-----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, QTGfGes0SOnlrDoVNZBn+ONuUAE4L5GQVOiUV71XtnlieLPaqiJkwZOQS/VVqnad Gko6m/tY0WtmScusS7ttkQ== /in/edgar/work/0000950144-00-008722/0000950144-00-008722.txt : 20000714 0000950144-00-008722.hdr.sgml : 20000714 ACCESSION NUMBER: 0000950144-00-008722 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20000713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATHEROGENICS INC CENTRAL INDEX KEY: 0001107601 STANDARD INDUSTRIAL CLASSIFICATION: [2834 ] IRS NUMBER: 582108232 STATE OF INCORPORATION: GA FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-31140 FILM NUMBER: 672592 BUSINESS ADDRESS: STREET 1: 8995 WESTSIDE PARKWAY CITY: ALPHARETTA STATE: GA ZIP: 30004 BUSINESS PHONE: 6783362500 S-1/A 1 s-1a.txt ATHEROGENICS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 2000 REGISTRATION NO. 333-31140 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------------- ATHEROGENICS, INC. (Exact name of Registrant as specified in its charter) GEORGIA 2834 58-2108232 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
8995 WESTSIDE PARKWAY ALPHARETTA, GEORGIA 30004 (678) 336-2500 (Address, including zip code, and telephone number,including area code, of Registrant's principal executive offices) --------------------------- RUSSELL M. MEDFORD, M.D., PH.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER ATHEROGENICS, INC. 8995 WESTSIDE PARKWAY ALPHARETTA, GEORGIA 30004 (678) 336-2500 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------------- Copies to: LEONARD A. SILVERSTEIN, ESQ. ALAN L. JAKIMO, ESQ. LONG ALDRIDGE & NORMAN LLP BROWN & WOOD LLP SUNTRUST PLAZA, SUITE 5300 ONE WORLD TRADE CENTER, 58TH FLOOR 303 PEACHTREE STREET NEW YORK, NEW YORK 10048 ATLANTA, GEORGIA 30308-3201 (212) 839-5300 (404) 527-4000
--------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO 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 THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 13, 2000 PROSPECTUS 6,000,000 SHARES (ATHEROGENICS LOGO) COMMON STOCK This is an initial public offering of common stock by AtheroGenics, Inc. AtheroGenics is selling 6,000,000 shares of common stock. The estimated initial public offering price will be between $11.00 and $13.00 per share. ------------------------ Prior to this offering, there has been no public market for our common stock. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol AGIX. ------------------------
PER SHARE TOTAL ----------- ----------- Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to AtheroGenics, before expenses................... $ $
AtheroGenics has granted the underwriters the right to purchase up to 900,000 additional shares of common stock to cover over-allotments. ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CHASE H&Q ADAMS, HARKNESS & HILL, INC. A.G. EDWARDS & SONS, INC. , 2000 3 Inside Cover Illustration: This four-color image/copy will appear on the inside front cover of the prospectus. The image/copy will depict the inflammatory diseases which AtheroGenics' v-protectant technology targets in the context of the organs of the body affected by these diseases. The image will include a full human body with the following organ (disease) call-outs: - Lungs (Asthma) - Kidneys (Solid organ transplant rejection) - Heart (Restenosis) - Carotid artery (Atherosclerosis) - Knee joints (Rheumatoid Arthritis) 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Risk Factors................................................ 8 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.................................................. 42 Certain Transactions........................................ 50 Principal Shareholders...................................... 52 Description of Capital Stock................................ 55 Shares Eligible for Future Sale............................. 58 Underwriting................................................ 60 Legal Matters............................................... 61 Experts..................................................... 62 Where You Can Find Additional Information................... 62 Financial Statements........................................ F-1
2 5 PROSPECTUS SUMMARY The following is only a summary. You should carefully read the more detailed information contained in this prospectus, including our financial statements and related notes included in this prospectus. Our business involves significant risks. You should carefully consider the information under the heading "Risk Factors" beginning on page 8. Unless otherwise indicated, all information in this prospectus assumes (1) the conversion of all outstanding shares of our preferred stock into 13,859,102 shares of common stock immediately prior to the closing of this offering and (2) no exercise by the underwriters of the over-allotment option. ATHEROGENICS AtheroGenics is an emerging pharmaceutical company focused on the discovery, development and commercialization of novel drugs for the treatment of chronic inflammatory diseases, such as atherosclerosis, asthma and arthritis. We designed our lead product candidate, AGI-1067, as an oral drug to benefit patients with coronary artery disease, which is atherosclerosis of the blood vessels of the heart. Atherosclerosis is a common disease that results from inflammation and the buildup of plaque in arterial blood vessel walls. In October 1999 we entered into a worldwide exclusive license agreement with Schering-Plough Corporation to develop and commercialize AGI-1067. We are currently testing AGI-1067 in a Phase II clinical trial for the prevention and treatment of restenosis, the reoccurrence of narrowing of the coronary arteries following angioplasty in patients with coronary artery disease. Schering-Plough has extensive experience in developing, manufacturing and commercializing pharmaceutical products. Schering-Plough's total licensing and development and sales milestone payments to us for this initial indication, excluding royalties and development costs, could reach $189 million. We have combined our basic research in the role of blood vessels in inflammation with applied research techniques into an integrated process to discover new drugs for treating diseases of chronic inflammation. We call this technology our vascular protectant or v-protectant platform. Our first v-protectant drug candidates from this platform technology block the production of VCAM-1, a protein that binds to white blood cells that accumulate along the walls of blood vessels and prolong inflammation. Inflammation normally protects the body from infection, injury and disease, but chronic inflammation often causes damage in a misdirected attempt at repair and healing. Diseases of chronic inflammation that we are targeting with our v-protectants include: - atherosclerosis, including coronary artery disease, which affects more than 12 million people in the United States and is the leading cause of death in the United States; physicians perform more than one million angioplasties annually worldwide; - asthma, which affects more than 17 million people in the United States; its prevalence and economic impact are both increasing; - cystic fibrosis, which affects 36,000 children and adults in the United States, of whom 25% are hospitalized at least once annually; - rheumatoid arthritis, which affects 2.1 million people in the United States and is more common in women than men; the economic cost of rheumatoid arthritis and related diseases exceeds $65 billion annually in the United States; and - solid organ transplant rejection, which affects more than 200,000 people in the United States and is a major factor contributing to organ shortage. Our v-protectants are drugs that block a class of signals inside of cells called oxidant signals. Oxidant signals inside of the cells that line blood vessels lead to the production of selected proteins including VCAM-1. These proteins attract white blood cells to the site of chronic inflammation. White blood cells destroy infective agents and promote healing but can also amplify chronic inflammation. Diseases marked by chronic inflammation are the therapeutic targets of several classes of currently available drugs. Some drugs are directed toward reduction of risk factors for the underlying disease, such as high blood 3 6 cholesterol in atherosclerosis. Other drugs provide symptomatic relief. Among these agents are anti-inflammatory drugs and drugs that decrease the body's natural defenses. These drugs, called immunosuppressants, decrease chronic inflammation, but increase the risk of infection. None of these drugs treats the underlying cause of chronic inflammation. In contrast, we believe that our v-protectants can suppress chronic inflammation by blocking production of VCAM-1 without undermining the body's ability to protect itself against infection. AGI-1067 is our v-protectant candidate that is most advanced in clinical development. We are currently managing a Phase II clinical trial, CART-1, to assess in approximately 300 patients the safety and effectiveness of AGI-1067 for the treatment of post-angioplasty restenosis. We recruited our first CART-1 patient in September 1999 and we expect to complete this clinical trial in the first half of 2001. Our Phase II clinical trial program follows our successful completion of seven Phase I clinical trials comprising more than 150 men and women. We have identified other potential v-protectant product candidates to treat asthma, cystic fibrosis, rheumatoid arthritis and solid organ transplant rejection. We are evaluating these v-protectant product candidates to choose lead candidates for clinical development into commercial products. We plan to develop these v-protectant lead product candidates rapidly and may seek regulatory fast track status to expedite development and commercialization. We will continue to expand our v-protectant technology platform with other scientific programs in inflammation using functional genomics to identify novel therapeutic gene targets. Functional genomics is the process by which one uses scientific models and techniques to discover and modify genes, measure the consequences of the modifications, and reliably determine the function of those genes. We base our competitive strategy on our ability to integrate the following strengths: - we have pioneered basic discoveries in vascular cell biology that form the foundation of our v-protectant technology platform; - our scientific expertise coupled with our clinical and regulatory expertise has enabled us to be the first company to conduct Phase I and II clinical trials of an orally-administered, small molecule v-protectant; - we expect that our exclusive license agreement with Schering-Plough will allow us to sustain and extend our competitive advantage; and - we believe that our scientific, development and licensing expertise strongly positions us to acquire promising technologies and products discovered outside AtheroGenics. We believe that these competitive advantages are important to the success of our business strategy, which is to: - develop AGI-1067 for commercialization in collaboration with Schering-Plough; - extend our v-protectant technology platform into additional therapeutic areas that address unmet medical needs; - create value rapidly through innovative drug discovery coupled with innovative development to produce useful drugs; - expand our product candidate portfolio by acquiring complementary product candidates and technologies; and - commercialize our products based upon the size and other relevant characteristics of the patient and physician populations. --------------------- We were incorporated in the State of Georgia in November 1993. Our executive offices are located at 8995 Westside Parkway, Alpharetta, Georgia 30004. Our telephone number at that location is (678) 336-2500 and our Internet address is www.atherogenics.com. We do not intend for information contained on AtheroGenics' website to constitute part of this prospectus. 4 7 THE OFFERING Common stock AtheroGenics is offering... 6,000,000 shares Common stock to be outstanding after this offering........................... 22,820,585 shares Underwriters' over-allotment option..... 900,000 shares Use of proceeds......................... We intend to use the net proceeds for research and development activities, including clinical trials, process development and manufacturing support, potential licensing and acquisition opportunities and for general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................................. AGIX The number of shares of our common stock to be outstanding immediately after this offering is based on the number of shares outstanding at June 27, 2000. This number does not take into account: - 2,580,725 shares of our common stock issuable upon exercise of options outstanding under our stock option plans at June 27, 2000 with a weighted average exercise price of $0.50 per share; - 1,051,238 shares of our common stock available for future grant or issuance under our benefit plans; and - 250,290 shares of our common stock issuable upon exercise of outstanding warrants at June 27, 2000 with an average exercise price of $3.40 per share. 5 8 SUMMARY FINANCIAL DATA The following table contains a summary of our statement of operations data. The pro forma net loss per share data below gives effect to (1) the conversion of each outstanding share of preferred stock into one share of common stock immediately prior to the closing of this offering and (2) the pro forma basis of presentation described in "Selected Financial Data" on page 20. See Note 12 to Financial Statements.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------------------------------- ------------------------- 1995 1996 1997 1998 1999 1999 2000 ----------- ----------- ----------- ------------ ------------ ----------- ----------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues: License fees................ $ -- $ -- $ -- $ -- $ 555,556 $ -- $ 833,333 Research and development.... -- -- -- -- 791,653 -- 1,257,947 ----------- ----------- ----------- ------------ ------------ ----------- ----------- Total revenues........ -- -- -- -- 1,347,209 -- 2,091,280 Operating expenses: Research and development, exclusive of $23,649 and $360,751 for the year ended December 31, 1999 and the three months ended March 31, 2000, respectively, reported below as amortization of deferred stock compensation.............. 780,159 1,776,891 4,656,478 8,954,904 9,041,345 2,200,960 2,885,640 General and administrative, exclusive of $61,831 and $1,207,732 for the year ended December 31, 1999 and the three months ended March 31, 2000, respectively, reported below as amortization of deferred stock compensation.............. 348,107 548,766 988,230 1,573,807 2,593,017 427,132 786,362 Amortization of deferred stock compensation........ -- -- -- -- 85,480 -- 1,568,483 ----------- ----------- ----------- ------------ ------------ ----------- ----------- Total operating expenses............ 1,128,266 2,325,657 5,644,708 10,528,711 11,719,842 2,628,092 5,240,485 ----------- ----------- ----------- ------------ ------------ ----------- ----------- Operating loss................ (1,128,266) (2,325,657) (5,644,708) (10,528,711) (10,372,633) (2,628,092) (3,149,205) Net interest income (expense)................... 21,547 277,563 485,392 (205,130) (60,617) (122,243) 157,767 ----------- ----------- ----------- ------------ ------------ ----------- ----------- Net loss...................... $(1,106,719) $(2,048,094) $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438) =========== =========== =========== ============ ============ =========== =========== Basic and diluted net loss per share....................... $ (0.72) $ (1.10) $ (2.25) $ (4.45) $ (4.27) $ (1.14) $ (1.13) Shares used in computing basic and diluted net loss per share....................... 1,543,064 1,869,246 2,292,966 2,409,948 2,443,237 2,412,125 2,635,816 Pro forma basic and diluted net loss per share.......... $ (0.82) $ (0.18) Shares used in computing pro forma basic and diluted net loss per share.............. 12,712,029 16,332,556
6 9 The following table contains a summary of our balance sheet at March 31, 2000: - on an actual basis; - on a pro forma basis to reflect the conversion of all outstanding shares of preferred stock into 13,859,102 shares of common stock effective immediately prior to the closing of this offering; and - on a pro forma as adjusted basis to reflect the conversion of all outstanding shares of preferred stock into 13,859,102 shares of common stock effective immediately prior to the closing of this offering and the sale of 6,000,000 shares of common stock offered hereby at an assumed initial public offering price per share of $12.00.
MARCH 31, 2000 ------------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------------ ------------ ------------ (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents............................ $ 10,010,491 $ 10,010,491 $ 75,010,491 Working capital...................................... 7,804,078 7,804,078 72,804,078 Total assets......................................... 14,416,698 14,416,698 79,416,698 Long-term obligations, less current portion.......... 164,811 164,811 164,811 Redeemable convertible preferred stock............... 39,604,288 -- -- Common stock......................................... 11,237,117 50,841,405 115,841,405 Deferred compensation................................ (9,186,237) (9,186,237) (9,186,237) Accumulated deficit.................................. (32,680,320) (32,680,320) (32,680,320) Total common shareholders' (deficit) equity.......... (30,629,440) 9,200,561 74,200,561
7 10 RISK FACTORS You should carefully consider the risks described below before making an investment decision. You should also refer to the other information in this prospectus, including our financial statements and the related notes. The risks and uncertainties we describe below are those that we currently believe may materially affect our company. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect our company. RISKS RELATED TO OUR COMPANY AND BUSINESS IF AGI-1067 FAILS IN CLINICAL TRIALS, WE MAY NOT BE ABLE TO GENERATE FUTURE REVENUES OR BECOME PROFITABLE. AGI-1067 is our lead compound and the subject of an exclusive licensing agreement with Schering-Plough. This compound would fail in clinical trials if we show it is ineffective or causes unacceptable side effects in the patients we treated. WE HAVE A HISTORY OF OPERATING LOSSES, AND WE MAY NOT GENERATE REVENUE OR ACHIEVE PROFITABILITY IN THE FUTURE. Our ability to generate revenue and achieve profitability depends on our ability, alone or with collaborators, to complete successfully the development of our product candidates, conduct pre-clinical tests in animals and clinical trials in human beings, obtain the necessary regulatory approvals, and manufacture and market the resulting drugs. We have experienced operating losses since we began operations in 1994. As of March 31, 2000, we had an accumulated deficit of approximately $32.7 million. We expect to incur additional operating losses over the next several years and expect cumulative losses to increase substantially as our research and development, pre-clinical, clinical, manufacturing and marketing efforts expand. Except for an initial licensing fee and research and development revenue that Schering-Plough paid to us, we have had no significant revenue to date. IF WE DO NOT SUCCESSFULLY DEVELOP OUR OTHER PRODUCT CANDIDATES, WE WILL HAVE LIMITED ABILITY TO GENERATE REVENUE. All of our other programs are in early stages of development, and we face the risks of failure inherent in developing drug products based on new technologies. We do not expect any of our potential product candidates to be commercially available until at least 2004. In addition, our drug discovery efforts may not produce any other proprietary product candidates. WE WILL NOT BE ABLE TO COMMERCIALIZE OUR PRODUCT CANDIDATES IF WE FAIL TO DEMONSTRATE ADEQUATELY THEIR SAFETY AND EFFICACY. We cannot assure you that any product candidate we develop, alone or with others, will prove safe and effective in clinical trials and will meet all of the applicable regulatory requirements needed to receive regulatory approval. We will need to conduct significant research, pre-clinical testing and clinical trials before we can file product approval applications with the U.S. Food and Drug Administration and similar regulatory authorities in other countries. Pre-clinical testing and clinical trials are long, expensive and uncertain processes. It may take us several years to complete our testing, and failure can occur at any stage. The FDA or we may suspend our clinical trials at any time if either of us believes that we are exposing the subjects participating in these trials to unacceptable health risks. The FDA or institutional review boards at the medical institutions and healthcare facilities where we sponsor clinical trials may suspend any trial indefinitely if they find deficiencies in the conduct of these trials. We must conduct clinical trials in accordance with the FDA's Good Clinical Practices. The FDA and these institutional review boards have authority to oversee our clinical trials and the FDA may require large numbers of test subjects. In addition, we must manufacture the product candidates which we use in our clinical trials under the FDA's Good Manufacturing Practices. 8 11 Even if we achieve positive results in early clinical trials, these results do not necessarily predict final results. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after achieving positive results in earlier trials. Negative or inconclusive results or adverse medical events during a clinical trial could cause the FDA or us to terminate a clinical trial or require that we repeat it. Even if the FDA approves a New Drug Application for any of our product candidates, the resulting product may not be accepted in the marketplace. Physicians, patients, payors or the medical community in general may be unwilling to accept, utilize or recommend any of our products. In addition, after approval and use in an increasing number of patients, our product could show side effect profiles that limit their usefulness or require their withdrawal although the drugs did not show the side effect profile in Phase I through Phase III clinical trials. WE MAY EXPERIENCE DELAYS IN OUR CLINICAL TRIALS THAT COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS AND OUR COMMERCIAL PROSPECTS. We do not know whether planned clinical trials will begin on time or whether we will complete any of our clinical trials on schedule or at all. Product development costs to us and our collaborators will increase if we have delays in testing or approvals or if we need to perform more or larger clinical trials than planned. Significant delays may adversely affect our financial results and the commercial prospects for our products, and delay our ability to become profitable. We typically rely on third party clinical investigators at medical institutions and healthcare facilities to conduct our clinical trials and, as a result, we may face additional delaying factors outside our control. BECAUSE WE CANNOT PREDICT WHETHER OR WHEN WE WILL OBTAIN REGULATORY APPROVAL TO COMMERCIALIZE OUR PRODUCT CANDIDATES, WE CANNOT PREDICT THE TIMING OF ANY FUTURE REVENUE FROM THESE PRODUCT CANDIDATES. We cannot assure you that for any product candidate we or our collaborators develop, including AGI-1067, the regulatory agencies will complete their review processes in a timely manner or that we will obtain regulatory approval. Pharmaceutical companies cannot market a drug in the United States or most other countries until they have completed a rigorous and extensive regulatory approval process for the drug. 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. Regulatory approval processes outside the United States include all of the risks associated with the FDA approval process. