause shall not apply to (i) the IPO Shares and the Milestone Shares, (ii) any securities issued with respect to the IPO Shares and the Milestone Shares pursuant to a stock split, stock dividend, recapitalization or reclassification and (iii) any securities obtained or purchased by DPM pursuant to rights set forth in this Agreement. This Section 6.1 shall terminate as to the IPO Shares and the Milestone Shares ten (10) years from the IPO Closing Date and the Milestone Closing Date, respectively. 6.2 MARKET STAND-OFF PROVISION. DPM agrees that, during the period of duration specified by SIGNAL and an underwriter of Common Stock or other securities of SIGNAL following the effective date of a registration statement of SIGNAL filed under the Securities Act (which period shall not exceed 180 days), DPM shall not, to the extent requested by SIGNAL, directly or indirectly sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of any securities of SIGNAL held by it at any time during such period. In order to enforce the provisions of this Section 6.2, SIGNAL may impose stop-transfer instructions with respect to the securities held by DPM that are subject to the foregoing restriction until the end of such period. 9. 11 7. REGISTRATION RIGHTS. 7.1 CERTAIN DEFINITIONS. When used in this Section 7 of this Agreement, the following terms shall have the following respective meanings: "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "FORM S-3" shall mean Form S-3 under the Securities Act as in effect on the date of this Agreement, or any substantially similar, equivalent or successor form under the Securities Act. "HOLDER" shall mean DPM or any transferee of registration rights under Section 7.9 hereof who then holds any outstanding Registrable Securities. The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRABLE SECURITIES" means: (i) the Milestone Shares, if such shares are Common Stock of SIGNAL (or, if the Milestone Shares are shares of Preferred Stock of SIGNAL, the shares of SIGNAL Common Stock issued or issuable upon conversion of the Milestone Shares); (ii) the IPO Shares; and (iii) shares of SIGNAL Common Stock issued in respect of the shares of Common Stock referred to under the foregoing clauses (i) and (ii) by reason of any stock split, stock dividend, recapitalization or similar event which have not been sold to the public. "REGISTRATION EXPENSES" shall mean all expenses incurred by SIGNAL in complying with Sections 7.2 and 7.3 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of SIGNAL which shall be paid in any event by SIGNAL). "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the applicable sale. 7.2 COMPANY REGISTRATION. (a) If, at any time or from time to time, SIGNAL shall determine to register any of its securities, either for its own account or the account of a security holder or holders exercising their respective demand registration rights, other than a registration relating solely to employee benefit plans on Form S-8 or similar forms which may be 10. 12 promulgated in the future or a registration on Form S-4 or similar forms which may be promulgated in the future relating solely to a Commission Rule 145 or similar transaction, SIGNAL will (i) promptly give to each Holder written notice thereof and (ii) include in such registration (and any related qualification under Blue Sky laws or other compliance), and in any underwriting involved therein, all Registrable Securities of such Holders as specified in a written request or requests made within 15 days after receipt of such written notice from SIGNAL. (b) If the registration of which SIGNAL gives notice is for a registered public offering involving an underwriting, SIGNAL shall so indicate in the notice given pursuant to Section 7.2(a). In such event the right of any Holder to registration pursuant to this Section 7.2 shall be conditioned upon such Holder's agreeing to participate in such underwriting and in the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with SIGNAL and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by SIGNAL or by other holders exercising any demand registration rights. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to SIGNAL and the underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. Notwithstanding any other provision of this Section 7.2, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all of the shares of Registrable Securities from such registration and underwriting; provided, however, that there shall first be excluded shares proposed to be included by holders not possessing legal rights to include the same pursuant to this Section 7.2 or any similar provision. 7.3 FORM S-3 REGISTRATION RIGHTS. After the IPO, SIGNAL shall use its best efforts to qualify for registration on Form S-3, and to that end SIGNAL shall use its best efforts to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE Act"), within twelve (12) months following the effective date of the IPO. After SIGNAL has qualified for the use of Form S-3, and subject to the provisions of Section 7.10, each Holder shall have the right to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of such shares by each such Holder), subject only to the following limitations: (a) SIGNAL shall not be obligated to cause a registration on Form S-3 to become effective prior to one hundred eighty (180) days following the effective date of a SIGNAL-initiated registration (other than a registration effected solely to qualify an employee benefit plan or to effect a business combination pursuant to Rule 145); 11. 13 (b) SIGNAL shall not be required to effect a registration pursuant to this Section 7.3 unless the Holder or Holders requesting such a registration propose to dispose of shares of Registrable Securities having an aggregate disposition price (before deduction of underwriting discounts and expenses of sale) of at least $1,000,000; (c) SIGNAL shall not be required to effect a registration pursuant to this Section 7.3 if SIGNAL shall furnish to the requesting Holders a certificate signed by the President of SIGNAL stating that in the good faith judgment of the Board of Directors of SIGNAL it would be seriously detrimental to SIGNAL or its stockholders for the registration statement to be filed at the date filing would be required, in which case SIGNAL shall have an additional period of not more than one hundred twenty (120) days within which to file such registration statement; provided, however, that SIGNAL shall not use this right more than once in any twelve (12) month period; and (d) SIGNAL shall not be required to effect a registration pursuant to this Section 7.3 more often than once in any twelve (12) month period. SIGNAL shall give notice to all Holders of the receipt of a request for registration pursuant to this Section 7.3 and shall use its best efforts to cause all Registrable Securities that such Holders have requested, within 15 days after receipt of such written notice, be registered in accordance with this Section 7.3 to be registered under the Securities Act. Subject to the foregoing, SIGNAL will use its best efforts to effect promptly any registration pursuant to this Section 7.3. 7.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 7.2 and 7.3 (exclusive of Selling Expenses but inclusive of the reasonable fees and expenses of any special counsel to the selling Holders) shall be borne by SIGNAL. All Selling Expenses incurred in connection with any registrations hereunder shall be borne by the holders of the securities registered pro rata on the basis of the number of shares registered. 7.5 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by SIGNAL pursuant to this Section 7, SIGNAL will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense SIGNAL will: (a) Keep such registration, qualification or compliance effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; 12. 14 (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) Use its reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that SIGNAL shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; and (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 7.6 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Section 7.2 or 7.3: (a) To the extent permitted by law, SIGNAL will indemnify each Holder, each of its officers, directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 7, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in 13. 15 settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by SIGNAL of any rule or regulation promulgated under the Securities Act applicable to SIGNAL and relating to action or inaction required of SIGNAL in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers and directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action; provided, however, that the indemnity agreement set forth in this Section 7.6(a) shall not apply to amounts paid in settlement of any such claim, loss damage, liability or action if such settlement is effected without the consent of SIGNAL, which consent shall not be unreasonably withheld; provided further, that SIGNAL will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to SIGNAL by an instrument duly executed by such Holder or underwriter and stated to be specifically for use therein. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify SIGNAL, each of its directors and officers, each underwriter, if any, of SIGNAL's securities covered by such a registration statement, each person who controls SIGNAL or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and partners and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof) including any of the foregoing incurred in settlement of any litigation commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading, or any violation by SIGNAL of any rule or regulation promulgated under the Securities Act applicable to SIGNAL in connection with any such registration, qualification, or compliance, and will reimburse 14. 16 SIGNAL, such Holders, such directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigation, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to SIGNAL by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the indemnity agreement set forth in this Section 7.6(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that the obligations of such Holders hereunder shall be limited to an amount equal to the proceeds to each such Holder of Registrable Securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 7.6 (the "INDEMNIFIED PARTY") shall give notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at its own expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 7.6 unless such failure resulted in actual detriment to the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party a release from all liability in respect of such claim or litigation. (d) If the indemnification provided for in this Section 7.6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by 15. 17 reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) The obligations of SIGNAL and Holders under this Section 7.6 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 7 and otherwise. 7.7 INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall furnish to SIGNAL such information as SIGNAL may request in writing regarding such Holder or Holders and the distribution proposed by such Holder or Holders and as shall be required in connection with any registration, qualification or compliance referred to in this Section 7. 7.8 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, after such time as a public market exists for the Common Stock of SIGNAL, SIGNAL agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration under the Securities Act filed by SIGNAL for an offering of its securities to the general public; (b) File with the Commission in a timely manner all reports and other documents required of SIGNAL under the Securities Exchange Act at any time after it has become subject to such reporting requirements; and (c) So long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by SIGNAL as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by SIGNAL for an offering of its securities to the general public) and of the Securities Act and the Securities Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of SIGNAL, and such other reports and documents of SIGNAL as a Purchaser may reasonably request in availing itself of any rule or regulation of the Commission allowing a Purchaser to sell any such securities without registration. 7.9 TRANSFER OF REGISTRATION RIGHTS. The rights to cause SIGNAL to register securities granted under Sections 7.2 and 7.3 may be assigned or otherwise conveyed to a 16. 18 transferee or assignee of Registrable Securities, who shall be considered a "HOLDER" for purposes of this Section 7, provided that (a) SIGNAL is given written notice by such Holder at the time of or within a reasonable time (but not more than thirty (30) days) after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned and (b) the transferee acquires at least 50,000 Shares in a private transaction. 7.10 TERMINATION OF REGISTRATION RIGHTS. The registration rights granted pursuant to this Section 7 shall terminate (i) upon the third anniversary of the effective date of the IPO or (ii) as to any particular Holder, at such time after the IPO as all Registrable Securities held by such Holder can be sold without compliance with the registration requirements of the Securities Act pursuant to Rule 144 (including Rule 144(k)) promulgated thereunder. 8. MISCELLANEOUS. 8.1 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. 8.2 NOTICES. Any notices or communications provided for in this Agreement to be made by either of the parties to the other shall be in writing, in English, and shall be made by prepaid air mail with return receipt addressed to the other at its address set forth above. Any such notice or communication may also be given by hand, or facsimile to the appropriate designation. Either party may by like notice specify an address to which notices and communications shall thereafter be sent. Notices sent by mail, facsimile or cable shall be effective upon receipt and notices given by hand shall be effective when delivered. 8.3 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, as such laws are applied to contracts entered into and to be performed within such state. 8.4 DISPUTE RESOLUTION. Disputes arising under this Agreement shall be resolved in accordance with Article 12 of the Collaboration Agreement. 8.5 ENTIRE AGREEMENT. This Agreement and the Collaboration Agreement between the parties of even date herewith set forth all of the covenants, promises, agreements, warranties, representations, conditions and understandings between the parties hereto and supersede and terminate all prior agreements and understanding between the parties. There are no covenants, promises, agreements, warranties, representations conditions or understandings, either oral or written, between the parties 17. 19 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. 8.6 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. 8.7 ASSIGNMENT. (a) 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) 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 another party and no consent for a merger or similar reorganization shall be required hereunder. (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. 8.8 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. 8.9 BROKERS OR FINDERS. Each party represents that it neither is nor will be obligated for any broker's or finder's fees or commissions in connection with this transaction. SIGNAL agrees to indemnify, defend and hold harmless DPM from and against any and all claims, actions, damages, costs and expenses arising from any claim of entitlement to any such fee or similar payment from SIGNAL in connection with this 18. 20 transaction. DPM agrees to indemnify, defend and hold harmless SIGNAL from and against any and all claims, actions, damages, costs and expenses arising from any claim of entitlement to any such fee or similar payment from DPM in connection with this transaction. 19. 21 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. THE DUPONT MERCK PHARMACEUTICAL COMPANY By: [SIG] ------------------------------- Title: President & CEO ---------------------------- SIGNAL PHARMACEUTICALS, INC. By: [SIG] ------------------------------- Title: Pres/CEO ---------------------------- 20. EX-10.45 5 JOINT DEVELOPMENT AGREEMENT DATED 2/9/00 1 *** Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406 Exhibit 10.45 JOINT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT BY AND BETWEEN NIPPON KAYAKU CO., LTD. AND SIGNAL PHARMACEUTICALS, INC. 2 TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS..........................................................................1 1.1 "Affiliate"...................................................................1 1.2 "Allowable Costs and Expenses"................................................2 1.3 "CNS".........................................................................2 1.4 "CNS Field"...................................................................2 1.5 "Collaboration"...............................................................2 1.6 "Collaboration Know-How"......................................................2 1.7 "Collaboration Patents".......................................................2 1.8 "Compound(s)".................................................................3 1.9 "Commercialization Management Committee"......................................3 1.10 "Commercialization Plan"......................................................3 1.11 "Commercializing Party".......................................................3 1.12 "Confidential Information"....................................................3 1.13 "Control".....................................................................3 1.14 "Development".................................................................3 1.15 "Development Candidate".......................................................3 1.16 "FDA".........................................................................3 1.17 "Field".......................................................................3 1.18 "Initial Joint Development Project"...........................................3 1.19 "Joint Project"...............................................................3 1.20 "Joint Project Head"..........................................................3 1.21 "Know-How"....................................................................4 1.22 "Net Sales of Other Products".................................................4 1.23 "Net Sales of Products".......................................................4 1.24 "Nippon Kayaku Know-How"......................................................4 1.25 "Nippon Kayaku Patents".......................................................4 1.26 [***].........................................................................5 1.27 "NSP6783".....................................................................5 1.28 "Other Product"...............................................................5 1.29 "Patent"......................................................................5