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. Our failure to comply with applicable FDA or other regulatory requirements including manufacturing, quality control, labeling, safety surveillance, promoting, and reporting may result in criminal prosecution, civil penalties, recall or seizure of our products, total or partial suspension of production or an injunction, as well as other regulatory action against our potential products or us. Discovery of previously unknown problems with a product, supplier, manufacturer or facility may result in restrictions on the sale of our products, including a withdrawal of such products from the market. We intend to seek fast track status for some of our product candidates. If we obtain this status for any of our product candidates, the time required for the FDA to review the Investigational New Drug Application that we submit for that product candidate would be shorter than would otherwise be the case. We cannot assure you that the FDA will grant fast track status to any Investigational New Drug Applications that we may submit or that, if granted, such status will result in faster New Drug Application approval or any approval at all. 9 12 IF SCHERING-PLOUGH DECIDES TO TERMINATE OUR EXCLUSIVE LICENSE AGREEMENT, WE WOULD LOSE ACCESS TO THEIR SUBSTANTIAL DEVELOPMENT, COMMERCIAL AND FINANCIAL RESOURCES, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND COMMERCIALIZE AGI-1067 AND OUR ABILITY TO GENERATE REVENUE. Schering-Plough may terminate our exclusive license agreement for any reason upon 60 days notice. Under our agreement, Schering-Plough will pay all costs related to the worldwide development and commercialization of AGI-1067. Schering-Plough also will pay us significant milestone fees upon attaining development, regulatory and sales objectives. In addition, the agreement provides us with access to their substantial product development, manufacturing and commercialization expertise. If, however, Schering-Plough terminates the agreement, we may not receive a substantial portion of our potential aggregate licensing and milestone payments from Schering-Plough or have access to their resources and expertise. THE RECEIPT AND TIMING OF MILESTONE PAYMENTS FROM SCHERING-PLOUGH IS UNCERTAIN, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR REVENUE AND PROFITABILITY. We have to date received a $5.0 million nonrefundable license fee from Schering-Plough for entering into our license agreement with them. The receipt and timing of the balance of the development and sales milestone payments to us under this agreement is subject to factors relating to the clinical and regulatory development and commercialization of AGI-1067, which generally are the responsibility of Schering-Plough and many of which are beyond our control and the achievement of which we cannot assure. OUR FAILURE TO PROTECT ADEQUATELY OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS OR SECURE RIGHTS TO THIRD PARTY PATENTS COULD MATERIALLY ADVERSELY AFFECT OUR PROPRIETARY POSITION IN THE MARKETPLACE OR PREVENT THE COMMERCIALIZATION OF OUR PRODUCTS. Our patent position, like that of many pharmaceutical companies, is uncertain and involves complex legal and factual questions for which important legal principles are unresolved. We may not develop or obtain rights to products or processes that are patentable. Even if we do obtain patents, they may not adequately protect the technology we own or in-license. In addition, others may challenge, seek to invalidate, infringe or circumvent any patents we own or in-license, and rights we receive under those patents may not provide competitive advantages to us. Our commercial success will depend in part on our ability to manufacture, use, sell and offer to sell our product candidates without infringing patents or other proprietary rights of others. We may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our drug candidates. For example, U.S. patent applications are confidential while pending in the Patent and Trademark Office, and patent offices in non-U.S. countries often publish patent applications for the first time six months or more after filing. Further, we may not be aware of published or granted conflicting patent rights. Any conflicts resulting from patent applications and patents of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection. If others obtain patents with conflicting claims, we may need to obtain licenses to these patents or to develop or obtain alternative technology. We may not be able to obtain any such license on acceptable terms or at all. Any failure to obtain such licenses could delay or prevent us from developing or commercializing our drug candidates, which would adversely affect our business. Litigation or patent interference proceedings may be necessary to enforce any of our patents or other proprietary rights, or to determine the scope and validity or enforceability of the proprietary rights of others. The defense and prosecution of patent and intellectual property claims are both costly and time consuming, even if the outcome is favorable to us. Any adverse outcome could subject us to significant liabilities, require us to license disputed rights from others, or require us to cease selling our future products. Our commercial success will also depend on our ability to manufacture, use, sell and offer to sell our product candidates without breaching our agreements with our patent licensees. We have obtained exclusive licenses to technologies from Emory University, covering aspects of our v-protectant technology, and The Regents of the University of California, covering aspects of our diagnostic technology. Our 10 13 exclusive license with Emory University requires us to take steps to commercialize the licensed technology in a timely manner. If we fail to meet these obligations, Emory University can convert our exclusive license to a non-exclusive license, can grant others non-exclusive rights in the licensed technology or can require us to sublicense aspects of the licensed technology. Our license agreement with The Regents of the University of California also includes a requirement that we develop the licensed technology within certain time limits. If we fail to meet these time limits, they can terminate our license. Further, The Regents of University of California are primarily responsible for patent prosecution of the technology we license from them, and we are required to reimburse them for the costs they incur in performing these activities. As a result, we do not have the ability to control these activities. We also rely upon trade secrets, proprietary know-how and technological advances which we seek to protect through agreements with our collaborators, employees and consultants. These persons and entities could breach our agreements, for which we may not have adequate remedies. In addition, others could become aware of our trade secrets or proprietary know-how through independent discovery or otherwise. IF OUR COMPETITORS DEVELOP AND MARKET ANTI-INFLAMMATORY PRODUCTS THAT ARE MORE EFFECTIVE, HAVE FEWER SIDE EFFECTS OR ARE LESS EXPENSIVE THAN OUR CURRENT OR FUTURE PRODUCT CANDIDATES, WE MAY HAVE LIMITED COMMERCIAL OPPORTUNITIES. Our competitors include large pharmaceutical companies and more established biotechnology companies. These competitors have significant resources and expertise in research and development, manufacturing, testing, obtaining regulatory approvals and marketing. Potential competitors also include academic institutions, government agencies, and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization. It is possible that any of these competitors could develop technologies or products that would render our technologies or product candidates obsolete or non-competitive. THIRD PARTIES' FAILURE TO SYNTHESIZE AND MANUFACTURE OUR PRODUCT CANDIDATES COULD DELAY OUR CLINICAL TRIALS OR HINDER OUR COMMERCIALIZATION PROSPECTS. We currently have no manufacturing facilities to synthesize or manufacture our product candidates, nor do we intend to develop these capabilities in the near future. Our reliance on third parties for these services exposes us to several risks that could delay our clinical trials or hinder our commercialization prospects. These risks include the following: - A finding that a third party did not comply with applicable governmental regulations. Manufacturers of pharmaceutical products are subject to continual review and periodic inspections by regulatory agencies. Failure of one of our third party manufacturers to comply with applicable regulatory requirements, whether or not related to our product candidates, could result in sanctions against our potential products, including recall or seizure, total or partial suspension of production or injunction. - A failure to synthesize and manufacture our product candidates in accordance with our product specifications. For example, a starting material used in the manufacturing process of AGI-1067 is probucol, which physicians previously prescribed as a cholesterol-lowering agent but which its manufacturer withdrew from the market for efficacy reasons. The occurrence of a rare side effect with chronic dosing of probucol requires that we maintain a very low maximal amount of probucol in the manufacture of AGI-1067. - A failure to deliver product candidates in sufficient quantities or in a timely manner. Any failure by our third party manufacturers to supply our requirements for clinical trial materials or supply these materials in a timely manner could jeopardize the scheduled initiation or completion of these clinical trials and could have a material adverse effect on our ability to generate revenue. 11 14 In addition, our continued dependence on third parties for the synthesis and manufacture of our future products may subject us to costs outside of our control, which could adversely affect our future profitability and our ability to commercialize products on a timely and competitive basis. IF WE ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL NOT BE ABLE TO COMMERCIALIZE OUR FUTURE PRODUCT CANDIDATES. We currently have no sales, marketing or distribution capabilities. Therefore, in order to commercialize our product candidates, we must either develop our own sales, marketing and distribution capabilities or collaborate with a third party to perform these functions. We have no experience in developing, training or managing a sales force and will incur substantial additional expenses in doing so. The cost of establishing and maintaining a sales force may exceed its cost effectiveness. In addition, we will compete with many companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against these companies. To the extent we seek sales, marketing and distribution alliances for our future products, we face risks including the following: - we may not be able to find collaborators, enter into alliances on favorable terms or enter into alliances that will be commercially successful; - any collaborator might, at its discretion, limit the amount of resources and time it devotes to marketing our products; and - any collaborator may terminate its agreement with us and abandon our products at any time for any reason, regardless of the terms of the agreement. OUR FAILURE TO ATTRACT, RETAIN AND MOTIVATE SKILLED PERSONNEL AND CULTIVATE KEY ACADEMIC COLLABORATIONS COULD MATERIALLY ADVERSELY AFFECT OUR RESEARCH AND DEVELOPMENT EFFORTS. We are a small company with 55 full-time employees. If we are unable to continue to attract, retain and motivate highly qualified management and scientific personnel and to develop and maintain important relationships with leading academic institutions and scientists, we may not be able to achieve our research and development objectives. Competition for personnel and academic collaborations is intense. Loss of the services of any of our key scientific personnel and, in particular, Dr. Russell M. Medford, our President and Chief Executive Officer, could adversely affect progress of our research and development programs. We do not have employment agreements with any of our employees. IF WE NEED ADDITIONAL FINANCING AND CANNOT OBTAIN IT, WE MAY NOT BE ABLE TO DEVELOP OR MARKET OUR PRODUCTS. We may encounter increased costs due to unanticipated changes in our product development or commercialization plans. If these costs exceed our available funds, we will need to seek additional financing. If additional funds are not available, we may need to delay clinical studies, curtail operations or obtain funds through collaborative arrangements that may require us to relinquish rights to certain of our products or potential markets. 12 15 OUR FAILURE TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT OR ACCEPTABLE PRICES FOR OUR PRODUCTS COULD DIMINISH OUR REVENUES. Our ability to commercialize our future products successfully, alone or with collaborators, will depend in part on the extent to which reimbursement for the products will be available from: - government and health administration authorities; - private health insurers; and - other third party payors. Government and other third party payors increasingly are attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new drugs. Third party private health insurance coverage may not be available to patients for any of our future products. The continuing efforts of government and other third party payors to contain or reduce the costs of healthcare through various means may limit our commercial opportunity. For example, in some countries other than the United States, pricing and profitability of prescription pharmaceuticals are subject to government control. In the United States, we expect proposals to implement similar government control to continue. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. Cost control initiatives could decrease the price that we or any potential collaborators could receive for any of our future products and could adversely affect our profitability. IF PLAINTIFFS BRING PRODUCT LIABILITY LAWSUITS AGAINST US, WE MAY INCUR SUBSTANTIAL FINANCIAL LOSS OR MAY BE UNABLE TO OBTAIN FUTURE PRODUCT LIABILITY INSURANCE AT REASONABLE PRICES, IF AT ALL, EITHER OF WHICH COULD DIMINISH OUR ABILITY TO COMMERCIALIZE OUR FUTURE PRODUCTS. The testing and marketing of medicinal products entail an inherent risk of product liability. Clinical trial subjects, consumers, healthcare providers, or pharmaceutical companies or others selling our future products could bring product liability claims against us. We cannot assure you that we will be able to acquire or maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE CAUSING VOLATILITY IN OUR STOCK PRICE. Our product candidates are now in research and various stages of development or clinical trials. Accordingly, we do not receive any revenues from sales of these product candidates. Our results of operations historically have fluctuated on a quarterly basis and can be expected to continue to be subject to quarterly fluctuations. Our results of operations at any given time will be based primarily on the following factors: - the status of development of our various product candidates; - whether we enter into collaboration agreements and the timing and accounting treatment of payments, if any, to us under those agreements; - whether and when we achieve specified development or commercialization milestones; and - the addition or termination of research programs or funding support. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. These fluctuations may cause the price of our stock to fluctuate, perhaps substantially. 13 16 RISKS RELATED TO THIS OFFERING OUR STOCK PRICE MAY BE VOLATILE, AND YOUR INVESTMENT IN OUR STOCK COULD DECLINE IN VALUE. Prior to this offering, there has been no public market for our common stock and an active public market for our common stock may not develop or be sustained after the offering. The initial public offering price will be determined by negotiations between the representatives of the underwriters and us and may not be indicative of future market prices. Factors to be considered in determining the initial public offering price of the common stock, in addition to prevailing market conditions, include: - estimates of our business potential and earnings prospects; - an assessment of our management; and - the consideration of the above factors in relation to market valuations of companies in related businesses. The market prices for securities of pharmaceutical and biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock: - announcements of technological innovations or new commercial products by our competitors or us; - developments concerning proprietary rights, including patents; - developments concerning any research and development, manufacturing, and marketing collaborations; - publicity regarding actual or potential results relating to medicinal products under development by our competitors or us; - regulatory developments in the United States and other countries; - litigation; - economic and other external factors, including disasters or crises; or - period-to-period fluctuations in financial results. BECAUSE A SMALL NUMBER OF EXISTING SHAREHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK, YOU WILL HAVE MINIMAL INFLUENCE ON SHAREHOLDER DECISIONS. Upon completion of this offering, we anticipate that our executive officers, directors and greater than five percent shareholders, along with their affiliates, will, in the aggregate, own approximately 42.8% of our outstanding common stock. As a result, such persons, acting together, will have the ability to influence substantially all matters submitted to the shareholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. These persons will also have the ability to control our management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other shareholders. FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE. The market price for our common stock could fall substantially if our shareholders sell large amounts of our common stock in the public market following this offering. These sales, or the possibility that these sales may occur, could also make it more difficult for us to sell equity or equity related securities if we need to do so in the future to address then-existing financing needs. Restrictions under federal securities 14 17 law requiring the registration or exemption from registration in connection with the sale of securities limit the number of shares of common stock available for sale in the public market. In addition, we, our directors and officers and substantially all of our existing shareholders have entered into lock-up agreements with the underwriters. The lock-up agreements restrict us, our directors and officers and substantially all of our existing shareholders from selling or otherwise disposing of any shares of our common stock for a period of 180 days after the date of this prospectus without the prior written consent of Chase Securities Inc. Chase Securities Inc. may, however, in its sole discretion and without notice, release all or any portion of the shares from the restrictions in the lock-up agreements. After this offering, we will have 22,820,585 outstanding shares of common stock. These shares will become eligible for sale in the public market as follows:
APPROXIMATE NUMBER OF SHARES DATE ELIGIBLE FOR PUBLIC RESALE - ---------------- ------------------------------- 6,002,054 After the date of this prospectus, freely tradable shares sold in this offering, and shares freely saleable under Rule 144(k) that are not subject to the 180-day lock-up. 33,118 After 90 days from the date of the prospectus, shares saleable under Rule 144 and not subject to the 180-day lock-up. 114,096 After 120 days from the date of this prospectus, shares saleable under Rule 144, subject in some cases to volume limitations or Rule 144(k). 15,283,911 After 180 days from the date of this prospectus, shares saleable under Rule 144, subject in some cases to volume limitations or Rule 144(k). 1,387,406 At various times after 180 days from the date of this prospectus, restricted shares that will become saleable under Rule 144 upon being held for one year.
We intend to file one or more registration statements to register shares of common stock subject to outstanding stock options and common stock reserved for issuance under our stock option plans not before 30 days after the date of this prospectus. We expect these additional registration statements to become effective immediately upon filing. In addition, upon completion of this offering and the conversion of our outstanding preferred stock into common stock, which will happen immediately prior to the completion of this offering, the holders of 14,724,342 shares of our common stock will have the right to require us to register their shares for sale to the public and holders of warrants exercisable into 200,290 shares of our common stock would have the right to participate in any such registration. Substantially all of these shares are subject to the 180-day lock-up agreements with the underwriters. If these holders register and sell a large number of shares in the public market, our stock price could fall. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS MAY MAKE AN ACQUISITION OF US, WHICH MAY BENEFIT OUR SHAREHOLDERS, MORE DIFFICULT. Provisions of our amended and restated articles of incorporation and amended and restated bylaws that could make it more difficult for a third party to acquire us include provisions that: - authorize the issuance of "blank check" preferred stock by our board of directors without shareholder approval, which would increase the number of outstanding shares and could thwart a takeover attempt; - limit who may call a special meeting of shareholders; - require shareholder action by unanimous written consent; - establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at shareholder meetings; - establish a staggered board of directors whose members can only be dismissed for cause; 15 18 - adopt the fair price requirements and business combinations with interested shareholders rules set forth in Article II, Parts 2 and 3 of the Georgia Business Corporation Code; and - require approval by the holders of at least 75% of the outstanding common stock to amend any of the foregoing provisions. YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING. The initial public offering price is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. Accordingly, at the assumed initial public offering price of $12.00 per share, if you purchase common stock in this offering, you will incur immediate and substantial dilution of approximately $8.73 in the net tangible book value per share of our common stock from the price you pay for our common stock. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent the holders of these outstanding options ultimately exercise them, there will be further dilution to you in this offering. FORWARD-LOOKING STATEMENTS We have made statements under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," and elsewhere in this prospectus that are forward-looking statements that involve substantial risks and uncertainty. You can identify these statements by forward-looking words such as "may," "will," "expect, "intend," "anticipate," "believe," "estimate, "plan," "could," "should" and "continue" or similar words. These forward-looking statements may also use different phrases. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements, which are subject to risks, uncertainties, and assumptions about us, may include, among other things, projections of our future results of operations or of our financial condition, our anticipated product commercialization strategies, and anticipated trends in our business. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or which we do not fully control that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including the following: - competitive factors; - general economic conditions; - the ability to develop safe and effective drugs; - ability to enter into future collaborative agreements; - variability of royalty, license and other revenue; - failure to achieve positive results in clinical trials; - failure to receive regulatory approval to market our product candidates; - uncertainty regarding our owned and our licensed patents and patent rights, including the risk that we may be forced to engage in costly litigation to protect such patent rights and the material harm to us if there were an unfavorable outcome of any such litigation; - governmental regulation and suspension; - technological change; - changes in industry practices; and 16 19 - one-time events. You should also consider carefully the statements under "Risk Factors" and other sections of this prospectus, which address additional factors that could cause our results to differ from those set forth in the forward-looking statements. The Private Securities Litigation Reform Act of 1995 does not apply to the statements in this prospectus. --------------------- AtheroGenics and associated design, AGI and Oxykine are trademarks of AtheroGenics, Inc. This prospectus also refers to trade names and trademarks of other organizations. USE OF PROCEEDS We estimate that the net proceeds from the sale of the 6,000,000 shares of common stock offered by us at an assumed initial public offering price of $12.00 per share will be approximately $65 million, after deducting the underwriting discounts and estimated offering expenses. If the underwriters exercise in full their option to purchase an additional 900,000 shares of common stock, we estimate that such net proceeds will be approximately $10 million. We expect to use the net proceeds from this offering for research and development activities, including clinical trials, process development and manufacturing support and for general corporate purposes, including working capital. We may use a portion of the proceeds to acquire or invest in complementary businesses, products or technologies, although we are not currently in negotiations concerning any such acquisitions or investments. Based upon the current status of our product development and commercialization plans, we believe that the net proceeds of this offering, together with our cash, cash equivalents and investments, will be adequate to satisfy our capital needs for at least the next 12 months. Pending such uses, we intend to invest the net proceeds of this offering in interest bearing, investment grade securities. DIVIDEND POLICY We have never declared or paid any dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance our operations and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. 17 20 CAPITALIZATION The following table sets forth our capitalization at March 31, 2000: - on an actual basis; - on a pro forma basis to reflect the conversion of all outstanding shares of preferred stock into 13,859,102 shares of common stock; and - on a pro forma as adjusted basis to reflect the conversion of all outstanding shares of preferred stock into 13,859,102 shares of common stock, and the sale of 6,000,000 shares of common stock offered hereby at an assumed initial offering price of $12.00, per share, and our receipt of the estimated net proceeds after deducting underwriting discounts and commissions and estimated offering expenses. You should read the following table in conjunction with our financial statements and related notes included in this prospectus.