i. *** Confidential Treatment Requested 3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 1.30 "Patent Costs"................................................................5 1.31 "PNS Field"...................................................................5 1.32 "Product".....................................................................5 1.33 "Profit or Loss"..............................................................5 1.34 "Regulatory Approval".........................................................5 1.35 "Research"....................................................................6 1.36 "Research and Development Management Committee"...............................6 1.37 "Research and Development Plan"...............................................6 1.38 "Research Lead"...............................................................6 1.39 "Research Lead Notice"........................................................6 1.40 "Rest of the World"...........................................................6 1.41 "Roche Agreement".............................................................6 1.42 "Signal Know-How".............................................................6 1.43 "Signal Patents"..............................................................6 1.44 "Term"........................................................................7 1.45 "Third Party".................................................................7 1.46 "Valid Claim".................................................................7 2. RESEARCH AND DEVELOPMENT PHASE OF COLLABORATION......................................7 2.1 Research and Development Management Committee.................................7 2.2 Responsibilities of the RDMC..................................................7 2.3 Determination of Additional Research Leads....................................9 2.4 Know-How, Reports and Delivery of Compounds...................................9 2.5 Management and Staffing of the Initial Joint Development Project.............10 2.6 Operational Authority and Responsibility of Joint Project Head Under the Initial Joint Development Project........................................10 2.7 Management and Staffing for Other Joint Projects.............................10 2.8 Contributions................................................................11 2.9 Expenses.....................................................................12 2.10 Visiting Personnel...........................................................12 3. COMMERCIALIZATION PHASE OF COLLABORATION............................................12
ii. 4 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 3.1 Commercialization Management Committee.......................................12 3.2 Responsibilities of the CMC..................................................12 3.3 Contributions................................................................14 3.4 Commercialization Expenses...................................................14 3.5 Regulatory Filings...........................................................14 3.6 Product Marketing Plans......................................................14 3.7 Product Brand Names..........................................................14 3.8 Contracting for Services.....................................................14 3.9 Supply of Bulk Drug Substance and Drug Product...............................15 4. SHARING OF PROFITS OR LOSSES; OTHER PAYMENTS........................................15 4.1 Sharing of Profits or Losses, Allowable Costs and Expenses and Costs of Goods Sold...................................................................15 4.2 Nippon Kayaku Royalties on Sales of Products in Japan........................16 4.3 Royalties on Sales of Products Outside the Field.............................16 4.4 Royalties on Sales of Other Products in the Field............................16 4.5 Royalties on Sales of Other Products Outside the Field.......................16 4.6 Reduction of Participation...................................................17 4.7 Revenues on Joint License to the Third Party.................................17 5. ROYALTY OBLIGATIONS.................................................................17 5.1 Royalties for Sales of Products or Other Products............................17 5.2 Foreign Exchange.............................................................17 5.3 Blocked Currency.............................................................17 5.4 Taxes........................................................................17 5.5 Payment and Reporting........................................................17 5.6 Duration.....................................................................18 5.7 Accounting...................................................................18 5.8 Sales by Licensees and Sublicensees..........................................18 6. LICENSE GRANTS......................................................................19 6.1 Licenses During Collaboration................................................19 6.2 Commercialization Licenses for Other Products and Outside the Field..........21
iii. 5 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 6.3 Licenses and Sublicenses.....................................................22 6.4 Duration of Licenses.........................................................22 7. CONFIDENTIALITY; PUBLICATIONS.......................................................22 7.1 Confidentiality; Exceptions..................................................22 7.2 Authorized Disclosure........................................................23 7.3 Publications.................................................................23 7.4 Public Disclosure............................................................23 8. OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS................................24 8.1 Ownership of Collaboration Patents; Nippon Kayaku Patents; Signal Patents......................................................................24 8.2 Patent Filings...............................................................24 8.3 Enforcement Rights...........................................................25 9. REPRESENTATIONS AND WARRANTIES; EXCLUSIVITY.........................................26 9.1 Representations and Warranties...............................................26 9.2 Limitation on Warranties.....................................................27 9.3 Negative Covenants...........................................................27 10. TERM AND TERMINATION................................................................27 10.1 Term.........................................................................27 10.2 Termination For Breach.......................................................28 10.3 Termination For Bankruptcy...................................................28 10.4 Surviving Rights.............................................................28 10.5 Accrued Rights; Surviving Obligations........................................28 10.6 Termination Not Sole Remedy..................................................28 11. INDEMNIFICATION; INSURANCE..........................................................29 11.1 Research and Development Indemnification.....................................29 11.2 Indemnification Procedures...................................................29 11.3 Insurance....................................................................29 12. DISPUTE RESOLUTION..................................................................29 12.1 Disputes.....................................................................29 12.2 Dispute Resolution Procedures................................................30
iv. 6 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 13. MISCELLANEOUS.......................................................................30 13.1 Assignment...................................................................30 13.2 Consents Not Unreasonably Withheld...........................................31 13.3 Force Majeure................................................................31 13.4 Further Actions..............................................................31 13.5 No Trademark Rights..........................................................31 13.6 Notices......................................................................31 13.7 Waiver.......................................................................32 13.8 Severability.................................................................32 13.9 Ambiguities..................................................................32 13.10 Counterparts.................................................................32 13.11 Entire Agreement.............................................................33 13.12 Governing Law................................................................33 13.13 Headings.....................................................................33
v. 7 JOINT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT THIS JOINT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT (the "Agreement") is made effective as of February 9, 2000 (the "Effective Date") by and between NIPPON KAYAKU CO., LTD., a Japanese corporation ("Nippon Kayaku"), having its principal place of business at Tokyo Fujimi Building, 11-2, Fujimi 1-chome, Chiyoda-ku, Tokyo 102-8172, Japan, and SIGNAL PHARMACEUTICALS, INC., a California corporation ("Signal"), having its principal place of business at 5555 Oberlin Drive, San Diego, California 92121, U.S.A. (each, a "Party" and, collectively, the "Parties"). RECITALS WHEREAS, Nippon Kayaku and Signal are parties to that certain Collaboration Agreement dated February 9, 1998 (the "Collaboration Agreement"); WHEREAS, pursuant to Section 3.1 of the Collaboration Agreement, the Parties desire to establish a collaborative relationship to develop and commercialize novel drug products based on or derived from compounds identified under the Collaboration Agreement for the treatment and prevention of diseases and disorders of the peripheral nervous system and central nervous system on the terms and subject to the conditions set forth herein; and WHEREAS, this Agreement is intended to supersede and replace the Collaboration Agreement in its entirety. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements contained herein, the Parties, intending to be legally bound, do hereby agree as follows: 1. DEFINITIONS For the purposes of this Agreement, the following terms, whether used in their singular or plural form, shall have the respective meanings set forth below. 1.1 "AFFILIATE" shall mean 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. 8 1.2 "ALLOWABLE COSTS AND EXPENSES" shall have the meaning provided in Exhibit B hereto. 1.3 "CNS" shall mean the central nervous system. 1.4 "CNS FIELD" shall mean the treatment or prevention of CNS diseases or disorders. 1.5 "COLLABORATION" shall mean the activities, rights and obligations of Nippon Kayaku and Signal encompassed in their relationship in accordance with the Collaboration Agreement during the term thereof (and the rights and obligations that survive such term) and this Agreement during the Term hereof (and the rights and obligations that survive such Term). 1.6 "COLLABORATION KNOW-HOW" shall mean Know-How: (i) relating to Compounds (including, without limitation, their structure, function and formulation); (ii) relating to results and data from animal studies conducted as part of the Research or Development under the Collaboration Agreement or this Agreement in accordance with the Research and Development Plan; (iii) otherwise arising from or in connection with the conduct of the Research or Development under the Collaboration Agreement or this Agreement in accordance with the Research and Development Plan and jointly owned by or within the common Control of the Parties, their respective Affiliates, licensees and sublicensees or purchasers and assignees of their rights or obligations hereunder; (iv) relating to results and data from preclinical and clinical studies conducted under this Agreement in accordance with the Research and Development Plan; (v) relating to commercialization, marketing, sales, finance, manufacturing, business or other activities, data or plans with respect to Development Candidates or Products under this Agreement; or (vi) otherwise arising from or in connection with the conduct of activities under this Agreement and jointly owned by or within the common Control of the Parties, their respective Affiliates, licensees and sublicensees or purchasers and assignees of their rights or obligations hereunder, but excluding Collaboration Patents. 1.7 "COLLABORATION PATENTS" shall mean 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, one of its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder , on the one hand, and officers, employees, consultants or agents of Nippon Kayaku or one of its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder, on the other hand, in connection with activities conducted pursuant to the Collaboration Agreement or this Agreement; (ii) which come under the common Control of Signal or one of its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder, on the one hand, and Nippon Kayaku or one of its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder, on the other hand, prior to the end of the Term; or (iii) based on or derived from a Compound and conceived or reduced to practice during the Research Term under the Collaboration Agreement (as defined therein) or during the Term of this Agreement by officers, employees, consultants, agents of one or more of the Parties, their Affiliates, licensees and sublicensees or purchasers and assignees of their rights or obligations hereunder. A list of the Collaboration Patents as of the Effective Date is set forth on Schedule III. 2. 9 1.8 "COMPOUND(s)" shall mean: (a) NSP6783; (b) [***]; (c) any small-molecule compound based on or derived from NSP6783 or [***]; (d) any compound series based on or derived from, or any analog or modification of, NSP6783 or [***]; or (e) any compound or series of compounds which is either synthesized through medicinal chemistry and combinatorial chemistry techniques or identified through searching the database of Signal's or Nippon Kayaku's compound library as described in Section 2.4(c) of the Collaboration Agreement or Section 2.4(c) of this Agreement, that, in each case, is identified, or is acquired or licensed, by one or both of the Parties pursuant to the Collaboration Agreement or this Agreement. 1.9 "COMMERCIALIZATION MANAGEMENT COMMITTEE" or "CMC" shall mean the committee established pursuant to Section 3.2 hereof. 1.10 "COMMERCIALIZATION PLAN" shall have the meaning provided in Section 3.1 hereof. 1.11 "COMMERCIALIZING PARTY" shall have the meaning provided in Section 5.1. 1.12 "CONFIDENTIAL INFORMATION" shall have the meaning provided in Section 7.1. 1.13 "CONTROL" shall mean possession of the ability, whether by ownership or license, to grant a license or sublicense as provided for herein without violating the terms of any agreement or other arrangements with any Third Party. 1.14 "DEVELOPMENT" shall mean all work performed by the Parties or on their behalf pursuant to this Agreement directed towards or in connection with the identification, development or Regulatory Approval of Development Candidates or Products. 1.15 "DEVELOPMENT CANDIDATE" shall mean a Research Lead that the RDMC has determined to be suitable for preclinical and clinical development hereunder. 1.16 "FDA" shall mean the United States Food and Drug Administration. 1.17 "FIELD" shall mean the PNS Field and the CNS Field. 1.18 "INITIAL JOINT DEVELOPMENT PROJECT" shall mean the Joint Project regarding the development of Development Candidates and Products containing or comprising NSP6783 for the prevention or treatment of chemotherapy-induced neuropathies. 1.19 "JOINT PROJECT" shall mean any research and development project in the Field that is approved by the RDMC as part of a Research and Development Plan. 1.20 "JOINT PROJECT HEAD" shall mean: (a) in the case of the Initial Joint Development Project, an employee of Nippon Kayaku or its Affiliates who shall be experienced in clinical and regulatory matters pertaining to the development of drug products and who is designated by Nippon Kayaku as the head of the Initial Joint Development Project; and 3. *** Confidential Treatment Requested 10 (b) in the case of any other Joint Project, an employee of a Party or its Affiliates who shall be experienced in clinical and regulatory matters pertaining to the development of drug products and reasonably acceptable to the other Party and who is designated by the RDMC as the head of such Joint Project. 1.21 "KNOW-HOW" shall mean 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, regulatory filings and submissions, analytical and quality control data, patent and legal data or descriptions, and manufacturing, marketing, sales or finance data. 1.22 "NET SALES OF OTHER PRODUCTS" shall mean the gross amounts invoiced for sales of Other Products by Signal or Nippon Kayaku, as the case may be, and its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder to Third Parties pursuant to one or more of the licenses and sublicenses granted under Article 6 and one or more of the rights obtained under Section 13.1 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. 1.23 "NET SALES OF PRODUCTS" shall mean the gross amounts invoiced for sales of Products by Signal or Nippon Kayaku, as the case may be, and its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder to Third Parties pursuant to one or more of the licenses and sublicenses granted under Article 6 and one or more of the rights obtained under Section 13.1 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. 1.24 "NIPPON KAYAKU KNOW-HOW" shall mean Know-How that is (i) owned or within the Control of Nippon Kayaku, its Affiliate, licensee and sublicensee or purchaser and assignee of its rights or obligations hereunder of Nippon Kayaku prior to the end of the Term and (ii) necessary or useful for the research, development, manufacture, use, sale or import of products pursuant to one or more of the licenses and sublicenses granted under Article 6 and one or more of the rights obtained under Section 13.1, but excluding Nippon Kayaku Patents, Collaboration Know-How, Collaboration Patents, Signal Know-How and Signal Patents. 1.25 "NIPPON KAYAKU PATENTS" shall mean all Patents owned or Controlled by Nippon Kayaku, its Affiliate, licensee and sublicensee or purchaser and assignee of its rights or obligations hereunder of Nippon Kayaku (excluding Collaboration Patents and Signal Patents) 4. 11 necessary or useful for the research, development, manufacture, use, sale or import of products pursuant to one or more of the licenses and sublicenses granted under Article 6 and one or more of the rights obtained under Section 13.1, where such Patents cover (i) inventions made prior to the Effective Date of this Agreement, (ii) inventions made solely by officers, employees, consultants or agents of Nippon Kayaku, its Affiliate, licensee and sublicensee or purchaser and assignee of its rights or obligations hereunder of Nippon Kayaku after the Effective Date and prior to the end of the Term (but specifically excluding Collaboration Patents covered by Section 1.7(iii) and Signal Patents), or (iii) inventions which come under the Control of Nippon Kayaku, its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder after the Effective Date and prior to the end of the Term; a list of the Nippon Kayaku Patents as of the Effective Date is set forth on Schedule I. 1.26 "[***]" shall mean the compound Controlled by Nippon Kayaku known as [***] and described on Exhibit A to the Collaboration Agreement. 1.27 "NSP6783" shall mean the compound known as NSP6783, which was identified pursuant to the Collaboration Agreement and described on Exhibit A hereto. 1.28 "OTHER PRODUCT" shall mean any pharmaceutical product based on or derived from a Compound other than a Research Lead, Development Candidate or Product. 1.29 "PATENT" shall mean (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. 1.30 "PATENT COSTS" shall mean 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. 1.31 "PNS FIELD" shall mean the treatment or prevention of diabetic neuropathy, chemotherapy-induced neuropathy or other diseases or disorders of the peripheral nervous system in humans but specifically excluding therapeutic and diagnostic products directed at pain, lower urinary tract dysfunction and peripheral vascular disease; provided, however, that to the extent, if any, that the rights of Roche Bioscience, a Division of Syntex (U.S.A.) Inc. in the PNS Field under the Roche Agreement terminate, the foregoing exclusion shall no longer be effective. 1.32 "PRODUCT" shall mean any pharmaceutical product based on or derived from any Research Lead that (a) has been designated a Development Candidate, (b) has received Regulatory Approval, and (c) 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. 1.33 "PROFIT OR LOSS" shall have the meaning provided in Exhibit B hereto. 1.34 "REGULATORY APPROVAL" shall mean any approval (including price and reimbursement approvals), licenses, registrations or authorizations of any supra-national, federal, state or local regulatory agency, department, bureau or other government entity, necessary for the 5. *** Confidential Treatment Requested 12 manufacture, use, storage, import, transport or sale of a pharmaceutical product in a regulatory jurisdiction. 1.35 "RESEARCH" shall mean all work in the Field performed by the Parties or on their behalf pursuant to the Collaboration Agreement or this Agreement directed towards or in connection with the discovery, identification and investigation of Research Leads. 1.36 "RESEARCH AND DEVELOPMENT MANAGEMENT COMMITTEE" or "RDMC" shall mean the committee established pursuant to Section 2.2 hereof. 1.37 "RESEARCH AND DEVELOPMENT PLAN" shall have the meaning provided in Section 2.1 hereof. 1.38 "RESEARCH LEAD" shall mean a Compound identified by either Party (separately or jointly) pursuant to the Collaboration Agreement or this Agreement showing a certain potentiality (potency, selectivity and other parameters determined by the RMDC) determined by the RDMC. 1.39 "RESEARCH LEAD NOTICE" shall have the meaning provided in Section 2.3. 1.40 "REST OF THE WORLD" shall mean the entire world excluding Japan. 1.41 "ROCHE AGREEMENT" shall mean the Research Collaboration Agreement dated August 26, 1996 between Signal and Roche Bioscience, a Division of Syntex (U.S.A.) Inc., a Delaware corporation. 1.42 "SIGNAL KNOW-HOW" shall mean Know-How that is (i) owned or within the Control of Signal, its Affiliate, licensee and sublicensee or purchaser and assignee of its rights or obligations hereunder prior to the end of the Term and (ii) necessary or useful for the research, development, manufacture, use, sale or import of products pursuant to one or more of the licenses and sublicenses granted under Article 6 and one or more of the rights obtained under Section 13.1, but excluding Signal Patents, Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How. 1.43 "SIGNAL PATENTS" shall mean all Patents owned or Controlled by Signal, its Affiliate, licensee and sublicensee or purchaser and assignee of its rights or obligations hereunder (excluding Collaboration Patents and Nippon Kayaku Patents) necessary or useful for the research, development, manufacture, use, sale or import of products pursuant to one or more of the licenses and sublicenses granted under Article 6 and one or more of the rights obtained under Section 13.1 where such Patents cover (i) inventions made prior to the Effective Date of this Agreement, (ii) inventions made solely by officers, employees, consultants or agents of Signal, its Affiliate, licensee and sublicensee or purchaser and assignee of its rights or obligations hereunder after the Effective Date and prior to the end of the Term (but specifically excluding Collaboration Patents covered by Section 1.7(iii) and Nippon Kayaku Patents), or (iii) inventions which come under the Control of Signal, its Affiliate, licensee and sublicensee or purchaser and assignee of its rights or obligations hereunder after the Effective Date and prior to the end of the Term; a list of the Signal Patents as of the Effective Date is set forth on Schedule II. 6. 13 1.44 "TERM" shall have the meaning provided in Section 10.1. 1.45 "THIRD PARTY" shall mean any entity or individual other than Signal, Nippon Kayaku and Affiliates of either. 1.46 "VALID CLAIM" shall mean 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. 2. RESEARCH AND DEVELOPMENT PHASE OF COLLABORATION. 2.1 RESEARCH AND DEVELOPMENT MANAGEMENT COMMITTEE. The purpose of the Collaboration is (a) to discover, and conduct further Research of, Research Leads identified under the Collaboration Agreement or this Agreement, and (b) to identify Research Leads suitable for designation as Development Candidates and for development into Products for commercialization in the Field. The Parties agree that, with respect to each Research Lead or Development Candidate, all Research and Development activities shall be conducted as specified in a written long-term research and development plan and an annual research and development plan and budget to be coordinated and approved by the Research and Development Management Committee, as such research and development plans and budgets may be amended from time to time in writing by the RDMC (collectively, a "Research and Development Plan"), with each Party to use commercially reasonable and diligent efforts (as defined below) to perform its responsibilities under each such Research and Development Plan. 2.2 RESPONSIBILITIES OF THE RDMC. The Parties shall establish a Research and Development Management Committee ("RDMC") promptly after the date of the execution of this Agreement. The RDMC shall be comprised of three (3) representatives of each Party or such greater number of representatives as the Parties may mutually agree, with at least one of each Party's representatives having Development responsibility and one of each Party's representatives having business management responsibility for such Party. The initial members of the RDMC are set forth on Schedule IV. Either Party may appoint substitute or replacement members of the RDMC 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 RDMC shall be made by unanimous vote. The RDMC shall continue in existence for so long as Research is ongoing or at least one Research Lead or Development Candidate is in ongoing Research or Development hereunder. The RDMC shall have the responsibility and authority, except for Japan, to: (a) Determine the overall strategy and policies for Research regarding the identification of additional Research Leads and Development of Development Candidates and Products; (b) Plan, monitor and prioritize Research activities, including approving, reviewing and modifying the Research and Development Plan and determining whether a Compound is a Research Lead, and Development activities, including approving, reviewing and 7. 14 modifying the long-range, annual and periodic (e.g., quarterly and monthly) Research and Development Plans; (c) Determine whether a Research Lead meets criteria established by the RDMC for initiating, continuing or discontinuing development of a Development Candidate; (d) Determine the principal indications and clinical and geographical markets for which Development Candidates shall be developed; (e) Evaluate the results and discuss information relating to Research, Development and commercialization activities hereunder; (f) Review scientific and business publications and presentations of the Parties regarding Research, Development and commercialization activities hereunder; (g) Determine the suitability of Third Party contract services for carrying out Research, Development and commercialization activities hereunder, including preclinical and clinical studies and Product marketing, sales, distribution and manufacturing; (h) Assign responsibility for the conduct of clinical studies and pursuit of Regulatory Approvals and the filing of drug approval applications for Products; (i) Determine the number of Nippon Kayaku and Signal employees (other than the Joint Project Head of the Initial Joint Development Project) and external consultants to be assigned to the Collaboration and otherwise allocate resources among Joint Projects; (j) Review and approve a Research and Development Plan for each Research Lead, Development Candidate and Product through, and following, Regulatory Approval; (k) Determine the suitability of a certain Third Party to be the licensee and sublicensee which shall obtain jointly from Nippon Kayaku and Signal the right to share the Profit or Loss by contributing development of Research Lead, Development Candidate or Product. The RDMC shall also review (but shall not have the authority to approve or prohibit) either Party's license or sublicense to a Third Party; (l) Determine the definition of the Project set forth in Section 4.6; (m) Evaluate and select Compounds for license or acquisition as part of the Collaboration; and (n) Determine whether providing clinicians or clinical investigators with samples of Research Leads or Development Candidates prior to Regulatory Approval is permissible. Either Party may refer any dispute to the appropriate officers of the Parties for consideration and resolution pursuant to Article 12. The RDMC shall meet at least once per calendar quarter, with two (2) of such meetings per calendar year being conducted in each of San 8. 15 Diego, California and Tokyo, Japan, or at such other times and places agreed to by the Parties, until the end of the Term. 2.3 DETERMINATION OF ADDITIONAL RESEARCH LEADS. Upon the identification by one or both of the Parties pursuant to this Agreement 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 RDMC and, if applicable, the other Party. 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, or its Affiliates, licensors (where permitted), licensees or sublicensees, at any time on or before the end of the Term, as promptly as is reasonably practicable after such Collaboration Know-How is learned, acquired or discovered. 