MARCH 31, 2000 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------------ ------------- ------------- Redeemable convertible preferred stock: Series A, $1.00 par and liquidation value: Authorized -- 1,000,000 shares; issued and outstanding -- 1,000,000 shares (none pro forma and pro forma as adjusted).............. $ 1,000,000 $ -- $ -- Series B, $3.00 par and liquidation value: Authorized -- 4,804,382 shares; issued and outstanding -- 4,695,974 shares (none pro forma and pro forma as adjusted).............. 14,164,057 -- -- Series C, $3.00 par and liquidation value: Authorized -- 8,500,000 shares; issued and outstanding -- 8,163,128 shares (none pro forma and pro forma as adjusted).............. 24,440,231 -- -- Series B-1, $5.00 par and liquidation value: Authorized 50,000 shares (none outstanding)...... -- -- -- Preferred stock warrants......................... 225,713 -- -- Common shareholders' equity (deficit): Common stock, no par value: Authorized -- 21,100,000 shares; issued and outstanding -- 2,805,308 shares (16,664,410 shares pro forma; 22,664,410 shares pro forma as adjusted).................................. 11,237,117 50,841,405 115,841,405 Warrants......................................... -- 225,713 225,713 Deferred stock compensation...................... (9,186,237) (9,186,237) (9,186,237) Accumulated deficit.............................. (32,680,320) (32,680,320) (32,680,320) ------------ ------------- ------------- Total common shareholders' equity (deficit).............................. (30,629,440) $ 9,200,561 $ 74,200,561 ------------ ============= ============= Total redeemable convertible preferred stock and common shareholders' equity................................. $ 9,200,561 ============
The information in the table above does not include: - shares of our common stock issuable upon exercise of options outstanding under our benefit plans, of which 2,580,725 were outstanding at June 27, 2000, with a weighted average exercise price of $0.50 per share; - shares of our common stock available for future grant or issuance under our benefit plans, of which 1,051,238 were available at June 27, 2000; and 18 21 - shares of our common stock issuable upon conversion of preferred stock issuable upon exercise of outstanding warrants, of which 250,290 were outstanding at June 27, 2000, with a weighted average exercise price of $3.40 per share. DILUTION Our pro forma net tangible book value as of March 31, 2000 was approximately $9.2 million, or $0.55 per share of common stock. Our pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the shares of common stock outstanding as of March 31, 2000, assuming the conversion of all outstanding shares of preferred stock. After giving effect to the sale of 6,000,000 shares of common stock we are offering hereby at an assumed initial public offering price of $12.00 per share and after deducting estimated underwriting discounts and commissions and offering expenses, our pro forma net tangible book value as of March 31, 2000 would have been approximately $74.2 million, or $3.27 per share. This represents an immediate increase in pro forma net tangible book value of $2.72 per share to existing shareholders and an immediate and substantial dilution of $8.73 per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share............. $12.00 Pro forma net tangible book value per share at March 31, 2000...................................................... $0.55 Increase per share attributable to this offering............ 2.72 ----- Pro forma net tangible book value per share after offering.................................................. 3.27 ------ Dilution per share to new investors......................... $ 8.73 ======
The following table summarizes, as of March 31, 2000, on the pro forma basis described above, the number of shares of common stock purchased in this offering, the aggregate cash consideration paid and the average price per share paid by existing shareholders for common stock and by new investors purchasing shares of common stock in this offering:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ------- ------------ ------- ------------- Existing Shareholders.................... 16,664,410 74% $ 40,229,726 36% $ 2.41 New Investors............................ 6,000,000 26 72,000,000 64 12.00 ----------- --- ------------ --- Total.......................... 22,664,410 100% $112,229,726 100% $ 4.95 =========== === ============ ===
This discussion and tables above assume no exercise of options outstanding under our benefit plans. As of June 27, 2000, there were options outstanding to purchase a total of 2,580,725 shares of common stock at a weighted average exercise price of $0.50 per share and 1,051,238 shares available for future grant or issuance under our benefit plans. The discussion and tables above also assume no exercise of any outstanding warrants. As of June 27, 2000, there were outstanding warrants to purchase 250,290 shares of our common stock, with a weighted average exercise price of $3.40 per share. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors. 19 22 SELECTED FINANCIAL DATA The selected financial data set forth below should be read in conjunction with our financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in this prospectus. The statement of operations data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999, are derived from, and qualified by reference to, our audited financial statements included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1995 and 1996, and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived from our audited financial statements that do not appear in this prospectus. The historical results are not necessarily indicative of the operating results to be expected in the future. Unaudited pro forma basic and diluted net loss per share have been calculated assuming the conversion of all outstanding preferred stock into common stock, as if the shares had converted immediately upon their issuance.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------------------------------- ------------------------- 1995 1996 1997 1998 1999 1999 2000 ----------- ----------- ----------- ------------ ------------ ----------- ----------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues: License fees.............. $ -- $ -- $ -- $ -- $ 555,556 $ -- $ 833,333 Research and development............. -- -- -- -- 791,653 -- 1,257,947 ----------- ----------- ----------- ------------ ------------ ----------- ----------- Total revenues...... -- -- -- -- 1,347,209 -- 2,091,280 Operating expenses: Research and development exclusive of $23,649 and $360,751 for the year ended December 31, 1999 and the three months ended March 31, 2000, respectively, reported below as amortization of deferred stock compensation............ 780,159 1,776,891 4,656,478 8,954,904 9,041,345 2,200,960 2,885,640 General and administrative exclusive of $61,831 and $1,207,732 for the year ended December 31, 1999 and the three months ended March 31, 2000, respectively, reported below as amortization of deferred stock compensation............ 348,107 548,766 988,230 1,573,807 2,593,017 427,132 786,362 Amortization of deferred stock compensation...... -- -- -- -- 85,480 -- 1,568,483 ----------- ----------- ----------- ------------ ------------ ----------- ----------- Total operating expenses.......... 1,128,266 2,325,657 5,644,708 10,528,711 11,719,842 2,628,092 5,240,485 ----------- ----------- ----------- ------------ ------------ ----------- ----------- Operating loss.............. (1,128,266) (2,325,657) (5,644,708) (10,528,711) (10,372,633) (2,628,092) (3,149,205) ----------- ----------- ----------- ------------ ------------ ----------- ----------- Net interest income (expense)................. 21,547 277,563 485,392 (205,130) (60,617) (122,243) 157,767 ----------- ----------- ----------- ------------ ------------ ----------- ----------- Net loss.................... $(1,106,719) $(2,048,094) $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438) =========== =========== =========== ============ ============ =========== =========== Basic and diluted net loss per share................. $ (0.72) $ (1.10) $ (2.25) $ (4.45) $ (4.27) $ (1.14) $ (1.13) Shares used in computing basic and diluted net loss per share................. 1,543,064 1,869,246 2,292,966 2,409,948 2,443,237 2,412,125 2,635,816 Pro forma basic and diluted net loss per share........ $ (0.82) $ (0.18) Shares used in computing pro forma basic and diluted net loss per share........ 12,712,029 16,332,556
20 23 The following table contains a summary of our balance sheet on an actual basis at December 31, 1995, 1996, 1997, 1998 and 1999; and at March 31, 2000.
DECEMBER 31, --------------------------------------------------------------------- MARCH 31, 1995 1996 1997 1998 1999 2000 ----------- ----------- ----------- ------------ ------------ ------------ (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents........ $ 1,491,400 $11,404,142 $ 6,925,364 $ 3,683,423 $ 13,409,450 $ 10,010,491 Working capital (deficiency)..... 1,584,187 11,330,250 6,108,938 (4,259,366) 9,651,239 7,804,078 Total assets..................... 2,266,384 11,965,284 7,612,796 5,341,816 15,717,214 14,416,698 Long-term obligations, less current portion................ -- 270,950 281,636 163,262 61,854 164,811 Redeemable convertible preferred stock and warrants............. 3,524,236 14,654,604 14,654,626 14,950,624 39,193,366 39,830,001 Deferred compensation............ -- -- -- -- (1,809,680) (9,186,237) Accumulated deficit.............. (1,314,381) (3,362,475) (8,521,791) (19,255,632) (29,688,882) (32,680,320) Total common shareholders' deficit........................ (1,260,359) (3,177,653) (8,240,444) (18,973,881) (29,288,600) (30,629,440)
21 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and related notes included in this prospectus. OVERVIEW Since our operations began in 1994, we have been engaged in the discovery and development of novel therapeutics for the treatment of acute and chronic inflammatory diseases. Our lead product candidate, AGI-1067, is currently in Phase II clinical trials for the treatment and prevention of post-angioplasty restenosis. To date, we have devoted substantially all of our resources to research and development. We have not derived any commercial revenues from product sales and, excluding the effect of certain license fees of a non-recurring nature received in connection with entering into an exclusive license agreement, expect to incur significant losses in most years prior to deriving any such product revenue. We have incurred significant losses since we began operations in 1994 and, as of March 31, 2000, had an accumulated deficit of $32.7 million. There can be no assurance if or when we will become profitable. We expect to continue to incur significant operating losses over the next several years as we continue to incur increasing research and development costs. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our ability to achieve profitability depends upon our ability, alone or with others, to complete the successful development of our product candidates, to obtain required regulatory clearances, and to manufacture and market our future products. In October 1999 we entered into an exclusive licensing agreement with Schering-Plough covering our lead compound, AGI-1067. Under terms of the agreement, Schering-Plough obtained exclusive worldwide rights to AGI-1067 and related compounds. Schering-Plough is responsible for all costs of development and commercialization. Schering-Plough paid us an initial licensing fee and will pay milestone fees upon achievement of development, regulatory and commercial milestones. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999 Revenues Total revenues were $2.1 million for the three months ended March 31, 2000, compared to none in 1999. Revenues of $833,333 in 2000 were attributable to licensing fees from the exclusive license agreement signed in October 1999 with Schering-Plough. This amount represents the earned portion of the $5.0 million initial license fee which is being amortized over 18 months. Research and development revenues related to such license agreement were $1.3 million in 2000. Expenses Research and Development. Research and development expenses were $2.9 million for the three months ended March 31, 2000, compared to $2.2 million for the three months ended March 31, 1999. The increase of $684,680, or 31%, reflects the continued expansion of our internal research and development capabilities as well as higher costs associated with the AGI-1067 clinical trials. General and Administrative. General and administrative expenses were $786,362 for the three months ended March 31, 2000, compared to $427,132 for the three months ended March 31, 1999. The increase of $359,230, or 84%, was primarily due to increases in facility costs, personnel costs in administration departments and professional fees. Amortization of Deferred Stock Compensation. In January 2000, we recorded non-cash deferred stock compensation of approximately $8.9 million for options granted with exercise prices below the deemed fair value for financial reporting purposes of our common stock on their respective grant dates. This deferred stock compensation is being amortized using the graded vesting method. Amortization of 22 25 deferred stock compensation was $1.6 million for the three months ended March 31, 2000 of which $360,751 was attributable to research and development expenses and $1.2 million was attributable to general and administrative expenses. There was no amortization of deferred stock compensation for the three months ended March 31, 1999. Net Interest (Expense) Income Net interest income was $157,767 for the three months ended March 31, 2000 as compared to net interest expense of $122,243 for the three months ended March 31, 1999. The increase in net interest income was due to an increased level of invested funds, as well as the elimination of interest expense related to the bridge loan, which was converted to preferred stock in April 1999. COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 Revenues Total revenues were $1.3 million in 1999, compared to none in 1998 and 1997. Revenues of $555,556 in 1999 were attributable to licensing fees from the exclusive license agreement signed in October 1999 with Schering-Plough. This amount represents the earned portion of the $5.0 million initial license fee which is being amortized over 18 months. Research and development revenues related to the exclusive license agreement signed with Schering-Plough were $791,653 in 1999. Expenses Research and Development. Research and development expenses were $9.0 million for the year ended December 31, 1999, $9.0 million for the year ended December 31, 1998 and $4.7 million for the year ended December 31, 1997. Research and development expenses in 1999 were higher than 1998 by $86,441, or 1%, reflecting higher costs associated with the AGI-1067 clinical trials. The $4.3 million, or 92%, increase in research and development expenses from 1997 to 1998 was due primarily to expansion of the number of clinical trials and pre-clinical testing for our lead compound AGI-1067. These increased costs principally involved payments to third party contractors. General and Administrative. General and administrative expenses for the years ended December 31, 1999, 1998 and 1997 were $2.6 million, $1.6 million and $988,230, respectively. The $1.0 million, or 63%, increase in 1999 compared to 1998 was due primarily to an increase in administrative personnel to support our expanded research and development and licensing programs, and to the costs of relocating to a larger scientific and administration facility. General and administrative expenses increased $585,577, or 62%, for 1998 compared to 1997. The increase in 1998 expense was primarily related to administrative activities to support our expanded research and development efforts. Amortization of Deferred Stock Compensation. In 1999 we recorded non-cash deferred stock compensation of approximately $1.9 million for options granted with exercise prices below the deemed fair value for financial reporting purposes of our common stock on their respective grant dates. Amortization of deferred stock compensation was $85,480 in 1999. Of such amount, $23,649 was attributable to research and development expenses and $61,831 was attributable to general and administrative expenses. There was no amortization of deferred stock compensation in 1998 and 1997. Net Interest (Expense) Income Net interest expense was $60,617 and $205,130 for the years ended December 31, 1999 and 1998, respectively. The $144,513, or 70%, decrease in expense in 1999 as compared to 1998 was attributable to an increase in the amount of cash available for investing from the sale of Series C convertible preferred stock and conversion of the bridge loan in preferred stock in April 1999. Net interest income was $485,392 for the year ended December 31, 1997. The $690,522 decrease in net interest income in 1998 as compared to 1997 was due primarily to a lower level of invested funds, as well as interest expense related to the bridge loan entered into in 1998. 23 26 Income Taxes As of December 31, 1999, we had net operating loss carryforwards and research and development credit carryforwards of $24.9 million and $1.1 million, respectively, available to offset future regular and alternative taxable income. The net operating loss carryforwards will expire between 2009 and 2019. The research and development credit carryforwards will expire between 2009 and 2014. The maximum annual use of the net operating loss carryforwards is limited in situations where changes occur in our stock ownership. Because of our lack of earnings history, the resulting deferred tax assets have been fully offset by a valuation allowance. The utilization of the loss and credit carryforwards to reduce future income taxes will depend on our ability to generate sufficient taxable income prior to the expiration of the net operating loss carryforwards and research and development credit carryforwards. We have not yet completed full analysis of IRC Section 382 limitations on the cumulative net operating loss carryforward. However, the annual limitations are not expected to prevent utilization of the net operating loss carryforward due to significant increases in value indicated by the successive issues of preferred stock. If a change in ownership has occurred, there will be an annual limitation; however, this limitation is not expected to result in a loss of the deferred tax benefit. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through private placements of preferred stock, which have resulted in net proceeds to us of $39.2 million through March 31, 2000. We had cash and cash equivalents of $10.0 million at March 31, 2000, compared with $13.4 million at December 31, 1999, $3.7 million at December 31, 1998 and $6.9 million at December 31, 1997. Working capital at March 31, 2000 was $7.8 million, compared to $9.7 million at December 31, 1999, a deficit of $4.3 million at December 31, 1998, and $6.1 million at December 31, 1997. Long-term debt was $164,811 at March 31, 2000 compared to $61,854, $163,262 and $281,636 for the years ending December 31, 1999, 1998 and 1997, respectively. Long-term debt consists primarily of capital equipment lease obligations. Net cash used in operating activities was $3.7 million for the three months ended March 31, 2000, and $6.7 million, $9.1 million and $4.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease in net cash used in 1999 compared to 1998 was due to receipt of a $5.0 million initial license fee from Schering-Plough. The increase in net cash used in 1998 compared to 1997 resulted from an increase in net loss from operations. Net cash used in investing activities was $513,054 for the three months ended March 31, 2000, and $1.1 million, $62,586 and $295,284 for the years ended December 31, 1999, 1998 and 1997, respectively. Net cash used in investing activities consisted primarily of equipment purchases and leasehold improvements. Net cash provided by financing activities was $858,677 for the three months ended March 31, 2000, and $17.5 million, $5.9 million and $76,461 for the years ended December 31, 1999, 1998 and 1997, respectively. Net cash provided by financing activities in 2000 consisted primarily of proceeds from the exercise of preferred stock warrants and common stock options. The preceding periods consisted primarily of proceeds from the sale of preferred stock and, in 1998, proceeds from the bridge loan. Based upon the current status of our product development and commercialization plans, we believe that the net proceeds of this offering, together with our existing cash and cash equivalents, will be adequate to satisfy our capital needs for at least the next 12 months. However, our actual capital requirements will depend on many factors, including: - the status of product development; - the time and cost involved in conducting clinical trials and obtaining regulatory approvals; - filing, prosecuting and enforcing patent claims; - competing technological and market developments; and 24 27 - our ability to market and distribute our future products and establish new licensing agreements. IMPACT OF YEAR 2000 In late 1999 we completed remediation and testing of our computer systems at a nominal cost. As a result of those planning and implementation efforts, we have experienced no significant disruptions in our information technology and non-information technology systems to date and we believe those systems successfully responded to the Year 2000 date change. We are not aware of any material problems resulting from Year 2000 issues. We will continue to monitor our mission critical computer systems and the appropriate systems of our suppliers and vendors throughout 2000 to ensure that any latent Year 2000 matters which may arise are addressed promptly. To date, we are not aware of any Year 2000 disruptions in the computer systems of our significant vendors or service providers. QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the fair value of the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of the principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments has generally been less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. 25 28 BUSINESS OVERVIEW AtheroGenics is an emerging pharmaceutical company focused on the discovery, development and commercialization of novel drugs for the treatment of chronic inflammatory diseases, such as atherosclerosis, asthma and arthritis. We designed our lead product candidate, AGI-1067, to benefit patients with coronary artery disease, which is atherosclerosis of the blood vessels of the heart. In October 1999 we entered into a worldwide exclusive license agreement with Schering-Plough to develop and commercialize AGI-1067. We are currently testing AGI-1067 in a Phase II clinical trial for the prevention and treatment of restenosis, the reoccurrence of narrowing of the coronary arteries following angioplasty in patients with coronary artery disease. Schering-Plough has extensive experience in developing, manufacturing and commercializing pharmaceutical products. We have developed a proprietary v-protectant technology platform to discover drugs for the treatment of chronic inflammation. Our first v-protectants are drugs that block the production of proteins that are necessary to initiate and maintain inflammation. For example, one of these proteins, VCAM-1, binds to white blood cells that accumulate at the site of inflammation and directs these cells in their migration from the bloodstream into the tissue. We believe that an excess number of VCAM-1 molecules on the surface of cells is a disease state. We also believe that v-protectants can suppress chronic inflammation by blocking production of VCAM-1 without undermining the body's ability to protect itself against infection. AGI-1067 is our v-protectant candidate that is most advanced in clinical development. We are currently managing a Phase II clinical trial, CART-1, to assess in approximately 300 patients the safety and effectiveness of AGI-1067 for the treatment of post-angioplasty restenosis. We recruited our first CART-1 patient in September 1999 and we expect to complete this clinical trial in the first half of 2001. Our Phase II clinical trial program follows our successful completion of seven Phase I clinical trials comprising more than 150 men and women. We have identified other potential v-protectant product candidates to treat asthma, cystic fibrosis, rheumatoid arthritis and solid organ transplant rejection. We are evaluating these v-protectant product candidates to choose lead product candidates for clinical development. We plan to develop these v-protectants rapidly and may seek regulatory fast track status to expedite development and commercialization. We will continue to expand our v-protectant technology platform using functional genomics to identify novel therapeutic gene targets. INFLAMMATION DISEASES Inflammation is a normal response of the body to protect tissues from infection, injury or disease. The inflammatory response begins with the production and release of chemical agents by cells in the infected, injured or diseased tissue. These agents cause redness, swelling, pain, heat and loss of function. Inflamed tissues generate additional signals that recruit white blood cells to the site of inflammation. White blood cells destroy any infective or injurious agent, and remove cellular debris from damaged tissue. This inflammatory response usually promotes healing but, if uncontrolled, may become harmful. The inflammatory response can be either acute or chronic. Acute inflammation lasts at most only a few days. The treatment of acute inflammation, where therapy includes the administration of aspirin and other non-steroidal anti-inflammatory agents, provides relief of pain and fever for patients. In contrast, chronic inflammation lasts weeks, months or even indefinitely and causes tissue damage. In chronic inflammation, the inflammation becomes the problem rather than the solution to infection, injury or disease. Chronically inflamed tissues continue to generate signals that attract white blood cells from the bloodstream. When white blood cells migrate from the bloodstream into the tissue they amplify the 26 29 inflammatory response. This chronic inflammatory response can break down healthy tissue in a misdirected attempt at repair and healing. Diseases characterized by chronic inflammation include, among others: - atherosclerosis, including coronary artery disease; - asthma; - cystic fibrosis; - rheumatoid arthritis; and - solid organ transplant rejection. Atherosclerosis is a common disease that results from inflammation and the buildup of plaque in arterial blood vessel walls. Plaque consists of inflammatory cells, cholesterol and cellular debris. Atherosclerosis, depending on the location of the artery it affects, may result in heart attack or stroke. There are no medications available for physicians to treat directly the underlying chronic inflammation of atherosclerosis. Atherosclerosis of the blood vessels of the heart is called coronary artery disease. Treatment for coronary artery disease often progresses to therapeutic procedures including angioplasty or bypass surgery to re-establish an effective blood supply to the heart. Angioplasty corrects the blockage by the inflation of a balloon delivered by catheter, with or without the placement of a stent, a small cylindrical mesh device, at the site of the obstructing plaque. After angioplasty, the artery opened by the procedure often re-narrows. Inflammation plays an important role in this re-narrowing called restenosis. There is no medical treatment for restenosis. Asthma is a common chronic inflammatory disease of the bronchial tubes, which are the airways in the lungs. Asthma is marked by episodic airway attacks that are caused by many stresses, including allergy, cold air, ozone or exercise. Asthma therapy has concentrated on the use of inhaled corticosteroids to reduce chronic inflammation and bronchodilators to provide symptomatic relief. Asthmatic patients, however, continue to experience flare-ups, or exacerbations, that are not prevented or treated by these medicines. Cystic fibrosis is an inherited disease that first appears in childhood with blocked glands of various organs, including the lungs, intestines and pancreas. This chronic blockage leads to chronic inflammation and recurrent lung infections. Patients with cystic fibrosis develop chronic lung inflammation that may suddenly flare with severe consequences. Current treatment only attempts to control infection, primarily with antibiotics. There is a wide variety of other chronic inflammatory diseases, including rheumatoid arthritis and solid organ transplant rejection. Physicians regularly use anti-inflammatory agents, such as aspirin, other non-steroidal anti-inflammatory drugs and corticosteroids, alone or in combination with immuno-suppressants, to treat these diseases. However, these diseases may suddenly flare due to either the tissue inflammation that underlies them or bacteria that take advantage of the suppressed immune response induced by present therapies. Treatments for the underlying disease have major side effects and are not completely effective for these inflammatory exacerbations. For example, systemic corticosteroids cause major side effects including high blood pressure, adult-onset diabetes, cataracts, brittle bones and increased risk of infection. Many physicians are only now becoming aware of the key role of chronic inflammation in diverse diseases such as atherosclerosis and asthma for which existing anti-inflammatory treatments are incomplete and limited in use. As more physicians recognize that a wide range of chronic diseases are inflammatory in nature, we believe that these physicians will require safer and more effective anti-inflammatory treatments. We believe that one of these therapeutic approaches will be the administration of drugs designed to block the migration of white blood cells through blood vessel walls into inflamed tissues unless the inflammation is due to infection. 27 30 V-PROTECTANT TECHNOLOGY We have developed a proprietary v-protectant technology platform for the treatment of chronic inflammatory diseases. This platform is based on the work of our scientific co-founders R. Wayne Alexander, M.D., Ph.D., and Russell M. Medford, M.D., Ph.D. In 1993 Drs. Alexander and Medford discovered a novel mechanism within arterial blood vessel walls which could control the excessive accumulation of white blood cells without affecting the body's ability to fight infection. V-protectant technology exploits the observation that the endothelial cells that line the interior wall of the blood vessel play an active role in recruiting white blood cells from the blood to the site of chronic inflammation. V-protectants are drugs that block two harmful effects of oxygen and other similar molecules, collectively called oxidants. Scientists have known for some time that some oxidants can damage cells, but have recently described that these same oxidants may also act as signals to modify gene activity inside cells. This change in gene activity leads to the production of proteins that initiate or maintain inflammation. The protein products of these cells, including VCAM-1, attract white blood cells to the site of chronic inflammation. We believe that an excess number of VCAM-1 molecules on the surface of cells is a disease state. We also believe that AGI-1067 and other v-protectants can act as anti-oxidants and can block the specific type of inflammation caused by oxidants acting as signals. We believe that v-protectants will provide this anti-inflammatory benefit without undermining the body's ability to protect itself against infection. V-PROTECTANTS BLOCK ACTIVATION OF VCAM-1 IN CELLS THAT LINE BLOOD VESSELS ACTIVATION OF VCAM-1 INHIBITION OF VCAM-1
(V-Protectants Block Chart) 1 INFLAMMATORY AGENT ATTACHES TO CELL SURFACE RECEPTOR 2 RECEPTOR CHANGES GENERATE OXIDANT SIGNALS INSIDE CELL 3 OXIDANT SIGNALS STIMULATE GENE TO PRODUCE VCAM-1 4 CELL PRODUCES VCAM-1 PROTEINS 5 VCAM-1 MIGRATES TO CELL SURFACE 6 WHITE BLOOD CELLS ATTACH TO VCAM-1 ON CELL SURFACE BUSINESS STRATEGY Our objective is to become a leading pharmaceutical company focused on discovering, developing and commercializing novel therapeutics for the treatment of chronic inflammatory diseases. The key elements of our strategy include the following: - Develop AGI-1067 for commercialization in collaboration with Schering-Plough. We have entered into an exclusive license agreement with Schering-Plough to develop and commercialize our lead 28 31 product candidate, AGI-1067, for the treatment of atherosclerosis. The collaboration will seek initially to develop AGI-1067 for the treatment and prevention of restenosis in patients with coronary artery disease who undergo angioplasty. - Extend our v-protectant technology platform into additional therapeutic areas that address unmet medical needs. We believe that our v-protectants have the potential for treating a wide variety of other inflammatory diseases and clinical conditions. These indications include asthma, cystic fibrosis, rheumatoid arthritis, solid organ transplant rejection and other diseases. - Create value rapidly through innovative drug discovery coupled with innovative drug development. We intend to use our capabilities to identify scientific breakthroughs in inflammation and move these rapidly through pre-clinical testing to clinical trials. We intend to use our development expertise to minimize the time required to commercialize our discoveries in functional genomics, which links genetics to drug research, and medicinal and combinatorial chemistry, which are techniques to identify novel drug candidates with pre-defined activities. - Expand our product candidate portfolio. In addition to our existing discovery programs, we intend to acquire rights to other product candidates and technologies that complement our existing product candidate lines or that enable us to capitalize on our scientific and clinical development expertise. We plan to expand our product candidate portfolio by in-licensing or acquiring product candidates, technologies or companies. - Commercialize our products. We plan to collaborate with large pharmaceutical companies to commercialize products that we develop to target patient or physician populations in broad markets. In contrast, we plan to develop a sales force to commercialize those of our products that we develop to target patient or physician populations in narrow markets. 29 32 PRODUCTS The table below summarizes our therapeutic programs, their target indication or disease, development status and commercial strategy.
- -------------------------------------------------------------------------------------------------- THERAPEUTIC PROGRAM DISEASE/INDICATION DEVELOPMENT STATUS(1) COMMERCIAL STRATEGY - -------------------------------------------------------------------------------------------------- LEAD V-PROTECTANT AGI-1067 Restenosis Phase II clinical trial Exclusive license to Schering-Plough - -------------------------------------------------------------------------------------------------- OTHER V-PROTECTANTS AGI-series, Exacerbations of asthma Compound selection Internal intravenous and cystic fibrosis AGI-series, oral Rheumatoid arthritis Compound selection Collaboration AGI-series, oral Solid organ transplant Compound selection Internal rejection Oral product Chronic asthma Research Collaboration candidate - -------------------------------------------------------------------------------------------------- OTHER PROGRAMS Functional genomics Inflammatory diseases Research Collaborations - -------------------------------------------------------------------------------------------------- DIAGNOSTICS Oxykine diagnostic Atherosclerosis Clinical testing Collaboration - --------------------------------------------------------------------------------------------------
- --------------- (1) References to compound selection means the process by which we are selecting a lead product candidate for clinical development. We have established therapeutic programs for product development using product candidates we select from among our compound libraries. These programs seek to exploit the value of the products early and to expand their use broadly. We are developing our lead compound, AGI-1067 and related compounds in collaboration with Schering-Plough. We are selecting product candidates from among our AGI-1000 series, AGI-1100 series, AGI-1200 series and AGI-1300 series for internal development. We are also pursuing novel discovery targets in chronic inflammation. AGI-1067 AGI-1067, our lead v-protectant product candidate, is a small molecule that patients take orally once per day. In pre-clinical testing, AGI-1067 has shown the following three biological properties that we believe will benefit patients with atherosclerosis: - AGI-1067 blocks production of VCAM-1. We believe that decreased VCAM-1 production will diminish atherosclerosis and restenosis. - AGI-1067 is a potent anti-oxidant. AGI-1067 protects LDL cholesterol from converting into a harmful inflammatory agent. - AGI-1067 lowers LDL cholesterol. LDL cholesterol lowering reduces the risk of developing atherosclerosis. 30 33 According to the American Heart Association, more than 12 million people in the United States have coronary artery disease, including approximately 1.1 million who have heart attacks every year. In order to make a definitive diagnosis in patients with suspected coronary artery disease, a specially trained cardiologist or radiologist performs a diagnostic procedure called angiography in which the cardiologist injects dye through an intravenous catheter to image the coronary arteries. Angiography can reveal coronary artery disease that may require an invasive procedure. Physicians perform this invasive procedure, called angioplasty, more than one million times annually worldwide. This procedure consists of placing a balloon-tipped catheter into the coronary artery and mechanically re-opening the blood vessel by expanding the balloon under very high pressure. In addition, cardiologists may opt to treat some of these coronary artery blockages by inserting a stent to keep the blood vessel open after the cardiologist removes the catheter. Angioplasty does not cure coronary artery disease, nor does it treat the underlying chronic inflammation. In fact, angioplasty induces an inflammatory response that contributes to its failure in approximately 30% of patients who undergo the procedure. This process of re-narrowing, or post-angioplasty restenosis, is a major clinical problem that limits the effectiveness of the procedure. Restenosis following balloon angioplasty occurs due to local damage to the coronary artery. The development of stents and the ongoing research and development activities with respect to catheter improvement have not eradicated the problem of restenosis, but have introduced the new problem of in-stent restenosis which is particularly difficult to treat. In-stent restenosis occurs when the cells that surround the stent proliferate and fill the opening of the vessel. Our initial development target is post-angioplasty restenosis. More significantly, we believe that AGI-1067 may treat all areas of the coronary artery susceptible to atherosclerosis in a way that cannot be achieved with any existing therapy. We have completed pre-clinical testing in multiple species to establish the therapeutic properties of AGI-1067. Dosed orally, AGI-1067 blocked VCAM-1 production, blocked damage from oxidants and prevented atherosclerosis. In addition, AGI-1067 reduced LDL cholesterol comparably to and in combination with statins, which are widely used cholesterol lowering drugs. Based upon our successful completion of pre-clinical testing, we studied AGI-1067 in seven Phase I clinical trials in more than 150 men and women, including healthy volunteers and patients up to the age of 85 to assess tolerability and potential for interaction with other drugs. In the course of these seven studies we have given AGI-1067 in combination with other drug classes commonly used in patients with atherosclerosis. In these seven clinical trials, six of which we conducted under the Investigational New Drug Application for cholesterol lowering, some subjects reported mild nausea during the first few doses of AGI-1067, but the nausea abated while they continued to take the drug. Overall, subjects tolerated AGI-1067 well, with no dose or use-limiting side effects. These clinical trial results, which showed that patients tolerated AGI-1067 well alone and in combination with other drugs, supported our progress to Phase II clinical trials. We are presently conducting a Phase II clinical trial in Canada to assess the tolerability and efficacy of AGI-1067 as an agent to prevent post-angioplasty restenosis. We opened our Canadian Investigational New Drug Application in April 1999 for AGI-1067 as an agent to prevent post-angioplasty restenosis. The Canadian Antioxidant Restenosis Trial, called CART-1, is a multi-center, randomized, double-blind, safety and efficacy dose-ranging study, comparing AGI-1067 with placebo and an active control in patients with established coronary artery disease who undergo elective angioplasty. We plan to dose approximately 300 patients for six weeks and follow them for a total of six months. During angiography performed six months after angioplasty, we will assess the efficacy of AGI-1067 by measuring directly the diameter of the opening of the treated coronary artery. We enrolled the first patient in CART-1 in September 1999 and the trial is ongoing at four Canadian centers of excellence in interventional cardiology. An independent data and safety monitoring board reviews patient data periodically to ensure the continued safety of enrolled patients. 31 34 We have formed a joint management committee with Schering-Plough to oversee all aspects of development and commercialization of AGI-1067. The committee consists of equal numbers of AtheroGenics and Schering-Plough representatives. Under direction of the joint management committee, we expect to manage further clinical, pre-clinical and chemical development work for AGI-1067. AGI-Series for Respiratory Diseases We are developing an intravenously-dosed, v-protectant drug to treat exacerbations of cystic fibrosis. If we achieve positive clinical trial results, we will evaluate our v-protectant for the treatment of patients hospitalized with exacerbations of asthma. For patients with chronic respiratory diseases, including cystic fibrosis and asthma, an exacerbation is a sudden worsening of the patient's breathing that usually requires hospitalization and intensive therapy. According to the American Lung Association, asthma afflicts more than 17 million adults and children in the United States. From 1980 to 1994, the prevalence of this disease increased by over 75%. Asthma morbidity and mortality continue to rise in spite of massive public health efforts. According to the American Lung Association, in 1998 the combined direct and indirect costs of asthma in the United States is approximately $11.3 billion annually. Current therapies that target the underlying disease include corticosteroids and several classes of drugs that relieve symptoms but are not effective for chronic inflammation. None of these drugs, including inhaled corticosteroids, is particularly effective for treating exacerbation of asthma which remains a major unmet medical problem. We believe that v-protectants may reduce the inflammation associated with chronic asthma and with the acute exacerbation of asthma and may be useful in the treatment of up to 1.8 million patients annually who develop acute exacerbations of asthma and seek emergency room treatment in the United States. Cystic fibrosis is a common hereditary disease among Caucasians. According to the Cystic Fibrosis Foundation, there are 36,000 children and adults with cystic fibrosis in the United States. Approximately 25% of patients with cystic fibrosis are hospitalized at least once per year. Physicians treat exacerbations of cystic fibrosis with antibiotics that treat the associated chronic bacterial infection of the lungs. These antibiotics, however, do not address the chronic inflammation that underlies cystic fibrosis. Physicians no longer use corticosteroids routinely to treat exacerbations because they compromise the patient's immune response to bacterial infection. We believe that v-protectants can treat this chronic inflammation without compromising the necessary immune response to bacteria. We have identified v-protectant drug candidates from among four AGI-series of compounds for intravenous administration to hospitalized patients with respiratory diseases. We are evaluating these small molecules based on development criteria such as potency, stability and ease of formulation. We will use these criteria to choose a lead product candidate for clinical development that targets one or more respiratory disease indications. We plan to apply to the FDA for fast track status for this lead product candidate as a treatment for exacerbations of cystic fibrosis. We have observed a decrease in lung inflammation in a pre-clinical model of asthma using a compound we discovered in this effort. AGI-Series for Rheumatoid Arthritis We are developing an orally-dosed, v-protectant drug to treat patients with chronic rheumatoid arthritis who have not responded to maximum current therapy. For patients with rheumatoid arthritis, chronic therapy progresses from pain relievers to increasingly toxic immunosuppressants, called disease modifiers. If we achieve positive clinical trial results, we will evaluate our v-protectant for the treatment of patients who are receiving moderate disease modifying therapy. Rheumatoid arthritis is a common auto-immune disease which affects joints and arterial blood vessels. According to the Arthritis Foundation, there are 2.1 million people with rheumatoid arthritis in the United States. Rheumatoid arthritis and related diseases cost the U.S. economy more than $65 billion annually in direct and indirect costs. Approximately 70% of patients with rheumatoid arthritis are young and middle-aged women. Physicians treat rheumatoid arthritis with pain relievers including aspirin and other non- steroidal anti-inflammatory drugs, and proceed in resistant patients to treatment with low doses of 32 35 corticosteroids and immunosuppressants. The recent successful introduction of new drugs, including Celebrex, Enbrel and Vioxx, has highlighted both the market potential and the size and scope of the unmet medical need of these patients. These drugs are partially effective but either increase the risk of infection or do not address the chronic vascular inflammation that marks rheumatoid arthritis. We believe that v-protectants can treat the chronic inflammation of rheumatoid arthritis including the direct inflammation of the arteries, without increasing the patient's risk for infection. We have identified v-protectant product candidates from among four AGI-series of compounds for oral administration to rheumatoid arthritis patients who have not responded to therapy. We are evaluating these small molecules based on development criteria such as potency, stability and ease of formulation. AGI-Series for Post-Transplant Chronic Solid Organ Rejection We are developing an orally-dosed, v-protectant drug to treat chronic solid organ transplant rejection. Patients' immune systems recognize transplanted organs as foreign and therefore reject them. This chronic inflammatory process is called chronic solid organ transplant rejection. Physicians treat these patients with powerful immunosuppressants to block all immune and inflammatory reactions that could cause solid organ rejection. These therapies place patients at risk for life threatening infection. The vascular protection provided by our product candidates may protect solid organs from rejection beyond the first year without increasing the risk of infection. We are not aware of any other solid organ anti-rejection drug in development that has this profile. Recent industry sources report there are approximately 200,000 organ transplant recipients in the United States who are at risk of chronic transplant rejection. Chronic rejection is a major factor contributing to organ shortage. We have identified v-protectant product candidates from among four AGI-series of compounds for oral administration to patients who have received transplants. We are evaluating these small molecules based on development criteria such as potency, stability and ease of formulation. We will use these criteria to choose a lead product candidate for clinical development that targets chronic solid organ transplant rejection. We plan to apply to the FDA for fast track status for this product candidate as an adjunct to current transplant therapy, which includes immunosuppressant and anti-inflammatory drugs. Diagnostic Assay Program Based on our v-protectant technology platform, we have designed a simple and proprietary blood test that measures a circulating blood marker for atherosclerosis. We plan to conduct tests on human blood samples to establish whether this new marker, called Oxykine, is an accurate and useful diagnostic tool. We believe Oxykine will allow physicians to determine whether a patient has active and progressive atherosclerosis and whether the disease is responding to medical therapy. There are currently no diagnostic tools that meet this critical need in atherosclerosis disease management. RESEARCH PROGRAM We have built a robust research program using our demonstrated expertise in functional genomics, molecular biology, cell biology, physiology, pharmacology, medicine, biochemistry, analytical and synthetic chemistry and bioengineering. Our research program has three main objectives: - To discover and develop v-protectants with enhanced potency and improved therapeutic properties. We are synthesizing novel compounds and testing them in a variety of biochemical and cell-based assays to discover and develop new, small molecule v-protectants. We believe that these v-protectants will have improved therapeutic properties and applicability across a wide range of chronic inflammatory diseases. 