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 or its Affiliates, licensees or sublicensees 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, acquired or discovered. The Parties shall exchange written reports (with copies to the RDMC) presenting a meaningful summary of research, development and commercialization activities performed under this Agreement, at a frequency to be determined from time to time by the RDMC (but in any event at least monthly). Each Party shall provide the other with raw data, including QSAR, for work carried out in the course of such activities, if reasonably requested by the other Party. Know-How and other information regarding the Collaboration 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 any Research hereunder shall first be used for purposes of the Collaboration. When the RDMC determines that Compounds are not suitable for pursuit under the Collaboration, then, to the extent Signal is not contractually prohibited under the terms of its collaboration agreements in existence as of the Effective Date, such Compound shall be freely available for testing by each of the Parties in their other research and development programs and use outside the Field by each of the Parties in accordance with the terms of this Agreement. Upon termination of the rights of Roche Bioscience in the PNS Field provided in Section 1.31, Signal shall provide notice thereof to Nippon Kayaku. (c) It is understood, and the Parties hereby acknowledge and agree, that as either Party's chemists develop structure-activity relationships from the active analogues of NSP6783 and/or [***] in the course of the Collaboration, that Party shall, using its database management program, conduct sub-structure searches of such Party's compound library for compounds to screen in the Collaboration, which may include compounds made or acquired in such Party's existing or future programs (where permitted). Any of these compounds that are not active in such programs' assays shall be evaluated in the Collaboration, regardless of whether such compounds were made or acquired as part of such programs. 9. *** Confidential Treatment Requested 16 (d) All Research Leads and analogs thereof synthesized by one Party in the course of the Collaboration shall be made available, together with their chemical structures, to the other Party promptly upon request. 2.5 MANAGEMENT AND STAFFING OF THE INITIAL JOINT DEVELOPMENT PROJECT. One employee of Nippon Kayaku or its Affiliates, who shall be experienced in clinical and regulatory matters pertaining to the development of drug products and who shall be reasonably acceptable to Signal, shall be designated the Joint Project Head of the Initial Joint Development Project. All other employees of either Party or its Affiliates assigned to the Initial Joint Development Project shall be determined by the RDMC. Any Nippon Kayaku or its Affiliates' employee(s) responsible for carrying out clinical development and regulatory affairs activities in the United States under the Initial Joint Development Project shall be assigned by the RDMC and based in offices of Nippon Kayaku, its Affiliates or Signal located in the United States. Such Nippon Kayaku or its Affiliates' employee(s) shall be under the primary direction of Nippon Kayaku management and adjusted from time to time as the requirements of the Initial Joint Development Project demand and the RDMC determines. Participation of clinical and regulatory employees of Signal in the Initial Joint Development Project shall be determined in advance as part of the Research and Development Plan and adjusted from time to time as the requirements of the Initial Joint Development Project demand and the RDMC determines. Such Signal employee(s) shall report to and be under the primary direction of Signal management but shall also take direction (consistent with the Research and Development Plan and the terms of this Agreement) from the Joint Project Head for the Initial Joint Development Project on matters regarding Product development activities. 2.6 OPERATIONAL AUTHORITY AND RESPONSIBILITY OF JOINT PROJECT HEAD UNDER THE INITIAL JOINT DEVELOPMENT PROJECT. With regard to clinical development activities under the Initial Joint Development Project, the Joint Project Head shall have primary authority and responsibility for: (a) coordinating day-to-day activities under the Initial Joint Development Project; (b) concluding and managing contractual agreements with Third Parties (e.g., CRO's and consultants); (c) managing the receipt and payment of funds for Collaboration activities; (d) managing the collection, analysis and reporting of Initial Joint Development Project data and information; and (e) recommending to the RDMC any changes in staffing of the Initial Joint Development Project. Such Joint Project Head shall carry out his or her duties: (i) either directly or by assigning other Nippon Kayaku, Signal or their Affiliates' employees to carry out such activities; (ii) in a manner consistent with the Research and Development Plan regarding the Initial Joint Development Project; and (iii) according to policies approved by the RDMC. It is further agreed that such Joint Project Head shall maintain regular communications with and, to the extent such guidance is consistent with achieving the Initial Joint Development Project's goals, take guidance from the heads of clinical development and regulatory affairs of both Nippon Kayaku and Signal, including regular briefings on recent developments and future plans under the Initial Joint Development Project. 2.7 MANAGEMENT AND STAFFING FOR OTHER JOINT PROJECTS. For any Joint Projects other than the Initial Joint Development Project, the RDMC shall determine the appropriate Joint Project Head and make other personnel assignments to such Joint Project. Other provisions in Sections 2.5 and 2.6 shall be applied to Other Joint Projects. 10. 17 2.8 CONTRIBUTIONS. (a) BY SIGNAL. Once the RDMC has designated a Compound as a Research Lead, the RDMC shall determine which Signal personnel shall be assigned to the applicable Joint Project. Signal agrees to exert commercially reasonable and diligent efforts to perform its obligations under each Research and Development 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. All employees and consultants of Signal who are assigned to the Collaboration shall be required to sign a proprietary information and confidentiality agreement assigning to Signal all rights to any inventions pertaining to the Collaboration. (b) BY NIPPON KAYAKU. With respect to the Initial Joint Development Project, Nippon Kayaku shall be responsible for: (a) designating the Joint Project Head; and (b) diligently managing and conducting, or contracting for the conduct of, Research, Development and commercialization activities with respect to NSP6783 in Japan. Once the RDMC has designated any other Compound as a Research Lead or Development Candidate, the RDMC shall determine which Nippon Kayaku or its Affiliates' personnel shall be assigned to the applicable Joint Project. Nippon Kayaku agrees to exert commercially reasonable and diligent efforts to perform its obligations under each Research and Development 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. All employees and consultants of Nippon Kayaku or its Affiliates who are assigned to the Collaboration shall be required to sign a proprietary information and confidentiality agreement assigning to Nippon Kayaku all rights to any inventions pertaining to the Collaboration. Nippon Kayaku shall provide written reports on the plan and progress of development of a Research Lead or Development Candidate in Japan to the RDMC on a quarterly basis until the filing of drug approval application for a Product. Nippon Kayaku shall, at Signal's request, provide Signal of all clinical data obtained during the clinical trial conducted by Nippon Kayaku or on its behalf in Japan in the Field. Such clinical data may be used in Development by Signal, its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder. (c) BY NIPPON KAYAKU AND SIGNAL, JOINTLY, OR BY A THIRD PARTY. With respect to Research Leads, Development Candidates and Products in the PNS Field, both Nippon Kayaku and Signal shall jointly carry out, or contract with Third Parties for the conduct of, Research, Development and commercialization activities in the Rest of the World. With respect to Research Leads, Development Candidates and Products in the CNS Field, both Parties shall have the option, upon mutual consent, to contract with a Third Party expert in the CNS Field to provide funding and assume certain responsibilities for Research, Development and commercialization in the Rest of the World. (d) COMMERCIALLY REASONABLE AND DILIGENT EFFORTS. As used herein, the term "commercially reasonable and diligent efforts" shall 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 11. 18 events with respect to the Research and Development Plans, the Parties agree to discuss such changed circumstances and appropriate mechanisms to address them. 2.9 EXPENSES. All costs and expenses incurred for research and development of Research Leads, Development Candidates and Products shall be shared equally by the Parties in accordance with Exhibit B hereto, provided that such costs and expenses are in accordance with the applicable Research and Development Plan, excluding costs and expenses incurred by or on behalf of Nippon Kayaku in connection with the development and commercialization of Products in Japan, which costs and expenses shall be borne solely by Nippon Kayaku. In determining Allowable Costs and Expenses and Costs of Goods Sold, any Party providing project-specific support-activities (e.g., laboratory research, animal pharmacology and toxicology, manufacturing, QA/QC, clinical development, regulatory affairs or clinical data management) may calculate the fully-burdened cost and expense of providing such support activity, including both project-specific variable costs and expenses and Allocable Overhead (as such term is defined in Exhibit B hereto), using standard activity-based project costing methods and otherwise in accordance with Exhibit B hereto. 2.10 VISITING PERSONNEL. Nippon Kayaku may, at its option, send up to [***] visiting personnel of Nippon Kayaku and its Affiliates with clinical development or regulatory affairs expertise to Signal's facilities in San Diego for a duration determined by the RDMC. [***] Nippon Kayaku shall be responsible for such scientists' living expenses, and Signal shall provide office and/or laboratory space and supervision. Such personnel shall sign Signal's standard form of Confidential Disclosure Agreement. Signal shall give Nippon Kayaku's or its Affiliates' personnel full and correct instructions necessary to avoid any loss, damage, death or injury, and Nippon Kayaku shall cause such personnel to obey such instructions. 3. COMMERCIALIZATION PHASE OF COLLABORATION. 3.1 COMMERCIALIZATION MANAGEMENT COMMITTEE. The Parties agree that, with respect to each Product, all commercialization activities (excluding Nippon Kayaku's commercialization activities with respect to Products in Japan) shall be conducted as specified in a written long-term commercialization plan and an annual commercialization plan and budget to be coordinated and approved by the Commercialization Management Committee, as such commercialization plans and budgets may be amended from time to time in writing by the CMC (collectively, a "Commercialization Plan"), with each Party to use commercially reasonable and diligent efforts (as defined above) to perform its responsibilities under each such Commercialization Plan. 3.2 RESPONSIBILITIES OF THE CMC. The Parties shall establish a Commercialization Management Committee ("CMC") promptly after a Development Candidate is entered into the first Phase III clinical trial. The CMC shall be comprised of three (3) representatives of each Party or such greater number of representatives as the Parties may mutually agree, with at least one of each Party's representatives having sales and marketing responsibility and one of each Party's representatives having senior business management responsibility for such Party. The initial members of the CMC shall be determined at the time the CMC is established. Either Party 12. *** Confidential Treatment Requested 19 may appoint substitute or replacement members of the CMC 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 CMC shall be made by unanimous vote. The CMC shall continue in existence for so long as at least one Development Candidate or Product is in ongoing development or commercialization hereunder. With respect to commercialization of Products in the Rest of the World, the CMC shall have the responsibility and authority to: (a) Oversee the commercialization of Products, including commercialization planning, Product manufacturing and inventory planning, annual budgeting, marketing, sales, distribution and post-Regulatory Approval clinical development of Products; (b) Monitor, review and comment on costs incurred by the Parties in the manufacture, marketing, sale, distribution and post-Regulatory Approval clinical development of Products; (c) Review and comment on the Commercialization Plans; (d) Receive and provide to the Parties all sales, pricing, and financial reports pertaining to Commercialization of Products; (e) Recommend to the RDMC the principal indications and delivery routes for all Products; (f) Determine the party (Nippon Kayaku, Signal, their Affiliates or Third Party, solely or jointly) which shall be responsible for preparing and submitting regulatory filings in all countries worldwide, except for Japan where Nippon Kayaku shall have primary responsibility for all regulatory filings; (g) Make pricing decisions with respect to Products; (h) Facilitate the flow of information with respect to the commercialization of Products; and (i) Determine on a country-by-country basis the party (Nippon Kayaku, Signal, their Affiliates or Third Party, solely or jointly) which shall conduct development and commercialization of a Development Candidate and Product. Either Party may refer any dispute to the appropriate officers of the Parties for consideration and resolution pursuant to Article 12. The CMC shall meet at least once per calendar quarter, with two (2) 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 Term. 13. 20 3.3 CONTRIBUTIONS. Each Party's respective rights and responsibilities for manufacturing, sales and marketing activities shall be determined by the CMC at such time as sufficient clinical trial and market information regarding a Product is available (which time shall be determined by the RDMC). (a) BY SIGNAL. Signal agrees to exert commercially reasonable and diligent efforts to perform its obligations under the Commercialization Plan. In the performance of such work, Signal shall maintain and utilize such staff (including consultants), offices and other facilities consistent with such undertaking. (b) BY NIPPON KAYAKU. Nippon Kayaku agrees to exert commercially reasonable and diligent efforts to perform its obligations under the Commercialization Plan. In the performance of such work, Nippon Kayaku shall maintain and utilize such staff (including consultants), offices and other facilities consistent with such undertaking. 3.4 COMMERCIALIZATION EXPENSES. All costs and expenses incurred for commercialization of Products shall be shared equally by the Parties except for Japan in accordance with Exhibit B hereto, provided that such costs and expenses are in accordance with the applicable Commercialization Plan. 3.5 REGULATORY FILINGS. Neither Party shall take any action that will or could reasonably be expected to unnecessarily impair the other Party's efforts to achieve Regulatory Approvals for which the Party is responsible. Nippon Kayaku and Signal shall, together with any licensee or sublicensee, if any, develop a worldwide development plan to coordinate clinical studies and regulatory filings in all countries for which marketing approval is to be sought with the goal of expediting the approval and marketing of each Product on a worldwide basis. 3.6 PRODUCT MARKETING PLANS. Subject to and as part of preparing Research and Development Plans and Commercialization Plans approved by the RDMC or CMC, respectively, Nippon Kayaku and Signal shall conduct, or contract with Third Parties to conduct, market analysis and develop marketing plans with the goal of maximizing each Product's Net Sales potential and competitive advantage worldwide through a combination of Product design, development, pricing, packaging, promotion and distribution strategies, which strategies shall be coordinated between and among all countries for which development approval and Regulatory Approval are to be sought. 3.7 PRODUCT BRAND NAMES. Subject to Research and Development Plans and Commercialization Plans approved by the RDMC or CMC, respectively, and to the extent such strategy is beneficial in a given territory, Nippon Kayaku and Signal shall endeavor to establish a common brand name under which each Product would be marketed worldwide in order to maximize brand equity and the corresponding return on development and marketing expenditures. 3.8 CONTRACTING FOR SERVICES. Either Party may contract with the other Party for various development and commercialization services, including preclinical and clinical development, regulatory affairs, manufacturing, marketing, sales and distribution services. Any such contracting shall be mutually determined by both Parties on a Product-by-Product basis. 14. 