33 36 - To identify novel anti-inflammatory therapeutic targets utilizing functional genomics. One part of our drug discovery platform is a set of techniques that connects our knowledge of genes, which code for proteins, to agents that modify gene activity. This collection of methods, called functional genomics, enables us to select targets efficiently. Our target for therapy may be the gene, the protein, another substance in the body that links to the protein, or the agent that induces the change. For example, oxidants are agents that induce changes in gene activity. We believe our functional genomics program will enable us to identify novel genes and their protein products that are critical to the chronic inflammatory process. - To develop new classes of v-protectant drugs based on the novel therapeutic targets identified by our functional genomics program. We are identifying enzymes and other molecular targets that either control or are controlled by oxidant signals. These discoveries will enable our chemists to synthesize the next generation of v-protectants. We intend to use these enzymes and other molecular targets for both internal efforts and as strategic collaboration assets. PATENTS AND INTELLECTUAL PROPERTY We have established a patent portfolio of owned and in-licensed patents that cover our lead v-protectant compounds and their use, as well as methods for regulating the fundamental biological pathway involved in the production of the inflammatory protein, VCAM-1. It is our goal to pursue both broad and specific patent protection in the key areas of our research and development both in the United States and internationally, and to identify value-added exclusive in-licensing opportunities. The patent approval process in the United States progresses through several steps from filing an application, through review of the application by the U.S. Patent and Trademark Office, and, if the application is allowed, to an issued patent. There is a similar regulatory process in most non-U.S. countries. We currently own one U.S. patent, two allowed U.S. patent applications, eight pending U.S. applications, and 50 associated non-U.S. patent filings, which, if issued, will expire from 2012 to 2020. We co-own with Emory University one pending U.S. patent application and 17 associated non-U.S. patent filings which, if issued, will expire on or before 2018. In addition, we hold exclusive licenses from Emory University to 11 U.S. patents, one U.S. patent application, and 59 associated non-U.S. patent filings, expiring on or before 2012. We purchased the U.S. patent that we own in an agreement with Sampath Parthasarathy. We believe the cost of this agreement to us is immaterial. We have license agreements with Emory University and The Regents of University of California covering aspects of our technology. These agreements obligate us to make milestone payments upon attainment of agreed-upon goals and royalty payments on sale of licensed products and technology. The licenses with Emory University and The Regents of the University of California also require us to be diligent in commercializing the licensed technologies within certain time periods. In addition, we have a collaborative research agreement with Emory University. Under our license agreement with Emory University, Emory University granted to us an exclusive license to make, use and sell methods and products covered by certain patents and patent applications owned by Emory University relating generally to the treatment and diagnosis of VCAM-1 related diseases. The license agreement requires us to make royalty payments to Emory University based on certain percentages of net revenue we derive from sales of products covered by the licensed patents or patent applications, and from sublicensing of the licensed patents or patent applications. The license agreement also requires us to make milestone payments to Emory University upon the occurrence of certain product development events. Milestone payments for AGI-1067 could total $250,000 if all milestone objectives are met. We must indemnify Emory University for all claims and/or losses caused or contributed to by AtheroGenics arising out of our use of the license. We have procured commercial general liability insurance in specified amounts customary in the industry naming Emory University as an insured. The Emory license agreement will terminate when all patent rights licensed under the agreement expire. Emory University may terminate the agreement if, after Emory gives notice to us, we fail to make a payment, we fail to render progress reports, we incur specified financial problems, we decide to no longer 34 37 develop licensed products under the agreement, or we breach a material term of the agreement. We may terminate the agreement upon advance notice to Emory, or if Emory University violates certain material terms of the agreement. Under our license agreement with the Regents of the University of California, we received a license to make, use and sell diagnostic and therapeutic methods and products using monoclonal antibodies in atherosclerosis and other diseases, which are claimed in applicable patent applications owned by the Regents of the University of California in the U.S. and Canada. We must make milestone payments to the Regents of the University of California upon occurrence of various product development events of up to $45,000 for each therapeutic application, and $35,000 for each diagnostic application. In addition, we must pay to the Regents of the University of California a percentage of the net revenue we receive from the sale of products covered by the patents and patent applications, and from our sublicensing the licensed patents and patent applications. The Regents of the University of California may terminate the agreement upon proper notice for violation of material terms of the agreement. The agreement expires in 2018, when the last patent covered by the license expires. We may terminate the agreement at any time upon prior notice to the Regents of the University of California. We must indemnify the Regents of the University of California for all losses and claims arising out of our use of the license. In addition, we have procured commercial liability insurance in specified amounts customary in the industry naming the University of California as an insured. Under our sponsored research agreement with Emory University, Emory University has agreed to provide facilities for and to perform research in collaboration with us. The initial term of the agreement was one year. Following the initial term, the agreement is renewable and has been renewed on an annual basis. The renewable term of the agreement will end in 2001. We believe our costs under the agreement are immaterial. Rights to patents, inventions and copyrightable works arising from the research may be held by Emory University independently or jointly between Emory University and us depending upon the circumstances under which the right arises. We have the option to exclusively license patent rights that Emory acquires from the sponsored research, under the terms of our license agreement with Emory. The agreement may be terminated upon mutual agreement, if a party is in material breach, or upon proper notice by either party if the principal investigator at Emory University is terminated and a suitable replacement is not identified. AGI-1067 Patent Portfolio Our patent coverage on AGI-1067 is based on patent filings that we own and patent filings exclusively licensed from Emory University. We own one issued patent, U.S. Patent 5,262,439, which expires in 2012, and related filings in Japan, Canada and Europe that generically cover the compound AGI-1067 as a member of a class of related compounds. The U.S. Patent and Trademark Office has recently allowed one of our patent applications that covers through 2018 the specific compound AGI-1067 and its use to treat VCAM-1 mediated diseases including, among others, atherosclerosis, post-angioplasty restenosis and coronary artery disease. The U.S. Patent and Trademark Office has allowed another of our patent applications that covers the use of a class of compounds closely related to AGI-1067 to treat VCAM-1 mediated diseases. These key applications have also been filed in 20 non-U.S. patent offices. The patents that we have exclusively licensed from Emory University include the use of a substance that inhibits a class of oxidant signals to treat diseases mediated by VCAM-1. Other V-Protectant Compounds We have filed patent applications in the United States and non-U.S. countries that cover the use of a number of compounds identified in our research program to act as v-protectants, and specifically for use in treating cardiovascular and inflammatory disease. Some of these compounds are novel and some represent new uses for known compounds. In addition we have exclusively licensed patents from Emory University that cover the use of a class of compounds which act as v-protectants. 35 38 Our patent position, like that of many pharmaceutical companies, is uncertain and involves complex legal and factual questions for which important legal principles are unresolved. We may not develop or obtain rights to products or processes that are patentable. Even if we do obtain patents, they may not adequately protect the technology we own or in-license. In addition, others may challenge, seek to invalidate, infringe or circumvent any patents we own or in-license, and rights we receive under those patents may not provide competitive advantages to us. Our commercial success will depend in part on our ability to manufacture, use, sell and offer to sell our product candidates without infringing patents or other proprietary rights of others. We may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our drug candidates. For example, U.S. patent applications are confidential while pending in the Patent and Trademark Office, and patent applications filed in non-U.S. countries are often first published six months or more after filing. Further, we may not be aware of published or granted conflicting patent rights. Any conflicts resulting from patent applications and patents of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection. If others obtain patents with conflicting claims, we may be required to obtain licenses to these patents or to develop or obtain alternative technology. We may not be able to obtain any such license on acceptable terms or at all. Any failure to obtain such licenses could delay or prevent us from developing or commercializing our drug candidates, which would adversely affect our business. Litigation or patent interference proceedings may be necessary to enforce any of our patents or other proprietary rights, or to determine the scope and validity or enforceability of the proprietary rights of others. The defense and prosecution of patent and intellectual property claims are both costly and time consuming, even if the outcome is favorable to us. Any adverse outcome could subject us to significant liabilities, require us to license disputed rights from others, or require us to cease selling our future products. Trademarks We have applications to register the trademarks AtheroGenics and associated design, AGI and Oxykine pending with the U.S. Patent and Trademark Office. We cannot assure you that our applications to register these trademarks will be successful. We have no knowledge of any infringement or any prior claims of ownership of trademarks that would materially adversely affect our current operations. EXCLUSIVE LICENSE AGREEMENT WITH SCHERING-PLOUGH On October 22, 1999 we entered into a worldwide exclusive license agreement with Schering-Plough. This agreement consists of contracts with two Schering-Plough affiliates. Under the agreement we granted to Schering-Plough an exclusive license under our patents and know-how to make, use and sell AGI-1067 and other specified compounds for the treatment of restenosis, coronary artery disease and atherosclerosis. During the term of the agreement with Schering-Plough, we will not develop or commercialize outside the agreement any compound for the treatment or prevention of restenosis, coronary artery disease or atherosclerosis. Schering-Plough paid us an initial nonrefundable licensing fee of $5,000,000 upon signing the agreement and has assumed responsibility for all costs going forward associated with the development, manufacturing and commercialization of products containing AGI-1067 and any other licensed compound. Further, Schering-Plough will make certain payments to us upon achievement of clinical and regulatory milestones. Schering-Plough will also pay us a royalty on all net sales of licensed products and will pay us fees associated with the achievement of certain annual sales levels. Schering-Plough's total direct payments to us for the initial indication of restenosis, excluding royalties and development costs, could reach $189 million during the term of the agreement. The amount and timing of any milestone and royalty payments, however, are subject to events many of which are beyond our control and the achievement of which we cannot assure. 36 39 The agreement will terminate when the last patent right which is the subject of the agreement expires. Schering-Plough may terminate the agreement at any time upon 60 days prior written notice to us. We may terminate the agreement upon the failure of Schering-Plough to meet certain development milestones. Either party may terminate the agreement upon proper notice of certain uncured material violations of the agreement. In addition, either party may terminate the agreement on a product-by-product basis if Schering-Plough ceases commercialization of a licensed product. Finally, either party may terminate the agreement if the other party incurs specified financial problems. Upon certain material breaches of the agreement by AtheroGenics, Schering-Plough may either terminate the agreement, continue the agreement with future milestone payments materially reduced by a specified percentage, or continue the agreement with future royalty payments reduced by a specified percentage. Should either party terminate the agreement, AtheroGenics will have the right to purchase Schering-Plough's remaining inventory of licensed products at a specified amount. MANUFACTURING We have entered into an arrangement with a third party manufacturer for the supply of AGI-1067 bulk drug substance and another third party manufacturer for the formulated drug product. We believe that we could obtain bulk drug and formulated drug product from other manufacturers and formulators at competitive prices, if necessary. The present agreements enable us to focus on our research and development strengths, minimize fixed costs and capital expenditures, and gain access to advanced manufacturing process capabilities and expertise. Our exclusive license agreement with Schering-Plough grants them the right to manufacture AGI-1067 for late-stage clinical trials and commercialization. Schering-Plough has extensive experience in manufacturing pharmaceutical products. Our supplier of the bulk drug substance for AGI-1067 operates under current Good Manufacturing Practice guidelines using cost-effective and readily available materials and reliable processes. The starting material used in the manufacturing process of AGI-1067 is probucol, which was once widely used in North America as a cholesterol-lowering agent, but has since been withdrawn from the North American market due to lack of efficacy. Under the terms of our contract, our bulk drug supplier is committed to manufacture sufficient quantities to support development activities for the foreseeable future. This supplier is currently manufacturing AGI-1067 in development-scale batches. After manufacture, a third party supplier formulates AGI-1067 into the drug product under current Good Manufacturing Practice guidelines. We anticipate that this supplier will be able to provide sufficient formulated drug product to complete our ongoing and currently planned clinical trials. We plan to establish manufacturing agreements with third parties that comply with Good Manufacturing Practice guidelines for bulk drug substance and oral or intravenous formulations of our other v-protectant product candidates. SALES AND MARKETING Under our exclusive license agreement for AGI-1067, Schering-Plough will handle exclusively, or sublicense, on a worldwide basis, sales, marketing and distribution of AGI-1067 for any therapeutic indication. Schering-Plough has extensive experience in marketing pharmaceutical products. We plan to collaborate with large pharmaceutical companies to commercialize product candidates other than AGI-1067 which are for patient or physician populations in broad markets. We believe that collaborating with large companies that have significant marketing and sales capabilities provides for optimal penetration into broad markets, particularly those areas that are highly competitive. In contrast, we plan to develop a sales force to commercialize the products targeted at patient and physician populations in narrow markets. By using our own sales and marketing organization, we believe we can retain a higher percentage of the profits generated from the sale of our products. We believe that this sales and marketing strategy will enable us to achieve our financial goals while maintaining our focus on innovative drug discovery coupled with innovative drug development. 37 40 COMPETITION We believe pharmaceutical companies and research institutions will increase their efforts to define and exploit emerging concepts about vascular cell biology and oxidant signals for drug discovery programs relating to chronic inflammation. Many of these companies and institutions have targeted indications that overlap significantly with our targets and have substantially greater resources than we do. They may, therefore, succeed in commercializing products before we do that compete with us on the basis of efficacy, safety and price. Our ability to compete is predicated on four related factors. - First, our scientists and their collaborators have pioneered the basic discoveries and research methodologies linking oxidant signals to vascular cell inflammation. These discoveries and research methodologies form the foundation for our proprietary drug discovery programs relating to chronic inflammation. - Second, our scientific expertise, coupled with our expertise in clinical drug development, has enabled us to be the first company to conduct clinical trials of an orally-administered, small molecule v-protectant. We believe that our current Phase II clinical trials demonstrate that we are maintaining this important first-to-clinic competitive advantage. - Third, we expect that our exclusive license agreement with Schering-Plough will allow us to sustain and extend our competitive advantage. - Fourth, we believe our scientific, development and licensing expertise strongly positions us to acquire promising technologies and products discovered outside AtheroGenics. Our initial target for drug development is restenosis. We are aware of two orally-dosed drugs that have shown efficacy in prevention of restenosis in clinical trials. One of these drugs, Tranilast, is currently in a worldwide Phase II/III clinical trial sponsored by SmithKline Beecham PLC. The rationale for this clinical trial is based on efficacy in a limited Phase II clinical trial in Japan. However, another major pharmaceutical company previously discontinued Tranilast development during Phase II in the United States as a treatment of asthma due to significant human liver toxicity. The second drug, Lorelco, decreased the rate of restenosis in a North American clinical trial undertaken by an independent investigator. This trial confirmed and extended results from Japan, where Lorelco is still marketed. However, Aventis SA previously withdrew Lorelco from North American markets as a lipid-lowering drug due to lack of efficacy. We believe that a rare but potentially fatal side effect makes Lorelco's return to the marketplace highly unlikely. In addition to these drugs, some physicians advocate the use of anti-oxidant vitamins or the use of specially designed catheters or improved angioplasty techniques to decrease the incidence or severity of restenosis. In addition to the drugs and devices that may compete with AGI-1067 in the treatment of restenosis, there are a number of other drugs and compounds in development for other indications that we target. A number of companies are pursuing drugs that control aspects of the immune system across the range of diseases that we target. For example, Genentech, Inc. in collaboration with Tanox, Inc. and Novartis AG is developing a novel injectable asthma therapy based on delivery of an anti-IgE monoclonal antibody, which targets the allergic component of chronic asthma. In addition, a number of companies are pursuing cystic fibrosis intervention either through gene therapy in children or through drugs that target the white blood cell response to chronic bacterial infection in children and adults. GOVERNMENTAL REGULATION We plan to develop prescription-only drugs for the foreseeable future. The FDA is the regulatory agency that is charged to protect people in the United States who take prescription medicines. Every country has a regulatory body with a similar mandate. In addition, the European Union has vested centralized authority in the European Medicines Evaluation Agency and Committee on Proprietary Medicinal Products to standardize review and approval across member nations. 38 41 Regulatory agencies have established guidelines and regulations for the drug development process. This process involves several steps. First, the drug company must generate sufficient pre-clinical data to support initial human testing. In the United States, the drug company must submit an Investigational New Drug Application prior to human testing. The Investigational New Drug Application contains adequate data on product candidate chemistry, toxicology and metabolism and, where appropriate, animal research testing to support initial safety evaluation in humans. In addition, the drug company provides to the FDA a clinical plan, including proposed use and testing in subjects comprising healthy volunteers and patients. Clinical trials for a new product candidate usually proceed through four phases: - Phase I clinical trials explore safety, blood levels, metabolism and the potential for interaction with other drugs. Phase I typically proceeds from healthy volunteers into patients with the target disease and comprises up to approximately 200 total subjects. - Phase II clinical trials establish a dose for future testing and marketing in an adequate number of patients with the target disease. The clinical trials may include hundreds of patients who have the target disease and who are receiving a range of background medications. In addition, Phase II clinical trials verify the mechanisms of action proposed pre-clinically. - Phase III clinical trials usually include two adequate and well controlled studies in the target population. For most chronic diseases, drug companies study a few thousand patients to assure a broadly applicable assessment of safety and efficacy. At the successful conclusion of Phase III, drug companies may submit a product license application, called a New Drug Application in the United States. Upon accepting the submission, the FDA or non-U.S. regulatory authorities review the file for completeness, accuracy and adherence to regulations. These authorities may use internal and external consultants and may convene an expert committee to advise on the safety, effectiveness and usefulness of the proposed new product candidate prior to final regulatory judgment. The final step to registration is approval of the package insert or label that defines what the drug company may promote to physicians who use the new drug. - Phase IV clinical trials support marketing of the drug for its approved indication. Phase IV clinical trials generate data to allow promotion of the new drug in comparison with other approved drugs and to support healthcare economics claims. In addition, every pharmaceutical company is responsible for post-marketing surveillance for safety in the marketplace. We must meet regulatory standards prior to exposing subjects to any candidate drug product. We remain responsible for any of these development activities whether we perform them internally or contract them to a third party. The FDA may audit us or our third party contractors at any time to ascertain compliance with standards. The FDA may halt all ongoing work if it determines that we or our contractors have deviated significantly from these standards. These standards include: - Good Manufacturing Practices, which govern process chemistry, formulation, labeling and handling of drug throughout its life cycle; - Good Laboratory Practices, which govern the use of drug in animal studies to support establishment of safety or the disposition and metabolism of the administered drug and handling of human or other biological samples for drug assays; and - Good Clinical Practices, which govern the exposure of human subjects under our protocols. Good Clinical Practices set standards for the constitution and activities of institutional review boards that are charged with assuring that the appropriate person gives informed consent prior to study participation and protect patients whether they receive an experimental drug, an approved drug, or an inactive look-alike called a placebo. 39 42 Advertising is subject to FDA approval in the United States and national review elsewhere. In addition, state and local governments and other federal agencies may control marketing if the drug substance, formulation, package, intended use or disposal is subject to local regulation. The FDA has expanded its expedited review process in recognition that certain severe or life-threatening diseases and disorders have only limited treatment options. Fast track designation expedites the development process but places greater responsibility on the drug company during Phase IV clinical trials. The drug company may request fast track designation for one or more indications at any time during the Investigational New Drug Application process, and the FDA must respond within 60 days. Fast track designation allows the drug company to develop product candidates and to request an accelerated or priority review of the New Drug Application based on clinical effectiveness in a smaller number of patients. If the FDA accepts the submission as a priority review, the time for New Drug Application review and approval is reduced from one year to six months. We plan to request fast track designation as appropriate for internal drug development programs. EMPLOYEES We currently have 55 full-time employees, including 40 in research and development. The employee group includes 14 Ph.D.s, five M.D.s and 11 employees with Masters degrees. We believe that our employee relations are good. FACILITIES Our scientific and administration facility encompasses approximately 27,000 square feet in Alpharetta, Georgia. We lease our facility pursuant to a long-term lease agreement that expires in 2009 and our aggregate commitment under this long-term, non-cancelable lease is approximately $10 million. This lease may be extended at our option to 2019. LEGAL PROCEEDINGS We are not currently a party to any legal proceedings. ADVISORY BOARDS We have established advisory boards to provide guidance and counsel on aspects of our business. These boards are convened once a year and individual members are contacted as required. Members of these boards provide input on product research and development strategy, education and publication plans. The advisory board members are paid an annual stipend and receive options for common stock for their services, and are reimbursed for expenses in connection with attendance at advisory board meetings. The names and members of these boards are as follows: Scientific Advisory Board R. Wayne Alexander, M.D., Ph.D., Chairman.......... Professor and Chairman of the Department of Medicine, Emory University School of Medicine Victor J. Dzau, M.D................................ Chairman, Department of Medicine, Harvard Medical School David Harrison, M.D................................ Professor of Medicine, Division of Cardiology, Emory University School of Medicine Dennis Liotta, Ph.D................................ Professor of Chemistry and Vice President of Research, Emory University School of Medicine Robert M. Nerem, Ph.D.............................. Parker H. Petit Professor and Director, Bioengineering and Bioscience, Georgia Institute of Technology
40 43 Sampath Parthasarathy, Ph.D........................ Professor, Department of Gynecology and Obstetrics, Emory University School of Medicine Robert D. Rosenberg, M.D., Ph.D.................... Professor of Biology, Massachusetts Institute of Technology and Professor of Medicine, Harvard Medical School Clinical Advisory Board William Virgil Brown, M.D.......................... Professor of Medicine, Director of Division of Atherosclerosis & Lipid Metabolism, Emory University School of Medicine Harvey M. Golomb, M.D.............................. Professor and Chairman, Department of Medicine, and Director, Section of Hematology/Oncology, The University of Chicago Joseph L. Witzum, M.D.............................. Professor of Medicine, University of California at San Diego
41 44 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The following table sets forth certain information regarding our executive officers, key employees and directors as of June 27, 2000:
NAME AGE POSITION - ---- --- -------- Russell M. Medford, M.D., Ph.D................. 45 President, Chief Executive Officer and Director Mark P. Colonnese.............................. 44 Vice President of Finance and Administration, Chief Financial Officer and Assistant Secretary Mitchell Glass, M.D............................ 48 Vice President, Clinical Development and Regulatory Affairs Don Kirksey, Ph.D.............................. 52 Vice President of Business and Corporate Development William A. Scott, Ph.D......................... 60 Vice President -- Research and Director Michael A. Henos (1)........................... 51 Chairman of the Board of Directors R. Wayne Alexander, M.D., Ph.D................. 59 Director and Secretary Vaughn D. Bryson............................... 62 Director T. Forcht Dagi, M.D. (2)....................... 51 Director Vijay K. Lathi (2)............................. 27 Director Arda Minocherhomjee (1)........................ 46 Director Arthur M. Pappas (1)........................... 52 Director Richard S. Schneider (2)....................... 59 Director
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Russell M. Medford, M.D., Ph.D. is our scientific co-founder, President and Chief Executive Officer and has served as a member of our board of directors since our inception in 1993. Dr. Medford has been our President and Chief Executive Officer since 1995 after serving as Executive Vice President from 1993 to 1995. Since 1989, Dr. Medford has held a number of academic appointments at the Emory University School of Medicine, most recently as Associate Professor of Medicine and Director of Molecular Cardiology. Dr. Medford is a molecular cardiologist whose research has focused on the molecular basis of cardiovascular disease and holds 11 U.S. patents. Dr. Medford currently serves on advisory committees to the National Heart, Lung and Blood Institute of the National Institutes of Health. He is also a director of privately-held Inhibitex, Inc. and Helios Health, Inc. Dr. Medford also serves on the Board of Trustees of EmTech Biotechnology Development, Inc. Dr. Medford received a B.A. from Cornell University, and an M.D. with Distinction and a Ph.D. in molecular and cell biology from the Albert Einstein College of Medicine. Dr. Medford completed his residency in internal medicine at the Beth Israel Hospital and his fellowship in cardiology at the Brigham and Women's Hospital and Harvard Medical School, where he also served on the faculty of Medicine. Mark P. Colonnese has served as our Vice President of Finance & Administration and Chief Financial Officer since 1999. Prior to joining us, Mr. Colonnese was at Medaphis Corporation from 1997 to 1998, serving most recently as Senior Vice President and Chief Financial Officer. Previously, Mr. Colonnese was Vice President of Finance and Chief Financial Officer and a member of the executive committee at Applied Analytical Industries, Inc., a pharmaceutical development company, from 1993 to 1997. Mr. Colonnese served on the board of directors of Endeavor Pharmaceuticals, Inc. from 1994 to 1997. From 1983 to 1993, Mr. Colonnese held a number of executive and management positions at Schering-Plough Corporation, culminating as Senior Director of Planning and Business Analysis. Mr. Colonnese 42 45 holds an M.B.A. from Fairleigh Dickinson University and a B.S. magna cum laude from Ithaca College, and is a Certified Public Accountant. Mitchell Glass, M.D. has served as our Vice President, Clinical Development and Regulatory Affairs since 1997. From 1995 to 1996, Dr. Glass served as Vice President and Director of Cardiopulmonary Clinical Research, Development and Medical Affairs at SmithKline Beecham PLC. From 1988 to 1995, Dr. Glass held various positions at ICI Pharmaceuticals PLC, subsequently Zeneca PLC, where he was responsible for developing the pulmonary therapeutics group. From 1985 to 1987, Dr. Glass served as an attending physician in Pulmonary Medicine and Critical Care at Graduate Hospital while maintaining a teaching position at the University of Pennsylvania. From 1981 to 1984, Dr. Glass was a postdoctoral Fellow and Research Associate in Pulmonary Medicine and Respiratory Physiology at the University of Pennsylvania. Dr. Glass received B.A. and M.D. degrees from the University of Chicago and completed his residency in internal medicine and clinical fellowship in Pulmonary Medicine at Presbyterian, University of Pennsylvania Medical Center. Don Kirksey, Ph.D. has served as our Vice President of Business and Corporate Development since 1998. Prior to joining us, Dr. Kirksey was Vice President of Licensing and Business Development at Medco Research, Inc. from 1996 to 1998. From 1989 to 1996, Dr. Kirksey served as Director of Global Research Alliances at Glaxo Wellcome, Inc. Dr. Kirksey received his Ph.D. from the University of Mississippi and a B.S. from Delta State University. He was a National Institutes of Health Neuroscience Fellow and is a member of the American Association for the Advancement of Science and the Licensing Executive Society. William A. Scott, Ph.D. has served as a member of our board of directors since 1997 and in a consulting role as our Vice President -- Research since May 2000. Dr. Scott was Chief Executive Officer and a member of the board of directors of Physiome Sciences, Inc., a company that specializes in the design of computer models of human organs, from 1997 to 1999. From 1983 to 1996, Dr. Scott held numerous positions at the Bristol-Myers Squibb Research Institute, most recently as Senior Vice President of Drug Discovery from 1990 until 1996. Dr. Scott has served as an Adjunct Professor at the Rockefeller University since 1983 and as an Associate Dean and Associate Professor at Rockefeller University. Michael A. Henos has served as Chairman of our board of directors since 1994 and was our Chief Financial Officer from 1994 to 1999. From 1991 to the present, Mr. Henos has served as managing general partner of Alliance Technology Ventures, L.P., a venture capital fund formed to invest in technology-based startup companies located in the Southeastern United States. Mr. Henos served as a general partner with Aspen Ventures, a $150 million early stage venture capital partnership from 1986 to 1993. Mr. Henos previously served as a vice president of 3I Ventures Corporation, the predecessor of Aspen Ventures from 1986 to 1991. From 1984 to 1986, Mr. Henos served as a healthcare consultant with Ernst & Young, specializing in venture financing of startup medical technology companies. Before joining Ernst & Young, Mr. Henos served in a variety of operating management positions and co-founded and served as Chief Executive Officer of ProMed Technologies, Inc. Mr. Henos previously served as a director of KeraVision, Inc. R. Wayne Alexander, M.D., Ph.D. is our scientific co-founder and has served as a member of our board of directors since our inception in 1993. Dr. Alexander has been a Professor of Medicine since 1988 and Chairman of the Department of Medicine of Emory University School of Medicine and Emory University Hospital since 1999. From 1988 to 1999, Dr. Alexander served as the Director of the Division of Cardiology at the Emory University School of Medicine and Emory University Hospital. Prior to his appointment at Emory University School of Medicine, Dr. Alexander served as Associate Professor of Medicine at Harvard Medical School from 1982 to 1988. Dr. Alexander received his Ph.D. in physiology from Emory University and his M.D. from Duke University School of Medicine. Dr. Alexander completed his residency in internal medicine at the University of Washington and completed his fellowship in cardiology at Duke University. Vaughn D. Bryson has served as a consultant to us since 1996 and a member of our board of directors since February 2000. Mr. Bryson is President of Life Science Advisors, a consulting firm focused on 43 46 assisting biopharmaceutical and medical device companies in building shareholder value. Mr. Bryson was a 32-year employee of Eli Lilly & Company and served as President and Chief Executive Officer of Eli Lilly from 1991 to 1993. Mr. Bryson was Executive Vice President of Eli Lilly from 1986 until 1991 and served as a member of Eli Lilly's board of directors from 1984 until his retirement in 1993. Mr. Bryson was Vice Chairman of Vector Securities International from 1994 to 1996. He is also a director of Amylin Pharmaceuticals Inc., Ariad Pharmaceuticals Inc., Boehringer Ingelheim Corporation, the U.S. subsidiary of Boehringer Ingelheim GmbH, Chiron Corporation and Quintiles Transnational Corp., and privately-held Fusion Medical Technologies, Inc. and Molecular Geriatrics, Inc. Mr. Bryson received a B.S. degree in Pharmacy from the University of North Carolina and completed the Sloan Program at the Stanford University Graduate School of Business. T. Forcht Dagi, M.D., M.P.H., F.A.C.S., F.C.C.M. has served as a member of our board of directors since 1999. Dr. Dagi joined Cordova Ventures, LLP, a venture fund with over $250 million under management as a Managing Partner in 1996. Prior to joining Cordova, Dr. Dagi served as director and principal of Access Partners, an early stage biotechnology fund. Dr. Dagi serves as a director of the following privately-held companies: AviGenics, Inc., Inhibitex, Inc., Cogent Neuroscience, Inc., Encelle, Inc., iPhysicianNet Inc., Merix Biosciences, Inc. and Xanthon, Inc. Dr. Dagi received an A.B. from Columbia College, an M.D. from the Johns Hopkins School of Medicine, an M.P.H. from the Johns Hopkins School of Hygiene and Public Health, an M.T.S. from Harvard University, and an M.B.A. in finance and strategic planning from the Wharton School of the University of Pennsylvania. Dr. Dagi was trained in neurosurgery and neurophysiology at the Massachusetts General Hospital and Harvard Medical School, where he was a Neuroresearch Foundation Fellow. Dr. Dagi is a diplomat of American Board of Neurological Surgeons and a Fellow of both the American College of Surgeons and the College of Critical Care Medicine. Vijay K. Lathi has served as a member of our board of directors since 1999. Mr. Lathi joined The Sprout Group in 1998 as an associate focused on life science, medical devices and information technology related to healthcare. Prior to joining Sprout, Mr. Lathi served as an analyst with the healthcare venture capital group at Robertson Stephens & Company from 1997 to 1998. From 1995 to 1997, Mr. Lathi served as an analyst at Cornerstone Research, an economic and financial consulting firm. Mr. Lathi received his B.S. in chemical engineering from Massachusetts Institute of Technology and his M.S. in chemical engineering from Stanford University. Arda M. Minocherhomjee, Ph.D. has served as a member of our board of directors since 1999. Dr. Minocherhomjee currently serves as Managing Director of William Blair Capital Partners, LLC. He joined William Blair & Company in 1992 as a Senior Healthcare Analyst. Dr. Minocherhomjee subsequently served as head of the firm's healthcare research group. Dr. Minocherhomjee serves as a director of the following privately-held companies: Morton Grove Pharmaceuticals Inc., Pharma Research Corporation, Cypres Medical Products, Inc. and DJ Pharma, Inc. He received an M.Sc. in Pharmacology from the University of Toronto and a Ph.D. in Pharmacology and an M.B.A. from University of British Columbia. Dr. Minocherhomjee was a post-doctoral fellow in pharmacology at University of Washington Medical School. Arthur M. Pappas has served as a member of our board of directors since June 1995. Mr. Pappas is Chairman and Chief Executive Officer of A.M. Pappas & Associates, LLC, an international consulting, investment and venture company that works with life science companies, products and related technologies. Prior to founding A.M. Pappas & Associates in 1994, Mr. Pappas was a director on the main board of Glaxo Holdings PLC with executive responsibilities for operations in Asia Pacific, Latin America, and Canada. In this capacity, Mr. Pappas was Chairman and Chief Executive of Glaxo Far East (Pte) Ltd. and Glaxo Latin America Inc., as well as Chairman of Glaxo Canada Inc. Mr. Pappas has held various senior positions with Abbott Laboratories International Ltd., Merrell Dow Pharmaceuticals and the Dow Chemical Company, in the United States and internationally. Mr. Pappas is a director of KeraVision, Inc., Quintiles Transnational Corp. and Valentis Inc., and privately-held ArgoMed, Inc. and Embrex, Inc. Mr. Pappas received a B.S. in biology from Ohio State University and an M.B.A. in finance from Xavier University. 44 47 Richard S. Schneider, Ph.D. has served as a member of our board of directors since 1997 and currently serves as a general partner of One Palmer Square Associates, L.L.C., the general partner of various Domain Associates, L.L.C. affiliates. Dr. Schneider served as a Managing Member of Domain Associates, a venture capital firm that manages over $500 million and invests in life sciences companies, from 1990 until his retirement in 1998. Prior to joining Domain Associates, Dr. Schneider served as a Vice President of 3I Ventures Corporation, a venture capital firm, from 1986 to 1990. From 1983 to 1989, Dr. Schneider served as President of Biomedical Consulting Associates Inc. Dr. Schneider was a founder and Vice President from 1967 to 1983 of Syva Company, subsequently a division of Syntex Corporation. Dr. Schneider also is a director of the following privately-held companies: Landec Corporation, Mitokor, Inc. and Selective Genetics, Inc. BOARD COMPOSITION Pursuant to our amended and restated articles of incorporation and amended and restated bylaws, our board of directors is divided into three classes, with each director serving a three-year term (after the initial term). Directors are elected to serve until they resign or are removed, or are otherwise disqualified to serve, or until their successors are elected and qualified. The directors of Class I, Mr. Bryson, Mr. Lathi and Dr. Schneider, hold office until the first scheduled annual meeting of shareholders following the offering. The directors of Class II, Dr. Alexander, Dr. Dagi, Dr. Minocherhomjee and Dr. Scott, hold office until the second annual meeting of shareholders following the offering. The Directors of Class III, Mr. Henos, Dr. Medford and Mr. Pappas, hold office until the third scheduled annual meeting of shareholders. Executive officers are elected by and serve at the discretion of our board of directors. No family relationships exist among any of our directors or executive officers. BOARD COMMITTEES We have established an audit committee, a compensation committee, an M&A/strategic committee and a science committee. Audit Committee. The audit committee, which consists of Dr. Dagi, Mr. Lathi and Dr. Schneider, is responsible for nominating our independent auditors for approval by the board of directors and reviewing the scope, results and costs of the audits and other services provided by our independent auditors. Compensation Committee. The compensation committee, which consists of Mr. Henos, Dr. Minocherhomjee and Mr. Pappas, reviews and approves the compensation and benefits for our executive officers, administers our 1995 Stock Option Plan and 1997 Equity Ownership Plan, and makes recommendations to the board of directors regarding such matters. M&A/Strategic Committee. The M&A/strategic committee, which consists of Drs. Medford, Minocherhomjee and Schneider, is responsible for providing guidance to us on matters relating to mergers and acquisitions and other strategic issues. Science Committee. The science committee, which consists of Drs. Alexander and Scott, is responsible for providing guidance to us on science-related matters. DIRECTOR COMPENSATION During 1999, we did not provide any compensation to members of our board of directors for serving on our board or for attendance at committee meetings. We reimbursed our non-management directors for ordinary and necessary travel expenses to attend board and committee meetings. In connection with joining our board of directors in February 2000, we have entered into a four-year consulting agreement with Mr. Bryson pursuant to which he will assist management in assessing growth opportunities and strategic direction. Our board of directors has agreed to pay Mr. Bryson for his consulting services a non-qualified stock option to acquire up to 20,000 shares of common stock with an exercise price equal to the fair market value of our common stock on the date of grant. The option vests 25% on the first anniversary of the date of grant and approximately 2% per month thereafter. 45 48 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 of its executive officers serving as a member of our board of directors or compensation committee. EXECUTIVE COMPENSATION The following table summarizes the compensation paid to or earned during the year ended December 31, 1999 by our Chief Executive Officer and four other most highly compensated executive officers whose total salary and bonus exceeded $100,000 for services rendered to us in all capacities during 1999. The executive officers listed in the table below are referred to as the Named Executive Officers. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------------------- SECURITIES ANNUAL COMPENSATION UNDERLYING ALL OTHER ---------------------- OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) (#) ($)(1) --------------------------- ---------- --------- ---------- ------------ Russell M. Medford, M.D., Ph.D..................... 237,000 -- 300,000 4,990 President and Chief Executive Officer Mark P. Colonnese.................................. 182,083 30,000 140,000 3,681(2) Vice President, Finance and Administration, Chief Financial Officer and Assistant Secretary Mitchell Glass, M.D................................ 210,000 -- 20,000 27,508(3) Vice President, Clinical Development and Regulatory Affairs Don Kirksey, Ph.D.................................. 182,292 -- 50,000 44,914(4) Vice President, Business and Corporate Development Uday Saxena, Ph.D.(5).............................. 120,000 -- -- 3,600 Vice President, Pre-Clinical Research
- --------------- (1) Includes for each named executive officer a 401(k) Plan matching contribution by us as follows: Dr. Medford: $4,990; Mr. Colonnese: $1,420; Dr. Kirksey: $1,312; Dr. Saxena: $3,600. (2) Includes $2,256 for consulting services prior to employment. (3) Represents reimbursement for personal travel. (4) Represents reimbursement for moving and relocation expenses. (5) Dr. Saxena resigned as Vice President, Pre-Clinical Research as of April 30, 2000. Dr. Saxena has agreed to serve as a consultant to us during the transition of his job responsibilities to Dr. Scott. 46 49 OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1999 The following table sets forth information concerning the individual grants of stock options to each of the Named Executive Officers during the fiscal year ended December 31, 1999. All options were granted under our 1997 Equity Ownership Plan. Each option has a ten-year term, subject to earlier termination if the optionee's service with us terminates. Options vest at the rate of 25% on the anniversary of the vesting commencement date and 1/48th monthly thereafter in 36 equal installments. All options are granted at the fair value on the date of grant as determined by our board of directors. In reaching the determination of fair value at the time of each grant, the board of directors considers a range of factors, including the price at which we were able to raise funds from third-party investors through the sale of convertible preferred stock in recent transactions and the rights of common stock compared to this preferred stock, as well as the illiquidity of an investment in the common stock. Subsequent to June 30, 1999, fair value has been determined by independent valuations.