21 Either Party may provide any such services at its fully-burdened cost plus a commercially reasonable mark-up. 3.9 SUPPLY OF BULK DRUG SUBSTANCE AND DRUG PRODUCT. With respect to Products developed for indications in the PNS Field, the Parties hereby agree that Nippon Kayaku shall have the exclusive right to manufacture and supply bulk drug substance and finished drug product on a worldwide basis. For purposes of determining the transfer price of bulk drug substance and finished drug product supplied by Nippon Kayaku hereunder, such transfer price shall [***]. Nippon Kayaku's unit transfer price for commercial bulk drug substance and finished drug product shall be no more than [***]. Signal further agrees to grant Nippon Kayaku exclusive manufacturing rights for Products developed for indications in the CNS Field, provided the granting of such rights to Nippon Kayaku does not limit the Parties' ability to obtain collaboration partners for indications in the CNS Field in the Rest of the World. 4. SHARING OF PROFITS OR LOSSES; OTHER PAYMENTS 4.1 SHARING OF PROFITS OR LOSSES, ALLOWABLE COSTS AND EXPENSES AND COSTS OF GOODS SOLD. Subject to the terms and conditions of this Agreement, Nippon Kayaku and Signal shall participate actively and equally in the Research, Development and commercialization of Research Leads, Development Candidates and Products, and, except as otherwise specifically provided in this Agreement, Nippon Kayaku and Signal shall share equally (50%/50%) the Profits and Losses, Allowable Costs and Expenses and Costs of Goods Sold (as such terms are defined in Exhibit B hereto) for Research Leads, Development Candidates and Products developed and commercialized under this Agreement (excluding Research Leads, Development Candidates and Products developed and commercialized by Nippon Kayaku pursuant to the license granted under Sections 6.1(b)(i) and 6.1(c)(i)) in accordance with the provisions of Exhibit B hereto. For the avoidance of doubt, the Parties represent that, if a Party licenses, sublicenses, sells or assigns its rights under this Agreement to its Affiliates or Third Parties, such Party, its licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder (the Affiliates and the Third Parties) in the aggregate shall take only fifty percent (50%) of Profits and Losses, Allowable Costs and Expenses and Costs of Goods Sold, and the other fifty percent (50%) of Profits and Losses, Allowable Costs and Expenses and Costs of Goods Sold shall in the aggregate be taken by the other Party, its Affiliates, licensees, sublicensees, purchasers and assignees. The Parties agree that if either Party fails to pay its respective share of development and commercialization costs and expenses in accordance with this Agreement (including, without limitation, Exhibit B hereto), then following due notice by the other Party, which shall be given to the non-paying Party and a copy of which shall be given to all of the RDMC members, and provided the non-paying Party has not cured the non-payment within the non-paying Party's fourteen (14) working days of such notice, then, upon the expiration of such fourteen (14) working day period, the non-paying Party shall be deemed to be a non-participating Party, shall forfeit its rights under the preceding sentence and shall be subject to the provisions of Section 4.6. 15. *** Confidential Treatment Requested 22 4.2 NIPPON KAYAKU ROYALTIES ON SALES OF PRODUCTS IN JAPAN. In consideration of the license granted to Nippon Kayaku pursuant to Sections 6.1(b)(i) and 6.1(c)(i), Nippon Kayaku shall pay to Signal a royalty of [***] percent ([***]%) of Net Sales of Products by Nippon Kayaku, its Affiliates or sublicensees of Products in the PNS Field in Japan and [***] percent ([***]%) of Net Sales of Products by Nippon Kayaku, its Affiliates or sublicensees of Products in the CNS 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(a)(i), Signal shall pay to Nippon Kayaku (i) a royalty of [***] percent ([***]%) of Net Sales of Products by Signal, its Affiliates or sublicensees outside the Field plus (ii) any royalties payable by Nippon Kayaku to a Third Party, not to exceed [***] percent ([***]%) of Net Sales of Products by Signal, its Affiliates or sublicensees outside the Field. (b) In consideration of the license granted to Nippon Kayaku under Section 6.2(a)(ii), Nippon Kayaku shall pay to Signal (i) a royalty of [***] percent ([***]%) of Net Sales of Products by Nippon Kayaku, its Affiliates or sublicensees outside the Field plus (ii) any royalties payable by Signal to a Third Party, not to exceed [***] percent ([***]%) of Net Sales of Products by Nippon Kayaku, its Affiliates or sublicensees outside the Field. 4.4 ROYALTIES ON SALES OF OTHER PRODUCTS IN THE FIELD. (a) In consideration of the license granted to Signal under Section 6.2(b)(i), Signal shall pay to Nippon Kayaku (i) a royalty of [***] percent ([***]%) of Net Sales of Other Products by Signal, its Affiliates or sublicensees in the Field plus (ii) any royalties payable by Nippon Kayaku to a Third Party, not to exceed [***] percent ([***]%) of Net Sales of Other Products by Signal, its Affiliates or sublicensees in the Field. (b) In consideration of the license granted to Nippon Kayaku under Section 6.2(b)(ii), Nippon Kayaku shall pay to Signal (i) a royalty of [***] percent ([***]%) of Net Sales of Other Products by Nippon Kayaku, its Affiliates or sublicensees in the Field plus (ii) any royalties payable by Signal to a Third Party, not to exceed [***] percent ([***]%) of Net Sales of Other Products by Nippon Kayaku, its Affiliates or sublicensees in the Field. 4.5 ROYALTIES ON SALES OF OTHER PRODUCTS OUTSIDE THE FIELD. (a) In consideration of the license granted to Signal under Section 6.2(c)(i), Signal shall pay to Nippon Kayaku (i) a royalty of [***] percent ([***]%) of Net Sales of Other Products by Signal, its Affiliates or sublicensees outside the Field plus (ii) any royalties payable by Nippon Kayaku to a Third Party, not to exceed [***] percent ([***]%) of Net Sales of Other Products by Signal, its Affiliates or sublicensees outside the Field. (b) In consideration of the license granted to Nippon Kayaku under Section 6.2(c)(ii), Nippon Kayaku shall pay to Signal (i) a royalty of [***] percent ([***]%) of Net Sales of Other Products by Nippon Kayaku, its Affiliates or sublicensees outside the Field plus (ii) any royalties payable by Signal to a Third Party, not to exceed [***] percent ([***]%) of Net Sales of Other Products by Nippon Kayaku, its Affiliates or sublicensees outside the Field. 16. *** Confidential Treatment Requested 23 4.6 REDUCTION OF PARTICIPATION. If at any time Nippon Kayaku or Signal, including Nippon Kayaku's or Signal's licensees and sublicensees, willfully reduces its participation in and contribution (i.e., 50% of Research, Development and commercialization costs) to a Project or to regional development and commercialization activity in a certain country or territory in the Rest of the World (in each case, a "Participation Reduction"), the Party reducing its participation and contribution (the "Non-Participating Party") shall be deemed to have dropped out of the Project or such regional development and commercialization activity, and the continuing Party (the "Commercializing Party") shall pay to the Non-Participating Party a royalty of [***] percent ([***]%) of Net Sales of the applicable Product in the Rest of the World in the case of Participation Reduction to the Project, and a royalty of [***] percent ([***]%) of Net Sales of the applicable Product in such country or territory in the case of Participation Reduction to the regional development and commercialization activity, by such Commercializing Party or its Affiliates, licensees or sublicensees. 4.7 REVENUES ON JOINT LICENSE TO THE THIRD PARTY. If Nippon Kayaku and Signal jointly grant a license to develop and commercialize Research Lead, Development Candidate or Product to the Third Party, Nippon Kayaku and Signal shall share equally (50%/50%) all revenues arising out of such license. 5. ROYALTY OBLIGATIONS 5.1 ROYALTIES FOR SALES OF PRODUCTS OR OTHER PRODUCTS. Any royalty obligations of a Party bearing royalty obligations hereunder (the "Commercializing Party") shall be subject to the provisions of this Article 5. 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 shall 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, Eastern U.S. Edition, 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, 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 shall (i) deduct those taxes from the remittable payment, (ii) timely pay the taxes to the proper taxing authority, and (iii) send 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 AND REPORTING. Royalty payments under this Agreement shall be made to the Receiving Party or its designee quarterly within forty-five (45) days following the end of each calendar quarter for which royalties are due from the Commercializing Party. Each royalty 17. *** Confidential Treatment Requested 24 payment shall be accompanied by a report summarizing in suitable detail (as determined by the CMC) the Net Sales of Products or Net Sales of Other Products during the relevant three-month period. In addition, the Commercializing Party shall provide a unit sales report to the Receiving Party monthly within thirty (30) days following the end of each month. 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, licensees 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 revenues, 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 quarter's or year's records at the other Party's expense and not more often than twice a year 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 revenues, costs, expenses or payments made under this Agreement. If any such audit fails to identify underpayments in excess of the lesser of five percent (5%) of the amounts that should have been paid or $100,000 ("Material Underpayments") by the Commercializing Party for any calendar year audited, the Commercializing Party shall reimburse the Party requesting the audit for such discrepancy if the underpayment is identified by such audit and the out-of-pocket expenses of both Parties in such audit shall be borne by the Party requesting the audit. If any Material Underpayments 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 LICENSEES AND SUBLICENSEES. In the event the Commercializing Party grants licenses or sublicenses to Third Parties to make, use and/or sell a Product or Other Product with respect to which a royalty payment is due hereunder, such licenses or sublicenses shall include an obligation for the licensee or sublicensee to 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 licensee or 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. 18. 25 6. LICENSE GRANTS 6.1 LICENSES DURING COLLABORATION. (a) RESEARCH AND DEVELOPMENT LICENSES. (i) Signal grants to Nippon Kayaku an exclusive, except as to Signal, royalty-free, worldwide license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How, to make and use methods and materials solely: (1) to carry out the Research in accordance with the Research and Development Plan for the discovery, identification and investigation of Research Leads in the Field until the earlier of such time as all of the Parties' respective obligations under the Research and Development Plan have been performed in full or the termination of this Agreement in accordance with its terms; and (2) to conduct Development activities in accordance with the Research and Development Plan(s) with respect to Research Leads, Development Candidates and Products in the Field until the earlier of such time as all of the Parties' respective obligations under the Research and Development Plan(s) have been performed in full or the termination of this Agreement in accordance with its terms. Signal grants to Nippon Kayaku an exclusive, even as to Signal, royalty-free license, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How, to carry out research and development including, but not be limited to, pursuit of Regulatory Approvals and the filing of drug approval applications for Products in the Field in Japan. (ii) Nippon Kayaku grants to Signal an exclusive, except as to Nippon Kayaku, royalty-free, worldwide license, with the right to grant sublicenses, under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How to make and use methods and materials solely: (1) to carry out the Research in accordance with the Research and Development Plan for the discovery, identification and investigation of Research Leads in the Field until the earlier of such time as all of the Parties' respective obligations under the Research and Development Plan have been performed in full or the termination of this Agreement in accordance with its terms; and (2) to conduct Development activities in accordance with the Research and Development Plan(s) with respect to Research Leads, Development Candidates and Products in the Field until the earlier of such time as all of the Parties' respective obligations under the Research and Development Plan(s) have been performed in full or the termination of this Agreement in accordance with its terms. 19. 26 (b) COMMERCIALIZATION 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, sell and import Products in the PNS Field solely in Japan. (ii) Subject to subparagraph (iii) below, Signal shall and hereby does grant to Nippon Kayaku such licenses, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How, and Nippon Kayaku shall and does hereby grant to Signal such licenses, with the right to grant sublicenses, under the Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How, as, in each case, are necessary or useful to make, have made, use, sell and import Products in the PNS Field in the Rest of the World in accordance with the terms of this Agreement. (iii) In the event of a Participation Reduction pursuant to Section 4.6, 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 research, develop, make, have made, use, sell and import the applicable Products for the applicable indication in the PNS Field in the Rest of the World in the case of Participation Reduction to the Project, and in the countries or territory in the case of Participation Reduction to the regional development and commercialization activity. (c) COMMERCIALIZATION LICENSES IN THE CNS 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, sell and import Products in the CNS Field solely in Japan. (ii) Subject to subparagraph (iii) below, Signal shall and hereby does grant to Nippon Kayaku, such licenses, with the right to grant sublicenses, under Signal Patents, Signal Know-How, Collaboration Patents and Collaboration Know-How, and Nippon Kayaku shall and hereby does grant to Signal such licenses, with the right to grant sublicenses, under the Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How, as, in each case, are necessary or useful to make, have made, use, sell and import Products in the CNS Field in the Rest of the World in accordance with the terms of this Agreement. (iii) In the event of a Participation Reduction pursuant to Section 4.6, 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 research, develop, make, have made, use, sell and import the applicable Products for the applicable indication in the CNS Field in the Rest of the 20. 27 World in the case of Participation Reduction to the Project, and in the countries or territory in the case of Participation Reduction to the regional development and commercialization activity. The licenses granted pursuant to subsections (b)(ii) and (c)(ii) above shall be subject to the obligation of the Parties to share Profits and Losses, Allowable Costs and Expenses and Costs of Goods Sold in accordance with Section 4.1 above and Exhibit B hereto and shall not be royalty-bearing. (d) LICENSE TO THE THIRD PARTY. If neither Party wishes to conduct or continue Development or commercialization of Research Lead, Development Candidate or Product and a Third Party wishes to conduct such Development or commercialization, Nippon Kayaku and Signal shall mutually agree whether to grant a license to such Third Party, and if the Parties determine to grant such a license, the Parties shall jointly grant such license. 6.2 COMMERCIALIZATION LICENSES FOR OTHER PRODUCTS AND OUTSIDE THE FIELD. (a) PRODUCTS OUTSIDE THE FIELD. (i) 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, sell and import Products outside the Field, subject to the Parties' rights and obligations under Section 4.3; and (ii) 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, sell and import Products outside the Field, subject to the Parties' rights and obligations under Section 4.3. (b) OTHER PRODUCTS IN THE FIELD. (i) 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, sell and import Other Products in the Field, subject to the Parties' rights and obligations under Section 4.4; and (ii) 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, sell and import Other Products in the Field, subject to the Parties' rights and obligations under Section 4.4. (c) OTHER PRODUCTS OUTSIDE THE FIELD. (i) Nippon Kayaku shall and hereby does grant to Signal a co-exclusive (with Nippon Kayaku), worldwide, royalty-bearing license, with the right to grant 21. 28 sublicenses, under Nippon Kayaku Patents, Nippon Kayaku Know-How, Collaboration Patents and Collaboration Know-How to make, have made, use, sell and import Other Products outside the Field, subject to the Parties' rights and obligations under Section 4.5; and (ii) 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, sell and import Other Products outside the Field, subject to the Parties' rights and obligations under Section 4.5. 6.3 LICENSES AND SUBLICENSES. Each Party shall notify any permitted licensee and sublicensee hereunder of all rights and obligations of such Party under this Agreement licensed to such licensee and sublicensee and shall have such licensee and sublicensee bear the same obligations as such Party bears under this Agreement as long as not inapplicable; provided, however, that if both Parties propose to grant licenses or sublicenses of their rights and obligations under this Agreement to the same licensee or sublicensee, then the Parties shall grant such license or sublicense jointly in accordance with the provisions of Section 4.7. Upon termination of this Agreement for breach pursuant to Section 10.2, any existing licenses or sublicenses granted by the defaulting or terminating Party shall continue in full force and effect following such termination, in accordance with their respective terms and conditions, as licenses or sublicenses of the non-defaulting Party. 6.4 DURATION OF LICENSES. Subject to the provisions of any particular license granted under this Article 6 and unless earlier terminated pursuant to Article 10, all licenses granted under this Article 6 shall continue in force on a country-by-country basis from the Effective Date so long as the Collaboration or the commercial sale of a Product or Other Product is continuing. 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 the Collaboration Agreement or 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; 22. 29 (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 (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 shall give prompt notice to the other Party of such disclosure requirement and, except to the extent inappropriate in the case of patent applications, shall 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 licensee or sublicensee and contracted service providers for the Collaboration, under confidentiality obligations, Confidential Information. 7.3 PUBLICATIONS. Either Party may publish or present the results of the Research and Development hereunder 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 and Development hereunder by delivering a copy thereof to the other Party (the "reviewing Party") no less than thirty (30) days before its intended submission for publication or presentation. The reviewing Party shall have twenty (20) 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 twenty (20) 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 from the date the reviewing Party notifies the submitting Party in writing of the concern) to seek patent protection for any material in such publication or presentation which it believes is patentable, or up to fifteen (15) days to resolve any other issues. Each Party also agrees to delete from any such proposed publication or presentation 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 detailed financial provisions; 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 Party shall be entitled to make public disclosures required by law, including compliance with securities laws. 23. 30 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 officers, employees, consultants or agents of a Party 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 both Parties shall 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 shall be administered by the RDMC, or, if the RDMC is no longer in existence, the CMC (or a subcommittee of the RDMC or CMC, as applicable, for which the RDMC or CMC shall be responsible). The Parties intend that: (i) Either Party may refer any dispute regarding the preparation, filing, prosecution or maintenance of Collaboration Patents to the appropriate officers of the Parties for consideration and resolution pursuant to Article 12; (ii) Unless otherwise determined by the RDMC or CMC, as applicable, 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, shall be the 24. 31 responsibility of Nippon Kayaku in Japan and shall be the responsibility of a Party determined by the RDMC or CMC in other countries; and (iii) The Parties shall share equally the external 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 shall include the timely and complete 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 6.1 or Section 6.2. (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, and such Patent shall be included in the Patents of the Party to whom such Patent is assigned and subject to all applicable license grants hereunder. 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 designated by the RDMC (or, if the RDMC is no longer in existence, the CMC) 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 Collaboration Know-How or with respect to a Product being commercialized jointly by the Parties, the RDMC (or, if the RDMC is no longer in existence, the CMC) shall determine how to respond to such claim, and shall designate the Party responsible for controlling 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 both Parties if such settlement would adversely affect either Party's interests, which consent shall not be unreasonably withheld. (b) INFRINGEMENT BY THIRD PARTIES. 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 Term of this Agreement, the Party to this Agreement (including, for purposes of this Section 8.3(b), such Party's licensees and sublicensees, and purchasers or assignees of its rights or obligations hereunder) first having knowledge of such 25. 32 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, Nippon Kayaku Patent or Signal Patent is infringed by a Third Party, the RDMC (or, if the RDMC is no longer in existence, the CMC) shall designate the Party responsible for controlling any action or proceeding with respect to such infringement, and, to the extent that the other Party Controls or has any right, title or interest in such Patent, such 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 designated by the RDMC or CMC fails to bring an action or proceeding within a period of sixty (60) days after having knowledge of infringement of such Patent, then, to the extent that the other Party Controls or has any right, title or interest in such Patent, such 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) MONETARY AWARDS. Any damages or other monetary awards recovered shall be allocated first, to the costs and expenses of the Party or Parties bringing suit, and then to 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 of the Parties if there has been no Participation Reduction, 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 Section 8.3(b) may not be entered into without the prior written consent of the Party not bringing the suit, which consent shall not be unreasonably withheld. (d) 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, and any damages or other monetary awards recovered shall be allocated first, to the costs and expenses of the Party or Parties bringing suit, and then to the costs and expenses, if any, of the other Party. Any amounts remaining shall be shared equally by the Parties. 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 this 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. 26. 33 (b) NO CONFLICTING GRANTS. Except as set forth in Section 2.4(b), each Party has not granted, and during the term of this Agreement shall 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 shall inform the other Party promptly 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 and Development activities 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 and Development, or the commercial utility of Research Leads or Development Candidates 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 RESEARCH LEAD, DEVELOPMENT CANDIDATE OR PRODUCT, OR ANY REPRESENTATION OR WARRANTY THAT A RESEARCH LEAD, DEVELOPMENT CANDIDATE OR 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. 10. TERM AND TERMINATION 10.1 TERM. The term of this Agreement (the "Term") shall commence as of the Effective Date and, unless sooner terminated as provided herein, shall continue in effect until the later of (a) the expiration or invalidation of the last Valid Claim of a Nippon Kayaku Patent, Signal Patent or Collaboration Patent in effect in any country, (b) ten (10) years from the first commercial sale of a Product in the last country for which Regulatory Approval of a Product is sought pursuant to the Research and Development Plan(s) and Commercialization Plan(s) and 27. 34 obtained or (c) conclusion or termination of any and all Research and Development under this Agreement. 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 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 or (ii) if a voluntary or involuntary petition in bankruptcy is filed in any court of competent jurisdiction against the other Party and is not dismissed or otherwise invalidated by the court within sixty (60) days. 10.4 SURVIVING RIGHTS. The obligations and rights of the Parties under Sections 6.2 (except as otherwise provided in Section 10.2), 6.3, 6.4, 8.1, 8.2(c), 8.2(d), 8.2(e), 10.2, 10.4, 10.5, 10.6, 11.1 and 11.2 and Articles 4, 5, 7, 12 and 13 shall survive termination or expiration of this Agreement. 10.5 ACCRUED RIGHTS; SURVIVING OBLIGATIONS. Termination or expiration of this Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of either Party, its licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder prior to such termination or expiration, including, without 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 this 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 shall remain available except as agreed to otherwise herein. 28. 35 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 willful misconduct or negligent acts of the Indemnifying Party performed in carrying out the Research, Development or commercialization activities 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 willful misconduct or 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 (or the failure to perform acts), 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, other materials or such products by the Indemnifying Party, its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder, except to the extent such Losses result directly or principally from the willful misconduct or negligence of the Indemnified Party, its Affiliates, licensees and sublicensees or purchasers and assignees of its rights or obligations hereunder. Each Party shall require indemnification, consistent with this Article 11, from its Third Party contractors, licensees and sublicensees, and purchasers and assignees of its rights or obligations hereunder. 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 cooperate as requested (at the expense of the Indemnifying Party) in the defense of the claim. 11.3 INSURANCE. Each Party shall maintain suitable amounts of insurance coverage for clinical trial and commercial product liability proportionate to the risks and exposures and standard for the industry and the respective territories in which Products are developed and commercialized. The Parties shall work with one another to coordinate such appropriate insurance coverage for the activities contemplated by the Parties under this Agreement. 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 or its licensees' or sublicensees' rights and/or 29. 36 obligations hereunder or which relate to rights and/or obligations sold or assigned to purchaser or assignee from the Party 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. If the Parties or the RDMC or CMC 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 Any such dispute arising out of or relating to this Agreement which is not satisfactorily 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 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. 13. MISCELLANEOUS 13.1 ASSIGNMENT. (a) GENERALLY. Except as otherwise set forth in subparagraph (b) below, either Party may sell, assign or sublicense all or a portion of its rights or obligations under this Agreement in any country to one or more of its Affiliates and/or Third Parties (including, without limitation, in connection with the sale of all or substantially all of a Party's assets or a 30. 37 merger or other change of management or ownership control of either Party); provided, however, that the selling, assigning or sublicensing Party (the "Selling Party"), together with the purchasers, assignees and sublicensees of such Party's rights or obligations hereunder, shall continue to be bound by the terms of this Agreement as long as not inapplicable. In the event of the sale of all or substantially all of a Party's assets, a merger or other change of management or ownership control, the other Party shall not have a right of first refusal to acquire the rights of the Selling Party hereunder. Each Party agrees to provide the other Party with prior written notice of any intended sale, assignment or sublicense of such Party's rights hereunder and shall permit the other Party to make a proposal to acquire such rights, which offer the Selling Party may elect to accept or reject in its sole discretion. (b) RESTRICTION. Neither Party shall sell, assign, license or sublicense all or a portion of its rights hereunder to any Affiliate or Third Party that is selling or developing any pharmaceutical product directly competitive with, and a direct substitute product for, Products being developed or commercialized hereunder and to any affiliate of such Third Party. (c) SUCCESSORS AND ASSIGNS. This Agreement (including, without limitation, the provisions of Section 13.1(b)) shall be binding upon and inure to the benefit of the successors, permitted assigns, licensees and sublicensees of each of the Parties. Any assignment not in accordance with this Agreement shall be void. 13.2 CONSENTS NOT UNREASONABLY WITHHELD. Whenever provision is made in this Agreement for either Party to secure the consent or approval of the other, that 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. 13.3 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 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. 13.4 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. 13.5 NO TRADEMARK RIGHTS. Except as otherwise provided herein, no right, express or implied, is granted by this 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 this Agreement. 13.6 NOTICES. All notices hereunder shall be in writing, and shall be given by hand with written acknowledgement of receipt by the receiving Party, mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service, to the Parties 31. 38 at the addresses set forth below (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). Notices given by hand shall be effective when delivered and notices sent by mail or express courier service shall be effective five (5) days after they are sent. If to Signal, to: Signal Pharmaceuticals, Inc. 5555 Oberlin Drive San Diego, CA 92121 Attention: Alan J. Lewis, Ph.D. President and Chief Executive Officer Telephone: (858) 558-7500 Telecopy: (858) 558-7513 If to Nippon Kayaku, to: Nippon Kayaku Co., Ltd. 31-12, Shimo 3-chome Kita-ku, Tokyo 115-8588 Japan Attention: Mr. Katsuhiro Aikawa Director, General Manager Research and Development Division Pharmaceuticals Group Telephone: 03-3598-5200 Telecopy: 03-3598-5421 13.7 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. 13.8 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 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. 13.9 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. 13.10 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. 32. 39 13.11 ENTIRE AGREEMENT. This Agreement sets forth all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties and supersedes and terminates all prior agreements and understanding between the Parties with respect to the subject matter of this Agreement, including, without limitation, the Collaboration Agreement, the Secrecy Agreement dated September 20, 1996 and the Material Transfer Agreement dated May 19, 1997. 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 unless reduced to writing and signed by the respective authorized officers of the Parties. 13.12 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. 13.13 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. 33. 