POTENTIAL REALIZABLE VALUE INDIVIDUAL GRANT AT ASSUMED ANNUAL RATES -------------------------------------------- OF STOCK PRICE PERCENT OF TOTAL APPRECIATION NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE FOR OPTION TERM(2) UNDERLYING OPTIONS TO EMPLOYEES PRICE EXPIRATION --------------------------- NAME GRANTED (#) IN FISCAL YEAR (%)(1) ($/SH) DATE 5%($) 10%($) - ---- -------------------- --------------------- -------- ---------- ------------ ------------ Russell M. Medford, M.D., Ph.D....................... 200,000 26.9 0.30 4/28/09 3,849,347 6,164,982 100,000 13.5 0.31 12/8/09 1,923,674 3,081,491 Mark P. Colonnese............ 120,000 16.1 0.30 2/23/09 2,309,608 3,698,989 20,000 2.7 0.31 12/8/09 384,735 616,298 Mitchell Glass, M.D. ........ 20,000 2.7 0.30 4/28/09 384,935 616,498 Don Kirksey, Ph.D............ 50,000 6.7 0.31 12/8/09 961,837 1,540,745 Uday Saxena, Ph.D............ -- -- -- -- -- --
- --------------- (1) In 1999, we granted options to employees to purchase an aggregate of 743,500 shares of common stock. (2) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and are applied to an assumed initial public offering price of $12.00 per share. These assumptions are not intended to forecast future appreciation of our stock price. The potential realizable value computation does not take into account federal or state income tax consequences of option exercises or sales of appreciated stock. The actual gains, if any, on the stock option exercises will depend on the future performance of the common stock, the optionee's continued employment through applicable vesting periods and the date on which the options are exercised and the underlying shares are sold. AGGREGATE OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES The following table provides certain summary information concerning stock options held as of December 31, 1999, by each of the Named Executive Officers. None of the Named Executive Officers exercised stock options in 1999. 47 50
NUMBER OF VALUE OF UNEXERCISED SECURITIES UNDERLYING IN-THE-MONEY OPTIONS UNEXERCISED OPTIONS AT AT DECEMBER 31, DECEMBER 31, 1999(#) 1999($)(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Russell M. Medford, M.D., Ph.D................... 100,000 300,000 1,190,000 3,509,000 Mark P. Colonnese................................ -- 140,000 -- 1,636,600 Mitchell Glass, M.D.............................. 75,000 75,000 877,500 877,500 Don Kirksey, Ph.D................................ 25,000 125,000 292,500 1,462,000 Uday Saxena, Ph.D................................ 91,300 28,700 1,068,210 335,790
- --------------- (1) There was no public trading market for our common stock as of December 31, 1999. Accordingly, the value of unexercised in-the-money options as of that date was calculated on the basis of an assumed initial public offering price of $12.00 per share, less the aggregate exercise price of the options. EMPLOYEE BENEFIT PLANS 1995 Stock Option Plan As of June 27, 2000, a total of 277,800 shares of common stock were reserved for issuance under our 1995 Stock Option Plan, or 1995 Plan, 260,000 of which were subject to outstanding options. The 1995 Plan provides for the grant of options to which Internal Revenue Code sec.422, relating generally to incentive stock options and other options, does not apply. The 1995 Plan provides for granting stock options to our directors, employees, consultants and contractors. The 1995 Plan is administered by our board of directors. Subject to the provisions of the 1995 Plan, the board of directors has the authority and sole discretion to determine and designate those persons to whom options are granted, the option price of the shares covered by any options granted, the manner in and conditions under which options are exercisable, including any limitations or restrictions thereon, and the time or times at which options shall be granted. Our board of directors may not grant any options under the 1995 Plan more than ten years after its date of adoption. The maximum term of options granted under the 1995 Plan is ten years. Unless terminated earlier in accordance with the provisions of the 1995 Plan, the 1995 Plan will terminate upon the later of: - the complete exercise or lapse of the last outstanding option, or - the last date upon which options may be granted under the 1995 Plan. 1997 Equity Ownership Plan As of June 27, 2000, a total of 3,354,163 shares of common stock were reserved for issuance under our 1997 Equity Ownership Plan, or 1997 Plan, of which options to purchase an aggregate of 2,320,725 shares were outstanding and 1,033,438 shares were available for future grant. No participant in the 1997 Plan may be granted awards in excess of 30% of the total number of shares authorized for issuance under the 1997 Plan. The 1997 Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code, nonqualified stock options, shares of restricted stock, stock appreciation rights and performance awards to our employees, directors, consultants and advisors. Incentive stock options may be granted only to our employees. The 1997 Plan is administered by our board of directors or its designee(s). Subject to the provisions of the 1997 Plan, the administrator has the authority to determine: - to whom awards will be granted, - the time when awards may be granted, - the number of shares to be covered by an award, - when an award becomes exercisable, 48 51 - the exercise price of an award, which price, in the case of incentive stock options, shall not be less than the fair market value of our common stock on the date of grant or, in the case of incentive stock options granted to employees who own, directly or indirectly, more than 10% of our total combined voting power, 110% of the fair market value of our common stock on the date of grant, and - any restrictions or conditions on the shares subject to awards. The maximum term of incentive stock options granted under the 1997 Plan is ten years. Our board of directors may terminate the 1997 Plan at any time, provided that no termination without the consent of the holder of an award shall adversely affect the rights of the participant under the award. 401(k) Plan We have established a tax-qualified employee savings and retirement plan, or 401(k) Plan. Under the 401(k) Plan, eligible participating employees may elect to contribute up to 15% of their salary, up to the maximum amount of tax deferred contribution allowed by the Internal Revenue Code. The 401(k) Plan permits us to make discretionary matching contributions. During 1999 we matched 50% of employees' contributions, up to a maximum of 6% of employees' annual base compensation. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees or by us to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that our contributions will be deductible by us when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any number of investment options. EMPLOYMENT AND CONSULTING AGREEMENTS We do not have employment agreements with any of our employees. We expect to enter into an employment agreement with Dr. Medford within the next 30 days. Our proposed employment agreement with Dr. Medford will have an initial term of three years, commencing on the effective date of the agreement. The initial term will extend automatically for one year on the second anniversary of the effective date of the agreement and on each anniversary thereafter, unless, prior to such anniversary, either party gives notice that it wishes to terminate the agreement at the end of the then current employment term. The proposed agreement provides for a base salary of not less than $275,000 per year and annual incentive compensation to be determined by our board of directors in its discretion. However, for the first year of the agreement, the target annual incentive would be $100,000 or 38% of base salary. Following our initial public offering, our board of directors would grant annually to Dr. Medford (subject to availability) additional stock or stock options with a value of at least 60% of Dr. Medford's then current base salary. The proposed employment agreement also provides Dr. Medford with an allowance for financial and tax planning assistance not to exceed $15,000 during the first year of the agreement and not to exceed $7,500 annually in subsequent years. If we terminate the agreement other than for cause or we choose not to extend the agreement, or if Dr. Medford terminates the agreement as a result of a constructive discharge or a change of control of AtheroGenics, we must continue Dr. Medford's then current base salary and target annual incentive for two years from the effective date of such termination. In the event that Dr. Medford voluntarily resigns or is discharged for cause, he will receive no special severance benefits or compensation. We expect that Dr. Medford's employment contract will have post-termination noncompete and nonsolicitation provisions typical for a person serving as an executive officer of a company. On May 11, 2000, we entered into a consulting agreement with Dr. Scott, a member of our board of directors, to engage him to serve as Vice President -- Research for a period of up to six months. We agreed to pay Dr. Scott $900 per day onsite, plus we will award him 1,000 shares of common stock for each month of service. As of June 27, 2000, we have awarded Dr. Scott 3,000 shares of common stock. The agreement may be terminated at any time by either party. 49 52 CERTAIN TRANSACTIONS Since January 1, 1997, we have engaged in the following transactions with our directors, officers and 5% shareholders and affiliates of our directors, officers and 5% shareholders: In January 1995, we entered into a license agreement with Emory University. Under the terms of this agreement, Emory granted to us an exclusive right and license to make, use and sell products utilizing inventions claimed in several patents developed by employees of Emory. The Emory employees who developed the licensed patents include Russell M. Medford, M.D., Ph.D., our President, Chief Executive Officer and director, R. Wayne Alexander, M.D., Ph.D., our Secretary and a member of our board of directors, and Sampath Parthasarathy, Ph.D., a member of our scientific advisory board. The license agreement requires us to make royalty payments to Emory based on certain percentages of net revenue we derive from sales of products utilizing inventions claimed in the licensed patents and from sublicensing of the licensed patents. The license agreement also provides for milestone payments to Emory upon the occurrence of certain events relating to the development of products utilizing the licensed patents. Drs. Alexander, Medford and/or Margaret K. Offermann, M.D., Ph.D., Dr. Medford's wife, will receive a portion of our payments to Emory under the license agreement. We paid a signing fee to Emory upon the execution of this agreement and an additional amount for achievement of the first milestone under the agreement. We are required to pay Emory royalties upon sales of products utilizing the patent technology and milestone payments totaling $250,000, if all sales and milestone objections are met. We have not made any other royalty or milestone payments to Emory under this agreement to date. We are a party to a sponsored research agreement with Emory dated October 14, 1996. Under the terms of this agreement, Emory agrees to collaborate with us and furnish the facilities necessary to carry out a specified research program. As discussed above, some of our directors and executive officers are employees of Emory. We have paid approximately $300,000 to Emory pursuant to this agreement. We are a party to a patent purchase agreement dated April 26, 1995 with Sampath Parthasarathy, Ph.D., a member of our scientific advisory board, whereby we are obligated to pay to Dr. Parthasarathy royalties based upon the gross selling price paid to us by a purchaser of any process, service or product that utilizes one of the claimed inventions of the patents purchased from Dr. Parthasarathy. We have not made any royalty payments to Dr. Parthasarathy pursuant to this agreement. In August 1998 we consummated a bridge financing in which we issued an aggregate of $6,000,000 principal amount notes bearing interest at a rate per annum equal to the prime rate as published in The Wall Street Journal plus 2%. At that time we also issued warrants exercisable for shares of our Series B convertible preferred stock covering an aggregate of 10% of the original principal amount of the notes to the purchasers of the notes. We issued $150,000 principal amount notes with the same terms to additional investors in February 1999. In April 1999 we issued warrants exercisable for shares of our Series C convertible preferred stock covering an aggregate of 10% of the original principal amount of the notes to the participants in the bridge financing as consideration for extending the maturity of the notes. The notes and a portion of the accrued interest on the notes were converted into 2,140,357 shares of our Series C convertible preferred stock in April 1999. The investors in this financing consisted principally of the holders of our convertible preferred stock. These investors included 5% shareholders Alliance Technology Ventures, L.P. and related entities, Domain Associates, L.L.C. and related entities and The Sprout Group, as well as Arthur M. Pappas, a member of our board of directors. Russell M. Medford, our President and Chief Executive Officer and a member of our board of directors, is a Special Limited Partner of Alliance, Michael A. Henos, Chairman of our board of directors, is the General Partner of Alliance, Richard S. Schneider, a member of our board of directors, is a General Partner of One Palmer Square Associates III, L.P., the General Partner of Domain Partners III, L.P. and DP III Associates, L.P., and was a Managing Member of Domain Associates, L.L.C. until 1998, and Vijay K. Lathi, a member of our board of directors, is an associate with Sprout. In July 1999, we entered into a sublease agreement with ATV Management Corp. for certain office space that, unless otherwise extended, will expire in July 2002. Michael A. Henos, Chairman of our board of directors, is the President and sole shareholder of ATV Management. The agreement provides for 50 53 monthly lease payments of approximately $6,200 to us from ATV Management. This monthly lease payment is substantially equivalent to our monthly lease payment for equivalent space. To date, we have received approximately $62,000 from ATV Management pursuant to this agreement. In April, May and August of 1999, we issued an aggregate of 5,899,999 shares of Series C convertible preferred stock at a price of $3.00 per share. Investors in this financing included 5% shareholders Alliance, Domain and Sprout, and their related entities, referred to above. 51 54 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of our common stock as of June 27, 2000 and as adjusted to reflect the sale of common stock offered hereby for: - each person who is known by us to beneficially own more than 5% of our common stock; - our Chief Executive Officer and each of our Named Executive Officers; - each of our directors; and - all of our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to the securities. Except as indicated by footnote, and subject to applicable community property laws, the persons and entities named in the table below have sole voting and sole investment power with respect to the shares set forth opposite such person's or entity's name. The percentage of beneficial ownership before the offering is based on 16,820,585 shares, consisting of 2,961,483 shares of common stock outstanding as of June 27, 2000, and 13,859,102 shares issuable upon conversion of preferred stock. The percentage of beneficial ownership after the offering is based on 22,820,585 shares, including the shares to be sold in this offering. Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days of June 27, 2000 are deemed outstanding for purposes of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person. The post-offering ownership percentages in the table below do not take into account any exercise of the underwriters' over-allotment option. Unless otherwise indicated, the address for each of the individuals listed in the table is c/o AtheroGenics, Inc., 8995 Westside Parkway, Alpharetta, Georgia 30004.
PERCENT BENEFICIALLY OWNED ------------------- SHARES BEFORE AFTER BENEFICIALLY THE THE BENEFICIAL OWNER OWNED OFFERING OFFERING - ---------------- ------------ -------- -------- Entities affiliated with Alliance Technology Ventures, L.P. ..................................................... 2,735,008(1) 16.3% 12.0% 8995 Westside Parkway Suite 200 Alpharetta, Georgia 30004 Entities affiliated with William Blair Capital Partners VI, L.P. ..................................................... 2,678,667(2) 15.9% 11.7% 232 West Adams Street Chicago, Illinois 60606 Entities affiliated with Sprout Capital, VII, L.P........... 1,709,212(3) 10.1% 7.5% 3000 Sand Hill Road Building 4, Suite 270 Menlo Park, California 94025 Entities affiliated with Domain Associates, L.L.C........... 1,655,557(4) 9.8% 7.2% One Palmer Square Suite 515 Princeton, New Jersey 08542 3i Bioscience Investment Trust plc................................................... 953,912(4) 5.7% 4.2% 91 Waterloo Road London SE18XP England Michael A. Henos............................................ 2,891,008(5) 17.2% 12.7%
52 55
PERCENT BENEFICIALLY OWNED ------------------- SHARES BEFORE AFTER BENEFICIALLY THE THE BENEFICIAL OWNER OWNED OFFERING OFFERING - ---------------- ------------ -------- -------- Arda Minocherhomjee, Ph.D. ................................. 2,678,667(6) 15.9% 11.7% Richard S. Schneider, Ph.D. ................................ 1,524,557(7) 9.0% 6.7% Russell M. Medford, M.D., Ph.D. ............................ 821,900(8) 4.8% 3.6% R. Wayne Alexander, M.D., Ph.D. ............................ 798,900(9) 4.7% 3.5% T. Forcht Dagi, M.D. ....................................... 678,666(10) 4.0% 3.0% Arthur M. Pappas............................................ 125,301(11) * * Uday Saxena, Ph.D........................................... 97,850 * * Mitchell Glass, M.D......................................... 89,800(12) * * Vaughn D. Bryson............................................ 55,032 * * Mark P. Colonnese........................................... 44,400(12) * * William A. Scott, Ph.D...................................... 44,000(13) * * Don Kirksey, Ph.D........................................... 39,000(12) * * Vijay K. Lathi.............................................. 12,000(12) * * All directors and executive officers as a group (14 persons).................................................. 9,901,081 56.7% 42.2
- --------------- * Less than one percent (1%) of outstanding shares. (1) Includes 2,089,879 shares owned by Alliance Technology Ventures, L.P., 483,011 shares owned by ATV/GP Parallel Fund, L.P., and 162,118 shares owned by ATV/MFJ Parallel Fund, L.P. Michael A. Henos, managing general partner of Alliance Technology Venture, L.P., exercises voting and investment power over the shares owned by these entities. See footnote (5) below. (2) Includes 12,000 shares subject to options exercisable within 60 days by William Blair & Company, L.L.C. and 2,666,667 shares owned by William Blair Capital Partners VI, L.P. Arda Minocherhomjee, Managing Director of William Blair Capital Partners, LLC, which is the general partner of William Blair Capital Partners VI, L.P., exercises voting and investment power over these shares. See footnote (6) below. (3) Includes 1,424,388 shares owned and 62,468 shares subject to warrants exercisable within 60 days by Sprout Capital VII, L.P.; 16,525 shares owned and 726 shares subject to warrants exercisable within 60 days by Sprout CEO Fund, L.P.; 163,740 shares owned and 7,182 shares subject to warrants exercisable within 60 days by DLJ First ESC, L.P.; and 32,747 shares owned and 1,436 shares subject to warrants exercisable within 60 days by DLJ Capital Corp. Philippe Chambon, Vice President of Sprout Group, exercises voting and investment power over the shares owned by these entities. (4) Includes 46,443 shares owned and 2,230 shares subject to warrants exercisable within 60 days by DP III Associates, L.P.; 1,342,446 shares owned and 64,438 shares subject to warrants exercisable within 60 days by Domain Partners III, L.P.; and 200,000 shares owned by Domain Associates, L.L.C. Kathleen Shoemaker, a partner with Domain Associates, L.L.C., exercises voting and investment power over the shares owned by these entities. The shares indicated do not include 906,038 shares owned or 47,874 shares subject to warrants exercisable within 60 days by 3i Bioscience Investment Trust plc, for whom Domain Associates serves as U.S. venture capital adviser and with respect to whose shares Domain Associates has no voting or investment power. (5) Includes 2,735,008 shares owned by entities affiliated with Alliance Technology Ventures, L.P. Alliance Technology Ventures, L.P. is a limited partnership of which Mr. Henos is managing general partner. As such, Mr. Henos shares voting and investment power over the shares owned by Alliance. (6) Includes 2,666,667 shares owned by William Blair Capital Partners VI, L.P. Dr. Minocherhomjee is Managing Director of William Blair Capital Partners, LLC, which is the general partner of William Blair Capital Partners VI, L.P. As such, Dr. Minocherhomjee shares voting and investment power over the shares owned by William Blair Capital Partners VI, L.P. Also includes 12,000 shares 53 56 subject to options exercisable within 60 days by William Blair & Company, L.L.C. over which Dr. Minocherhomjee shares voting and investment power. (7) Includes 46,443 shares owned and 2,230 shares subject to warrants exercisable within 60 days by DP III Associates, L.P.; 1,342,446 shares owned and 64,438 shares subject to warrants exercisable within 60 days by Domain Partners III, L.P.; and 48,000 shares held in the name of Domain Associates, L.L.C. as nominee for Dr. Schneider. Dr. Schneider is a general partner of One Palmer Square Associates III, L.P., the general partner of Domain Partners III, L.P. and DP III Associates, L.P. As such, Dr. Schneider shares voting and investment power over the shares owned by DP III Associates and Domain Partners III. The shares indicated also include 21,000 shares subject to options exercisable by Dr. Schneider within 60 days. (8) Includes 166,000 shares subject to options exercisable within 60 days. (9) Includes 139,000 shares subject to options exercisable within 60 days. (10) Includes 666,666 shares owned by Cordova Technology Partners, L.P. Cordova is a limited partnership of which Dr. Dagi is both a limited and general partner. As such, Dr. Dagi has voting and investment power over the shares owned by Cordova. The shares indicated also include 12,000 shares subject to options exercisable by Dr. Dagi within 60 days. (11) Includes 87,301 shares held by A.M. Pappas Strategic Equities Fund II, L.P., a limited partnership of which Mr. Pappas is the general partner and 30,000 shares held by A.M. Pappas & Associates, LLC, in which Mr. Pappas holds a controlling interest and of which Mr. Pappas is the Chairman and Chief Executive Officer. As such, Mr. Pappas exercises voting and investment power over these shares. (12) All of the shares indicated are subject to options exercisable within 60 days. (13) Includes 41,000 shares subject to options exercisable within 60 days. 54 57 DESCRIPTION OF CAPITAL STOCK GENERAL Our Fourth Amended and Restated Articles of Incorporation, which will become effective immediately prior to the closing of this offering, authorizes the issuance of up to 100 million shares of common stock, no par value, and five million shares of preferred stock, no par value, the rights and preferences of which may be established from time to time by our board of directors. As of June 27, 2000, 2,961,483 shares of common stock were issued and outstanding and 13,859,102 shares of preferred stock convertible into the same number of shares of common stock immediately prior to the completion of this offering were issued and outstanding. As of June 27, 2000, we had 42 common shareholders of record. Immediately after the closing of this offering, we will have 22,820,525 shares of common stock outstanding, assuming no exercise of options to acquire 2,580,725 additional shares of common stock or warrants to purchase 250,290 additional shares of common stock that are outstanding as of the date of this prospectus. The description set forth below gives effect to the filing of the Fourth Amended and Restated Articles of Incorporation and the adoption of the Third Amended and Restated Bylaws. The following summary is qualified in its entirety by reference to our Fourth Amended and Restated Articles of Incorporation and Third Amended and Restated Bylaws, copies of which will be filed as exhibits to the registration statement of which this prospectus is a part. COMMON STOCK Holders of our common stock have unlimited voting rights. Each shareholder is entitled to one vote for each share on all matters to be voted upon by the shareholders. There are no cumulative voting rights and no preemptive or conversion rights. There are no redemption or sinking fund provisions available to the common stock. Holders of our common stock are entitled to receive dividends share for share on a pro rata basis when, as and if declared by the board of directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of AtheroGenics, holders of common stock will be entitled to share ratably in all assets remaining after payment of liabilities of AtheroGenics. PREFERRED STOCK Our board of directors is authorized, subject to any limitations prescribed by law, without shareholder approval, to issue from time to time up to an aggregate of five million shares of preferred stock, in one or more series, each series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as shall be determined by our board of directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. As of the consummation of the offering, we will have no shares of preferred stock outstanding and we have no present plans to issue any shares of preferred stock. WARRANTS We have issued and outstanding warrants to purchase an aggregate of 250,290 shares of our capital stock. In February 1996 and October 1997 we issued to Phoenix Leasing Incorporated warrants to purchase 12,500 shares of Series B convertible preferred stock at an exercise price of $3.00 per share, which are exercisable for five years following this offering. Prior to this offering, these warrants will convert into the right to purchase 12,500 shares of common stock at the same price per share. In July 1998, we issued to Cousins Properties, Inc. a warrant to purchase 50,000 shares of Series B-1 convertible preferred stock at an exercise price of $5.00 per share, which is exercisable until January 2009. Prior to this offering, 55 58 this warrant will convert into the right to purchase 50,000 shares of common stock at the same price per share. In August 1998, we issued to certain investors warrants to purchase 205,002 shares of Series B convertible preferred stock at an exercise price of $3.00 per share, which are exercisable until August 19, 2008. Prior to this offering, these warrants will convert into the right to purchase 205,002 shares of common stock at the same price per share. In April 1999, we issued to certain investors warrants to purchase 200,001 shares of Series C convertible preferred stock at an exercise price of $3.00 per share, which are exercisable until December 31, 2008. Prior to this offering, these warrants will convert into the right to purchase 200,001 shares of common stock at the same price per share. REGISTRATION RIGHTS Demand Registration. According to the terms of the Amended and Restated Master Rights Agreement dated as of October 31, 1995, as amended, beginning 180 days after the closing of this offering the holders of 14,724,342 shares of common stock and warrants to acquire 200,290 additional shares of common stock have the right to require us to effect a registration of their stock on Form S-1, Form S-2, Form SB-1 or Form SB-2 so that those shares may be resold to the public. To