40 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date set forth below. SIGNAL PHARMACEUTICALS, INC. NIPPON KAYAKU CO., LTD. By: /s/ Alan J. Lewis By: /s/ Haruo Inose ---------------------------------- ---------------------------------- Name: ALAN J. LEWIS, PH.D. Name: HARUO INOSE -------------------------------- -------------------------------- Title: President and Chief Executive Title: Managing Director Officer Head of Pharmaceuticals Group ------------------------------- ------------------------------- Date: February ___,2000 Date: February ___,2000 -------------------------------- -------------------------------- EXHIBITS A NSP6783 and/or its Salt B Sharing of Profits and Losses SCHEDULES I Nippon Kayaku Patents II Signal Patents III Collaboration Patents IV Initial RDMC Members 34. 41 EXHIBIT A NSP6783 AND/OR ITS SALT [***] 1. *** Confidential Treatment Requested 42 EXHIBIT B SHARING OF PROFITS OR LOSSES UNDER THE JOINT DEVELOPMENT AND COMMERCIALIZATION AGREEMENT THIS EXHIBIT B to the Joint Development and Commercialization Agreement (the "Agreement") effective as of February 9, 2000, between NIPPON KAYAKU CO., LTD. ("Nippon Kayaku"), and SIGNAL PHARMACEUTICALS, INC. ("Signal"), addresses the accounting policies and procedures to be followed in determining Profits or Losses. Terms not defined in this Exhibit shall have the meanings set forth in the Agreement. FOR PURPOSES OF THIS EXHIBIT ONLY, the accounting for research, development and sale of each Research Lead, Development Candidate or Product, together with certain related costs and expenses, and the receipt of any applicable royalties and non-royalty payments for such Research Lead, Development Candidate or Product, shall be referred to as the Joint Venture. The Joint Venture is not intended to be and is not a legal entity and has been defined for identification purposes only. 1. CALCULATION OF PROFIT OR LOSS The Profit or Loss for each Research Lead, Development Candidate or Product shall be determined on a product-by-product basis and shall be equal to: (i) Revenues plus Net Sales of Products (as defined in the Agreement) in the Territory, less (ii) Allowable Costs and Expenses and Costs of Goods Sold (each as defined below), plus or minus (iii) Net Interest Income of a Party in connection with the development, manufacturing, marketing or selling of such Research Lead, Development Candidate or Product, plus or minus (iv) Other Non-Operating and Extraordinary Gains (Losses) incurred by or on behalf of a Party in connection with the development, manufacturing, marketing or selling of Research Leads, Development Candidates or Products, all as more fully described below. Each Party shall calculate and maintain detailed records of its Allowable Costs and Expenses and Costs of Goods Sold and shall report to the RDMC or CMC, as appropriate, and to the other Party such Allowable Costs and Expenses and Costs of Goods Sold on a monthly basis (or at such other intervals as the RDMC or CMC shall direct) by the end of the month following the end of the applicable month. All calculations hereunder shall be made using, and all defined and undefined terms shall be construed in accordance with, U.S. generally accepted accounting principles, consistently applied, and consistent with generally accepted methods for activity-based project costing for similar products in similar industries. Without limiting the foregoing, no cost item subject to sharing by the Parties hereunder shall be included more than once in calculating Profit or Loss. The Parties anticipate that neither Party shall incur expenses which are included in the Profit or Loss calculation unless the RDMC or CMC, as applicable, has agreed that such Party shall incur such expenses. 2. REPORTING AND PAYMENT The fiscal year of the Joint Venture shall be a twelve (12) month period ending on December 31 or such portion thereof as shall be applicable. The Joint Venture's first, second, 1. 43 third and fourth quarters shall end on March 31, June 30, September 30 and December 31, respectively. Reporting by the RDMC or CMC, as applicable, for the Joint Venture revenues and expenses shall be performed as follows: REPORTING EVENT FREQUENCY TIMING OF SUBMISSION --------------- --------- -------------------- Preliminary Monthly 30-45 days following the end of each month Actuals (with adjustments for Quarterly 30-45 days following the all prior months of quarter) end of each quarter
The RDMC or CMC, as applicable, shall be responsible for the preparation of reports, calculation of the Profit or Loss to be shared and determination of the cash settlement between the Parties. The RDMC or CMC, as applicable, shall provide to the Parties, by the submission dates shown above, a statement showing the Joint Venture's results for the preceding calendar month or quarter, as applicable, and year to date in the format set forth in Schedule B-1 hereto, comparing monthly or quarterly results and year to date results to revenue forecasts and expense budgets, calculating the Profit or Loss as provided in paragraph 1 above and Schedule B-1 hereto, and determining the cash settlement required. To the extent any quarter-end adjustments to the Joint Venture are determined in good faith by the RDMC or CMC, as applicable, to be appropriate, an appropriate adjustment to Profit or Loss for the applicable quarter shall be made and an appropriate payment shall be made by the applicable Party within thirty (30) days following receipt of the invoice issued by other Party based on the RDMC's or CMC's report describing such adjustment. Any such adjustment payment shall be without interest if such amount is less than the lesser of (a) [***] percent ([***]%) of Profits or Losses for such quarter or (b) [***], and shall bear interest from the due date for the invoice at the prime rate, as published in The Wall Street Journal (Eastern U.S. Edition) on the last business day preceding such date if such amount is greater than or equal to the lesser of (x) [***] percent ([***]%) of Profits or Losses for such quarter or (y) [***]. 3. DEFINITIONS. As a supplement to the definitions provided in Article 1 of the Agreement, the following accounting terms shall be further specified as follows. As used herein, the term "operating unit" shall mean the standard operating unit in which a profit and loss statement is prepared for management accounting purposes in the Party's normal accounting procedures, consistently applied within and across its operating units. "TERRITORY" shall mean the Rest of the World. "ALLOCABLE OVERHEAD" shall mean (for any particular cost item) a Party's internal allocation, based on direct project headcount or other generally accepted activity-based accounting methods, of indirect overhead costs incurred by a Party or any of its operating units to support and carry out the activities of the specific business function, such as development, manufacturing, and sales and marketing, with respect to a Research Lead, Development Candidate or Product for the Territory, which indirect costs may include but are not limited to: indirect labor costs; occupancy costs; repair and maintenance costs; office supplies and service 2. *** Confidential Treatment Requested 44 costs; equipment costs; insurance costs; and outside professional and other service costs. Such overhead shall exclude any indirect costs associated with large start-up expenses or any excess or unused capacity not directly related to a Research Lead, Development Candidate or Product for the Territory. Furthermore, overhead costs of a Party or operating units that are not engaged in the development, manufacturing, marketing or selling of a Research Lead, Development Candidate or Product in the Territory shall not be recoverable as Allocable Overhead or otherwise, except as provided herein. "ALLOWABLE COSTS AND EXPENSES" shall mean those costs and expenses incurred by the Parties or for their account that are specifically attributable or related to the research (to the extent consistent with the terms of the Agreement), development, manufacturing, marketing or selling of a Research Lead, Development Candidate or Product in the Territory, and consisting of: (i) Research and Development Expenses, (ii) Sales and Marketing Expenses and (iii) General and Administrative Expenses. "COST OF GOODS SOLD" shall mean the manufactured cost of a Product shipped in final therapeutic form, calculated on a fully burdened basis (i.e., including Allocable Overhead specifically attributable thereto). The "cost of a Product shipped in final therapeutic form" shall mean the cost of Product shipped in bulk form plus the cost of final manufacturing. The "cost of a Product shipped in bulk form" shall mean the standard unit cost of Product in bulk form calculated in accordance with the customary cost accounting methods, consistently applied, of the Party performing the work. Standard unit cost generally consists of direct material, direct labor and Allocable Overhead specifically attributable to the Product at standard. The cost of final manufacturing shall be calculated in accordance with customary cost accounting methods, consistently applied, of the Party performing the work. Final manufacturing costs generally consist of direct material, direct labor and Allocable Overhead directly attributable to the Product at standard. Direct material costs shall include, but not be limited to, the costs incurred in purchasing raw materials and finished goods, including (without limitation) freight, 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, but not be limited to, the cost of employees engaged in direct manufacturing activities who are directly employed in Product manufacturing and packaging for the Territory. Allocable Overhead included in Cost of Goods Sold shall include, but not be limited to, other indirect costs associated with the operating unit(s) manufacturing a Product for the Territory. Such Allocable Overhead shall include, but not be limited to, expenses associated with: warehousing of a Product in the Territory; quality assurance, manufacturing and engineering associated with the operating unit(s) manufacturing a Product for the Territory; and depreciation, repairs and maintenance, insurance and property taxes associated with the plant(s) manufacturing Products for the Territory. Allocable Overhead shall not include costs associated with capacity not incorporated into standard unit costs. Standard unit costs shall exclude costs associated with excess or unused capacity not directly related to Products for the Territory. 3. 45 Costs of Goods Sold shall also include, but not be limited to, (i) manufacturing variances and other attributable costs not in standard (but excluding capacity not incorporated into standard manufacturing unit costs) such as, but not limited to, material price variances, labor hour variances, material usage variances, excess and obsolescence, inventory reserves and batches that do not conform to specification, and (ii) actual Third Party royalty expenses. Third Party royalty expenses shall include, but not be limited to, royalties or other compensation payable to a Third Party possessing or having a license under patents and/or other technology rights relating to the manufacture, sale, use, offer for sale or import of a Product for the Territory. "RESEARCH AND DEVELOPMENT EXPENSES" shall mean the expenses incurred by a Party or for its account that are attributable to the Research or Development of a Research Lead, Development Candidate or Product for the Territory, calculated on a fully burdened basis (i.e., including Allocable Overhead specifically attributable thereto). Without limiting the generality of the foregoing, "Research and Development Expenses" shall mean amounts paid by a Party to Third Parties involved in the Research or Development of a Research Lead, Development Candidate or Product for the Territory, and all internal costs (calculated on a full-time equivalent basis) incurred by a Party in connection with the Research or Development of a Research Lead, Development Candidate or Product for the Territory. Research and Development Expenses shall include, but are not limited to, the following costs incurred for the Research or Development of a Research Lead, Development Candidate or Product for the Territory: the costs of modifying and optimizing a prospective Research Lead, Development Candidate or Product, including its chemical structure and formulation, to achieve product development goals regarding efficacy, safety, dosing and route of administration; the cost of studies on the toxicological, pharmacokinetic, metabolic or clinical aspects of a prospective Product conducted internally or by individual investigators or consultants necessary or desirable for the purpose of obtaining and/or maintaining Regulatory Approval of a Product in a country of the Territory; costs (and related fees) for preparing, submitting, reviewing or developing data or information for the purpose of submission to a governmental authority to obtain and/or maintain Regulatory Approval of a Product in a country of the Territory; and manufacturing process development and scale-up for a Product in bulk and finished form for the Territory for purposes of conducting preclinical and clinical studies necessary to obtain and/or maintain Regulatory Approval of Products in a country of the Territory. In addition, Research and Development Expenses shall include, but are not limited to, the following development costs incurred by the Parties in support of or for extension of the applicable Product in the Territory after the First Commercial Sale: Phase IV clinical trials; ongoing product development (e.g., new formulations and routes of administration); ongoing product support; ongoing medical affairs; and fees and expenses of outside consultants and counsel in respect of regulatory affairs. "SALES AND MARKETING EXPENSES" shall mean the costs which are incurred by a Party or for its account attributable to the distribution, sale, promotion and marketing of a Product in the Territory, calculated on a fully burdened basis (i.e., including Allocable Overhead specifically attributable thereto). Sales and Marketing Expenses shall mean the sum of Selling Expenses, Marketing Management, Market and Consumer Research, Advertising, Trade Promotion, Consumer Promotion, Education Expenses and Freight and Transportation-Out, each of which is specified below. The costs of activities which promote a Party's business as a whole without 4. 46 being product specific (such as corporate image advertising) are specifically excluded from Sales and Marketing Expenses. To the extent multiple products are involved and some of such products are not Products, then such allowances shall be allocated on a pro rata basis based upon net sales of each respective product by such operating unit during the most recent quarter. "ADVERTISING" shall include, but not be limited to, all media costs associated with Product advertising in the Territory as follows: production expense/artwork including set up; design and art work for an advertisement; the cost of securing print space, air time, etc. in newspapers, magazines, trade journals, television, radio, billboards, etc. "CONSUMER PROMOTION" shall include, but not be limited to, the expenses associated with programs to promote a Product in the Territory directly to the prescriber or end user. This category shall include, but not be limited to, expenses associated with promoting products directly to the professional community such as professional samples, professional literature, promotional material costs, patient aids and detailing aids. To the extent multiple products are involved and some of such products are not the applicable Product, then such allowances shall be allocated on a pro rata basis based upon net sales of each respective product by such operating unit during the most recent quarter. "EDUCATION EXPENSES" shall include, but not be limited to, expenses associated with professional education with respect to a Product in the Territory through any means not covered above, including, but not be limited to, articles appearing in journals, newspapers, magazines or other media; seminars, scientific exhibits, and conventions; and symposia, advisory boards and opinion leader development activities. "FREIGHT AND TRANSPORTATION-OUT" shall include (to the extent not already recovered in the calculation of Net Sales), but not be limited to, the portion of distribution costs relating to moving Product goods in the Territory from a warehouse to the customer as follows: outbound transportation costs; costs of moving goods from a manufacturing point to a warehouse at another location from which it is ultimately to be distributed to a customer; the costs of the traffic department where there is a separate department that has responsibility for administration of freight costs. "MARKET AND CONSUMER RESEARCH" shall include, but not be limited to, compensation and departmental expenses for market and consumer research personnel and payments to Third Parties related to conducting and monitoring professional and consumer appraisals of existing, new or proposed Products in the Territory, such as market share services (e.g., IMS data), special research testing and focus groups. "MARKETING MANAGEMENT" shall include, but not be limited to, product management and sales promotion management compensation and departmental expenses. This shall include, but not be limited to, costs associated with developing overall sales and marketing strategies (e.g., product line or customer segment), as well as planning and programs for Products in the Territory. In addition, payments to Third Parties in connection with trademark selection, filing, prosecution and enforcement in the Territory shall be included in this category. 5. 47 "SELLING EXPENSES" shall include, but not be limited to, the following costs directly associated with the efforts of field sales representatives with respect to Products in the Territory: field sales force; field sales offices; home offices; staffs directly involved in the management of and the performance of the selling functions; and payments to Third Parties under contract sales and marketing agreements. The costs of detailing sales calls shall be allocated on a weighted average basis based on the proportionate time and effort given to the detailing of Products versus drug products other than a Product at an accounting charge rate consistently applied within and across a Party's or a Third Party's operating units and which is no less favorable than the internal charge rate used by such Party or such Third Party for its own internal cost accounting purposes for drug products other than the Product (excluding internal profit margins and markups). "TRADE PROMOTION" shall include, but not be limited to, the allowances given to retailers, brokers, distributors, hospital buying groups, etc. for purchasing, promoting, and distribution of Products in the Territory. This shall include, but not be limited to, purchasing, advertising, new distribution, and display allowances as well as free goods, wholesale allowances and reasonable field sales samples. "GENERAL AND ADMINISTRATIVE EXPENSES" shall mean a Party's customary allocation, based on direct project headcount or other generally accepted activity-based accounting methods, of the costs of the following corporate general and administrative functions of such Party or any of its operating units incurred to support or facilitate the development, manufacturing, marketing or selling of Research Leads, Development Candidates or Products in the Territory: finance and accounting; purchasing and receiving; management information systems; facilities; human resources; executive management; and legal, patent and trademark. Such costs include, but not be limited to, the costs of employees performing such functions, the direct costs of supporting such individuals in the performance of their jobs (e.g., travel, floor space, computers and other supplies and telephones) and the actual cost of outside services (e.g., consulting and audit services). General and administrative expenses of a Party or operating unit that are incurred in the Research, Development, manufacturing, marketing or selling of a Research Lead, Development Candidate or Product in Japan shall be excluded from General and Administrative Expenses. In view of the manner in which General and Administrative Expenses are calculated, administration expenses shall be excluded from the definition of each of the other cost items that make up Allowable Costs and Expenses and Costs of Goods Sold. Notwithstanding any other provision of this Agreement, commencing as of the first (1st ) anniversary of the First Commercial Sale of a Product, total General and Administrative Expenses shall not exceed [***] percent ([***]%) of Net Sales of such Product in the Territory in any quarter, except as otherwise agreed in writing by the CMC. "NET INTEREST INCOME" shall mean interest income less interest expense and adjusted for realized gains and losses from the sale of investments. "NET SALES OF PRODUCTS" shall have the meaning provided in Section 1.23 of the Agreement. 6. *** Confidential Treatment Requested 48 "OTHER NON-OPERATING AND EXTRAORDINARY GAINS (LOSSES)" shall mean gains or losses incurred either from secondary or auxiliary activities of the Joint Venture, outside the ordinary and primary course of business, or unusual and infrequent gains and losses of material amounts. "PROFIT OR LOSS" shall have the meaning ascribed to it in paragraph 1 above. "REVENUES" shall mean the amounts received from the Third Party pursuant to Section 4.7 of the Agreement. 4. FOREIGN EXCHANGE The functional currency for accounting for Profit or Loss shall be U.S. Dollars. The statement of Profit or Loss shall be translated into U.S. Dollars using, for each currency, the selling rate of exchange for the currency of the country from which the royalties are payable as published by The Wall Street Journal, Eastern U.S. Edition, for the last business day of the quarterly period for which a payment due. 5. REPORTING OF ALLOWABLE COSTS AND EXPENSES AND COSTS OF GOODS SOLD To the extent that, consistent with the applicable Research and Development Plan or Commercialization Plan, a Party or a Third Party with whom such Party has contracted incurs Allowable Costs and Expenses and Costs of Goods Sold, such Party shall promptly provide the RDMC or CMC, as applicable, with a reasonably detailed written invoice for such Allowable Costs and Expenses and Costs of Goods Sold, and such Allowable Costs and Expenses and Costs of Goods Sold shall be accounted for in the fiscal quarter in which such invoice is received by the RDMC or CMC, as applicable. 6. AUDITS Each Party shall have the right to request that a mutually agreed independent public accounting firm performs an audit of the RDMC's or CMC's, as applicable, books of accounts for the sole purpose of verifying compliance with this Exhibit B. Such audits shall be conducted at the expense of the Party requesting the audit; provided, however, that if the audit results in an amount payable to the auditing Party that exceeds the lesser of (i) [***] percent ([***]%) of Losses or Profits or (ii) [***] in any quarter, the reasonable cost of the audit shall be borne by the other Party. Any disputes with regard to the foregoing shall be resolved in accordance with Article 12 of the Agreement. Audit results shall be shared with both Parties. Audits are limited to the same time periods as provided in Section 5.7 of the Agreement. Each Party shall also have the right to request that an independent public accounting firm of national standing reasonably acceptable to the other Party performs an audit of the other Party's books of accounts for the sole purpose of verifying invoices for the audited Party's Allowable Costs and Expenses and Costs of Goods Sold submitted to the RDMC or CMC hereunder. Such audits shall be conducted at the expense of the auditing Party; provided, however, that if the audit results in an amount payable to the auditing Party that exceeds [***] percent ([***]%) of the audited Party's Allowable Costs and Expenses and Costs of Goods Sold in any period, the reasonable cost of the audit shall be borne by the audited Party. Audit results 7. *** Confidential Treatment Requested 49 shall be shared with both Parties. Audits are limited to the same time periods as provided in Section 5.7 of the Agreement. 7. PAYMENT OF EXPENSES AND COSTS BY THE PARTIES There shall be no pooling or deposit of funds significantly prior to incurring Allowable Costs and Expenses and Costs of Goods Sold hereunder. Instead, Nippon Kayaku and Signal shall promptly pay their respective share of fixed Allowable Costs and Expenses and Costs of Goods Sold (e.g., project labor and Allocable Overhead) on a monthly basis, payable in advance. Each of Nippon Kayaku and Signal shall pay in advance fifty percent (50%) of all deposits required by suppliers prior to the start of services under Third Party contracts. Nippon Kayaku and Signal shall pay their respective share of variable Allowable Costs and Expenses and Costs of Goods Sold (e.g., costs and expenses of preclinical and clinical studies and drug materials) within thirty (30) days of receipt of the invoice accompanying the applicable monthly or quarterly financial statement of the Joint Venture. 8. SHARING OF PROFITS AND LOSSES As provided in the Agreement, the Parties share equally (50%/50%) the Profit or Loss for each quarterly period, subject to the provisions of Section 4.6 of the Agreement. 9. START OF OPERATIONS Operation of the Joint Venture shall be deemed to have commenced on the Effective Date of the Agreement. 10. EXPENSES PERTAINING TO SALES OF A PRODUCT IN THE TERRITORY AND OUTSIDE THE TERRITORY (a) In the event an expense is of benefit or utility to the Research, Development or commercialization of a Research Lead, Development Candidate or Product in the Territory, then 100% of such expense shall be charged to the Joint Venture. (b) In the event an expense is of sole benefit or utility to the Research, Development or commercialization of a Research Lead, Development Candidate or Product in Japan, then 100% of such expense shall be borne by Nippon Kayaku and shall not be charged to the Joint Venture. 11. CAPITAL INVESTMENTS Notwithstanding anything to the contrary in the Agreement or herein, any capital investment required to be made (consistent with the applicable Research and Development Plan or Commercialization Plan) in connection with a Research Lead, Development Candidate or Product (such as a capital investment in a manufacturing facility) are to be borne by the Party making such capital investment initially and recouped through an appropriate depreciation charge to the Joint Venture. 8. 50 SCHEDULE B-1 PROFIT AND LOSS FINANCIAL STATEMENT FORMAT Nippon Kayaku Signal Total ------ ------ ----- REVENUES - -------- Revenues: Royalty Payments Non-Royalty Payments Total Revenues Gross Product Sales Less: Trade, Cash & Quantity Credits/Discounts Allowance for Returns/Rejections Handling Fees/Restocking Expenses Freight & Transportation-In Taxes & Duties Governmental Chargebacks/Rebates Total Net Sales of Product Total Revenues Cost of Goods Sold: Standard Direct Material Cost Standard Direct Labor Costs Manufacturing Variances Third Party Royalty Expenses Allocable Overhead Total Cost of Goods Sold Gross Profit ALLOWABLE COSTS AND EXPENSES - ---------------------------- Research and Development Expenses: Product Development Pre-Clinical Pharmacology & Toxicology Clinical Trials Regulatory Affairs Other Contract R&D Allocable Overhead Total Research and Development Expenses Sales and Marketing Expenses: Selling Expenses Marketing Management Market & Consumer Research Advertising Trade Promotion Consumer Promotion Education Freight & Transportation-Out Allocable Overhead Total Sales and Marketing Expenses
1. 51 Nippon Kayaku Signal Total ------ ------ ----- General and Administrative Expenses: Finance & Accounting Purchasing & Receiving Management Information Systems Facilities Human Resources Executive Management Legal & Patent Total General and Administrative Expenses Operating Profit (Loss) Interest Income (Expense)-Net Other Non-Operating and Extraordinary Gains (Losses) Net (with attendant schedule) Profit (Loss) Adjustments for Non-Cash Items (with attendant schedule) Adjustments per paragraph 10(a) Balancing Receipt (Payment) per paragraph 7
2. 52 SCHEDULE I NIPPON KAYAKU PATENTS Nippon Kayaku Patents on NK5805 or its derivatives
Country Appln. No. Filing Date Patent No. [***] [***] [***] [***] [***]
1. *** Confidential Treatment Requested 53
[***] [***] [***] [***] [***]
2. *** Confidential Treatment Requested 54
[***] [***] [***] [***] [***]
[***] 3. *** Confidential Treatment Requested 55 SCHEDULE II SIGNAL PATENTS [***] 1. *** Confidential Treatment Requested 56 [***] 2. *** Confidential Treatment Requested 57 SCHEDULE III COLLABORATION PATENTS [***] 1. *** Confidential Treatment Requested 58 SCHEDULE IV INITIAL RDMC MEMBERS Initial Signal Representatives: David Anderson, Ph.D. Anthony Manning, Ph.D. Shripad Bhagwat, Ph.D. Initial Nippon Kayaku Representatives: Kunio Nishii, Ph.D. Yuh-ichiro Ichikawa, Ph.D. Takaaki Okuma, Ph.D. 1. EX-10.50 6 SECOND AMENDMENT AGREEMENT DATED 2/18/00 1 ***Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80, 200.83 and 230.406 EXHIBIT 10.50 SECOND AMENDMENT TO THE RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT THIS SECOND AMENDMENT TO THE RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT (the "Second Amendment") by and between SIGNAL PHARMACEUTICALS, INC., a California corporation ("Signal"), and ARES TRADING S.A., a Swiss company ("Ares"), dated November 25, 1997, as amended (the "Agreement"), is entered into by and between Signal and Ares as of February 18, 2000 (defined terms used but not defined herein shall have the meaning set forth in the Agreement). RECITALS WHEREAS, Signal and Ares wish to amend certain terms of the Agreement to allow for greater flexibility in the conduct and sponsorship by Ares of the Research; NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth, the Parties hereto agree as follows: 1. The first sentence of Section 2.10 of the Agreement is hereby deleted in its entirety and replaced with the following new sentence: "Immediately following the expiration of the Initial Term, subject to termination of the Agreement pursuant to Article VI, the Research shall continue for successive twelve-month terms (each and "Additional Term") during the Subsequent Term, provided, however, that Ares may terminate the Research at the end of any Additional Term by giving at least three (3) months prior written notice to Signal of its intention to do so." 2. The last two sentences of Section 2.11 of the Agreement are hereby deleted in their entirety and replaced with the following new sentences: "As full compensation for Signal's, its agents', consultants', and academic collaborators' performance of the Research during each Additional Term, Ares shall pay, or cause to be paid, to Signal [***] United States Dollars (U.S. $[***]) during each Additional Term, provided, however, that should the Research continue during any given Additional Term at a level of resource allocation which by mutual consent of the Parties is inferior to that described in Section 2.04 of the Agreement, then such [***] United States Dollars (U.S. $[***]) payment shall be reduced on a proportional basis to reflect the diminution of the resources allocated by Signal to the Research. One quarter of the amount due to Signal during each Additional Term pursuant to this Section 2.11 shall be due and payable at the start of such 1. ***Confidential Treatment Requested 2 Additional Term and thereafter at three-month intervals during such Additional Term." 3. Except as specifically amended by this Second Amendment, the terms and conditions of the Agreement shall remain unchanged and in full force and effect. 4. The form, execution, validity, construction and affect of this Second Amendment 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. 5. The Second Amendment 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 Second Amendment. IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Second Amendment as of the day and year first written above. SIGNAL PHARMACEUTICALS, INC. ARES TRADING S.A. By: /s/ DOUGLAS E. RICHARDS By: /s/ [SIGNATURE ILLEGIBLE] ------------------------------- ------------------------------- Name: Douglas E. Richards Name: [name illegible] ----------------------------- ----------------------------- Title: V.P., Corporate Development Title: General Counsel, CFO ---------------------------- ---------------------------- 2. EX-23.1 7 CONSENT OF EXPERTS AND COUNSEL 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and "Selected Financial Data" and to the use of our report dated February 4, 2000 (except Note 7, as to which the date is , 2000), in the Registration Statement (Form S-1) and related Prospectus of Signal Pharmaceuticals, Inc. for the registration of shares of its common stock. ERNST & YOUNG LLP San Diego, California The foregoing consent is in the form that will be signed upon the completion of the restatement of capital accounts described in Note 7 to the financial statements. /s/ ERNST & YOUNG LLP San Diego, California March 21, 2000 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 6,613,834 2,806,093 108,959 0 0 9,956,280 8,951,211 (5,546,064) 14,538,865 5,996,086 0 0 12,246 1,847 5,968,469 14,538,865 0 11,748,325 0 19,758,602 0 0 154,529 (7,855,748) 0 (8,674,235) 0 0 0 (8,674,235) (5.29) (5.29)
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