demand a registration, the holders having such registration rights must propose to dispose of at least 20% of the common stock subject to registration or the anticipated aggregate offering price must be at least $15,000,000. If such a request is made, then the Company must use its best efforts to effect the registration. We only have to file two registration statements requested in this manner. In addition, the holders of common stock having registration rights may require us to effect a registration of their stock of Form S-3 at any time that we are eligible to file a registration on that form if those shareholders making the request propose to dispose of at least $1,000,000 in the offering. We may delay filing a demand registration if the statement would become effective within 180 days of an underwritten registration statement filed by us. We may also defer the filing of a demand registration for a period of up to 90 days once in any 12-month period. Piggyback Registration. In addition, if we register in an underwritten offering any securities for public sale, other than a registration relating solely to employee benefit plans, a registration relating solely to a Rule 145 transaction, or a registration on any form that does not include substantially the same information as would be required in a registration statement covering secondary sales of stock, holders of demand registration rights will have the right to include their shares in the registration statement. Piggyback registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares of common stock to be included in the registration. We are generally required to bear the expenses of all registrations, except underwriting discounts and commissions. The Master Rights Agreement also contains our commitment to indemnify the holders of registration rights for losses attributable to statements or omissions by us incurred in connection with registrations under the agreement. EFFECTS OF CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND GEORGIA LAW Classified Board and Removal of Directors. Our Articles of Incorporation provide for our board of directors to be elected initially to staggered one, two and three year terms and, thereafter, for three year terms. In addition, members of our board of directors may only be removed for cause, which requires the affirmative vote of the holders of at least 75% of the outstanding shares of our common stock. The classification of directors, together with the limitation on the removal of directors, has the effect of making it more difficult for shareholders to change the composition of our board of directors. Shareholder Action; Special Meeting of Shareholders. Our shareholders may not take action, outside of a duly called annual or special meeting, by less than unanimous consent. Our bylaws further provide that special meetings of our shareholders may be called only upon the request of the holders of not less than 75% of the shares then outstanding and entitled to vote. 56 59 Advance Notice Requirements for Shareholder Proposals and Director Nominations. Our bylaws provide that any shareholder proposals or director nominations must be provided to us in writing at least 60 days before the date of an annual meeting of shareholders or, in the case of a special meeting of shareholders, at least 60 days prior to such meeting or the tenth day following the day on which public announcement is made of the date of the meeting. Our bylaws also specify requirements as to form and content of a shareholder's notice. Such provisions may preclude shareholders from bringing matters before the shareholders at an annual or special meeting. Anti-takeover Provisions and Georgia Law. The Georgia Business Corporation Code, or Georgia Code, generally restricts a corporation from entering into certain business combinations with an interested shareholder, which is defined as any person or entity that is the beneficial owner of at least 10% of a company's voting stock, or its affiliates, for a period of five years after the date on which the shareholder became an interested shareholder, unless: - the transaction is approved by the board of directors of the corporation prior to the date the person became an interested shareholder; - the interested shareholder acquires 90% of the corporation's voting stock in the same transaction in which it exceeds 10%; or - subsequent to becoming an interested shareholder, the shareholder acquires 90% of the corporation's voting stock and the business combination is approved by the holders of a majority of the voting stock entitled to vote on the transaction. The fair price provisions of the Georgia Code further restrict business combination transactions with 10% shareholders. These provisions require that the consideration paid for stock acquired in the business combination must meet specified tests that are designed to ensure that shareholders receive at least fair market value for their shares in the business combination. The interested shareholder and fair price provisions of the Georgia Code do not apply to a corporation unless the bylaws of the corporation specifically provide that these provisions are applicable to the corporation. We have elected to be covered by these provisions in our bylaws, provided, however, that, notwithstanding anything to the contrary in the provisions, the provisions shall not apply to any business combination with (1) any shareholder who was an interested shareholder as of the date we adopted our bylaws or (2) any person or entity that is at the time of such business combination wholly owned by such interested shareholder. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for our common stock is American Stock Transfer & Trust Company. LISTING We have applied to have our common stock quoted on the Nasdaq National Market under the symbol "AGIX." 57 60 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock, and we cannot assure you that a significant public market for the common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants, in the public market following this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. As described below, 6,002,054 shares currently outstanding will be available for sale immediately after this offering. SALES OF RESTRICTED SECURITIES Upon completion of this offering, we will have outstanding 22,820,585 shares of common stock, based upon shares outstanding as of June 27, 2000, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants that do not expire prior to completion of this offering. Of these shares, the shares sold in this offering will be freely tradable without restriction under the Securities Act, except for any shares purchased by our "affiliates" as defined in Rule 144 under the Securities Act. An additional 2,054 shares will also be freely tradeable under Rule 144(k). The remaining 16,818,531 shares of common stock held by existing shareholders are "restricted shares" as defined in Rule 144. 114,096 of these shares are subject to a 120-day lock-up pursuant to a master rights agreement between us and certain shareholders of AtheroGenics. All of the remaining restricted shares are subject to lock-up agreements providing that for a period of 180 days after the date of this prospectus, without the prior written consent of Chase Securities Inc., the shareholder will not offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock owned as of the date of this prospectus or acquired directly from us by the shareholder or with respect to which they have or may acquire the power of disposition, other than transfers by individual shareholders to family members or trusts or other legal entities for the benefit of family members, charitable organizations, or other legal entities over which such individual shareholder maintains control over the disposition and voting of such shares; or by non-individual shareholders to equity owners of that entity provided that such equity owners maintain control over the disposition and voting of such shares. As a result of these lock-up agreements, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, none of these shares will be resellable until 181 days after the date of this prospectus. Chase Securities Inc. may, in its sole discretion, and at any time without notice, release all or any portion of the restricted shares subject to lock-up agreements. Beginning 181 days after the date of this prospectus, approximately 15,283,911 restricted shares will be eligible for sale in the public market. All of these shares are subject to volume limitations under Rule 144, except 2,107,355 shares eligible for sale under Rule 144(k) and no shares eligible for sale under Rule 701, subject in some cases to repurchase rights of AtheroGenics. In addition, as of June 27, 2000, there were outstanding warrants to purchase 250,290 shares of common stock. Rule 144. In general, under Rule 144, as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year, including the holding period of any prior owner except an affiliate of AtheroGenics, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1.0% of the number of shares of common stock then outstanding, which will equal approximately 228,206 shares immediately after this offering; or - the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate of us at any time during the three months preceding a sale, and who has 58 61 beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner except an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701. Rule 701, as currently in effect, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144. Any employee, officer or director of or consultant to us who purchased shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell their Rule 701 shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their Rule 701 shares. However, certain Rule 701 shares are subject to lock-up agreements and will only become eligible for sale at the earlier of the expiration of the 180-day lock-up agreements or the receipt of the written consent of Chase Securities Inc. more than 90 days after the date of this prospectus. After this offering, we intend to file a registration statement on Form S-8 registering shares of common stock subject to outstanding options or reserved for future issuance under our benefit plans. As of June 27, 2000, options to purchase a total of 2,580,725 shares were outstanding and 1,051,238 shares were reserved for future issuance under our benefit plans. Any shares of common stock issued upon exercise of outstanding vested options, other than common stock issued to our affiliates or subject to lock-up agreements, will be available for immediate resale in the open market following the effectiveness of such registration statement. LOCK-UP AGREEMENTS We, all of our executive officers and directors, all principal shareholders and other existing shareholders who, upon the closing of this offering, will beneficially own an aggregate of 16,686,317 outstanding shares of common stock, together with holders of options to purchase 2,580,725 shares of common stock and holders of warrants to purchase 187,072 shares of common stock, have agreed that for a period of 180 days following the date of this prospectus, without the prior written consent of Chase Securities Inc., they will not: - directly or indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise dispose of, other than by operation of law, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, including, without limitation, common stock which may be deemed to be beneficially owned in accordance with the rules and regulations promulgated under the Securities Act; or - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. Notwithstanding the foregoing, our shareholders who have agreed to sign the lock-up agreement have the right, without the prior written consent of Chase Securities Inc., to transfer shares held by individual shareholders to family members, trusts, charitable organizations, or other legal entities over which such individual shareholder maintains control over the disposition and voting of such shares; or by non-individual shareholders to equity owners of that entity provided that such equity owners maintain control over the disposition and voting of such shares. 59 62 UNDERWRITING Chase Securities Inc., Adams, Harkness & Hill, Inc. and A.G. Edwards & Sons, Inc. are the representatives of the underwriters. Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representatives, have severally agreed to purchase from us the following respective numbers of shares of common stock:
NUMBER NAME OF SHARES - ---- --------- Chase Securities Inc........................................ Adams, Harkness & Hill, Inc................................. A.G. Edwards & Sons, Inc.................................... --------- Total..................................................... 6,000,000 =========
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and the independent auditors. The underwriters are committed to purchase all of the common shares offered by us if they purchase any shares. The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters. Such amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares. UNDERWRITING DISCOUNTS AND COMMISSIONS
WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT EXERCISE EXERCISE -------------- -------------- Per Share.................................................. $ $ Total...................................................... $ $
We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $2.0 million. The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. The underwriters may allow and such dealers may re-allow a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. The representatives have advised us that the underwriters do not intend to confirm discretionary sales in excess of 5% of the shares of common stock offered in this offering. We have granted to the underwriters a 30-day option to purchase up to 900,000 additional shares of common stock at the initial public offering price, less the underwriting discount set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares of common stock offered hereby. We will be obligated, pursuant to this option, to sell shares to the underwriters to the extent the options are exercised. The underwriters may exercise these options only to cover over-allotments made in connection with the sale of shares of common stock offered by us. The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. 60 63 We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of these liabilities. Substantially all of our security holders and all of our executive officers and directors have agreed or will agree, subject to certain limited exceptions, prior to completion of this offering, that they will not, without the prior written consent of Chase Securities Inc., offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of any shares of capital stock, options or warrants to acquire shares of capital stock or securities exchangeable for or convertible into shares of capital stock owned by them for a period of 180 days following the date of this prospectus. We have agreed that we will not, without the prior written consent of Chase Securities Inc., offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of any shares of capital stock, options or warrants to acquire shares of capital stock or securities exchangeable for or convertible into shares of capital stock for a period of 180 days following the date of this prospectus, except that we may issue shares upon the exercise of options and warrants granted prior to the date hereof. We may also grant additional options or other awards under our stock option plans. Without the prior written consent of Chase Securities Inc., any additional options granted shall not be exercisable during this 180-day period. The representatives of the underwriters participating in this offering may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the common shares at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the shares of common stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the underwriters to reclaim a selling concession from a syndicate member in connection with the offering when common shares sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. Prior to this offering, there has been no public market for our common shares. The initial public offering price for the common shares will be determined by negotiations among us and the representatives. Among the factors to be considered in determining the initial public offering price will be prevailing market and economic conditions, our revenue and earnings, market valuations of other companies engaged in activities similar to our business operations and our management. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions or other factors. At our request, the underwriters have reserved up to 10% of the shares of common stock for sale at the initial public offering price to our directors, business associates and related persons. The number of common shares available for sale to the general public will be reduced if such persons purchase the reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. We have applied for listing of our shares of common stock on the Nasdaq National Market under the symbol AGIX. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Long Aldridge & Norman LLP, Atlanta, Georgia. Certain legal matters will be passed upon for the Underwriters by Brown & Wood LLP, New York, New York. As of the date of this prospectus, Long Aldridge & Norman LLP is the beneficial owner of 33,332 shares of our common stock. 61 64 EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, as set forth in their report. We've included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. King & Spalding is our patent counsel. The statements in this prospectus under the captions "Our failure to adequately protect or enforce our intellectual property rights or secure rights to third party patents could materially adversely affect our proprietary position in the marketplace or prevent the commercialization of our products" in the risk factors section, and "Patents and Intellectual Property" in the business section have been reviewed and approved by King & Spalding, as experts in such matters. We have included these statements in reliance upon that review and approval. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act, and the rules and regulations promulgated thereunder, with respect to the shares of common stock offered by this prospectus. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits thereto. Statements contained in this prospectus as to the contents of any contract or other document that is filed as an exhibit to the registration statement are not necessarily complete and each such statement is qualified in all respects by reference to the full text of such contract or document. You may read and copy all or any portion of the registration statement and the exhibits at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these documents, upon payment of a duplication fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the SEC's public reference rooms. Also, the SEC maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. As a result of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934 and, in accordance therewith, will file periodic reports, proxy and information statements and other information with the SEC. These periodic reports, proxy and information statements and other information will be available for inspection and copying at the public reference facilities, regional offices and SEC's website referred to above. 62 65 ATHEROGENICS, INC. INDEX TO FINANCIAL STATEMENTS CONTENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-4 Statements of Redeemable Convertible Preferred Stock and Common Shareholders' Deficit.......................... F-5 Statements of Cash Flows.................................... F-6 Notes to Financial Statements............................... F-7
F-1 66 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders AtheroGenics, Inc. We have audited the accompanying balance sheets of AtheroGenics, Inc. as of December 31, 1998 and 1999, and the related statements of operations, redeemable convertible preferred stock and common shareholders' deficit 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 generally accepted auditing standards 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 AtheroGenics, 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 31, 1999, in conformity with generally accepted accounting principles in the United States. /s/ Ernst & Young LLP Atlanta, Georgia February 18, 2000 F-2 67 ATHEROGENICS, INC. BALANCE SHEETS
PRO FORMA COMMON DECEMBER 31, MARCH 31, SHAREHOLDERS' EQUITY --------------------------- ----------- AT 1998 1999 2000 MARCH 31, 2000 ------------ ------------ ----------- ---------------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................ $ 3,683,423 $ 13,409,450 $10,010,491 Unbilled receivables................................. -- 791,653 2,049,600 Interest and other receivables....................... 62,160 32,708 51,549 Reimbursable expenditures under operating lease...... 1,153,440 -- -- Prepaid expenses..................................... 43,422 56,911 465,986 ------------ ------------ ----------- Total current assets........................... 4,942,445 14,290,722 12,577,626 Equipment and leasehold improvements: Leasehold improvements............................... 369,627 1,137,868 1,137,868 Laboratory equipment................................. 796,683 904,599 1,130,776 Computer and office equipment........................ 54,701 168,899 264,454 Construction in progress............................. -- 124,730 311,896 ------------ ------------ ----------- 1,221,011 2,336,096 2,844,994 Less accumulated depreciation and amortization....... 821,640 1,101,463 1,196,422 ------------ ------------ ----------- 399,371 1,234,633 1,648,572 Long-term note receivable.............................. -- 191,859 190,500 ------------ ------------ ----------- Total assets................................... $ 5,341,816 $ 15,717,214 $14,416,698 ============ ============ =========== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable..................................... $ 1,449,553 $ 679,142 $ 559,080 Accrued liabilities.................................. 46,755 285,600 323,958 Accrued development costs............................ 1,291,514 240,000 418,799 Accrued interest..................................... 215,753 -- -- Current portion of capitalized lease obligation...... 198,236 101,408 138,378 Current portion of deferred revenues................. -- 3,333,333 3,333,333 Bridge loan.......................................... 6,000,000 -- -- ------------ ------------ ----------- Total current liabilities...................... 9,201,811 4,639,483 4,773,548 Long-term portion of capitalized lease obligation...... 163,262 61,854 164,811 Long-term portion of deferred revenues................. -- 1,111,111 277,778 Redeemable convertible preferred stock: Series A, $1 par and liquidation value: Authorized -- 1,000,000 shares; issued and outstanding -- 1,000,000 shares (none pro forma)... 1,000,000 1,000,000 1,000,000 $ -- Series B, $3 par and liquidation value: Authorized -- 4,804,382 shares; issued and outstanding -- 4,586,815 shares at December 1998 and 1999 and 4,695,974 at March 31, 2000 (none pro forma)............................................. 13,704,499 13,704,499 14,164,057 -- Series C, $3 par and liquidation value: Authorized -- 8,500,000 shares; issued and outstanding -- 8,057,022 and 8,163,128 shares at December 31, 1999 and March 31, 2000, respectively (none pro forma)................................... -- 24,006,992 24,440,231 -- Series B-1, $5 par and liquidation value: Authorized 50,000 shares (none outstanding).......... -- -- -- -- Preferred stock warrants............................. 246,125 481,875 225,713 -- Commitments and contingencies........................ -- -- -- -- Common shareholders' equity (deficit): Common stock, no par value: Authorized -- 21,100,000 shares; issued and outstanding -- 2,410,375, 2,536,543 and 2,805,308 shares at December 31, 1998 and 1999 and March 31, 2000, respectively (16,180,380 shares pro forma)... 281,751 2,209,962 11,237,117 50,841,405 Warrants............................................. -- -- -- 225,713 Deferred stock compensation.......................... -- (1,809,680) (9,186,237) (9,186,237) Accumulated deficit.................................. (19,255,632) (29,688,882) (32,680,320) (32,680,320) ------------ ------------ ----------- ------------ Total common shareholders' equity (deficit).... (18,973,881) (29,288,600) (30,629,440) 9,200,561 ------------ ------------ ----------- Total liabilities, redeemable convertible preferred stock and shareholders' deficit.... $ 5,341,816 $ 15,717,214 $14,416,698 ============ ============ ===========
The accompanying notes are an integral part of these financial statements. F-3 68 ATHEROGENICS, INC. STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------- ------------------------- 1997 1998 1999 1999 2000 ----------- ------------ ------------ ----------- ----------- (UNAUDITED) Revenues: License fees.......................... $ -- $ -- $ 555,556 $ -- $ 833,333 Research and development.............. -- -- 791,653 1,257,947 ----------- ------------ ------------ ----------- ----------- Total revenues................. -- -- 1,347,209 -- 2,091,280 Operating expenses: Research and development, exclusive of $23,649 and $360,751 for the year ended December 31, 1999 and three months ended March 31, 2000, respectively, reported below as amortization of deferred stock compensation........................ 4,656,478 8,954,904 9,041,345 2,200,960 2,885,640 General and administrative, exclusive of $61,831 and $1,207,732 for the year ended December 31, 1999 and three months ended March 31, 2000, respectively, reported below as amortization of deferred stock compensation........................ 988,230 1,573,807 2,593,017 427,132 786,362 Amortization of deferred stock compensation........................ -- -- 85,480 -- 1,568,483 ----------- ------------ ------------ ----------- ----------- Total operating expenses....... 5,644,708 10,528,711 11,719,842 2,628,092 5,240,485 ----------- ------------ ------------ ----------- ----------- Operating loss.......................... (5,644,708) (10,528,711) (10,372,633) (2,628,092) (3,149,205) Net interest income (expense)........... 485,392 (205,130) (60,617) (122,243) 157,767 ----------- ------------ ------------ ----------- ----------- Net loss................................ $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438) =========== ============ ============ =========== =========== Net loss per share -- basic and diluted............................... $ (2.25) $ (4.45) $ (4.27) $ (1.14) $ (1.13) =========== ============ ============ =========== =========== Weighted average shares outstanding -- basic and diluted...... 2,292,966 2,409,948 2,443,237 2,412,125 2,635,816 =========== ============ ============ =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 69 ATHEROGENICS, INC. STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON SHAREHOLDERS' DEFICIT
REDEEMABLE CONVERTIBLE PREFERRED STOCK ------------------------------------------------ SERIES A SERIES B ---------------------- ----------------------- SHARES AMOUNT SHARES AMOUNT --------- ---------- --------- ----------- BALANCE AT JANUARY 1, 1997 1,000,000 $1,000,000 4,570,149 $13,654,501 Issuance of stock for exercise of stock options at $.10 to $.30 per share...................... -- -- -- -- Issuance of warrants in relation to capital lease.......................................... -- -- -- -- Issuance of stock options for consulting services at fair value of $.08 per share....... -- -- -- -- Net loss........................................ -- -- -- -- --------- ---------- --------- ----------- BALANCE AT DECEMBER 31, 1997 1,000,000 1,000,000 4,570,149 13,654,501 Issuance stock for exercise of stock options at $.30 per share................................. -- -- -- -- Issuance of 50,000 Series B-1 convertible preferred stock warrant in relation to building agreement...................................... -- -- -- -- Issuance of 200,001 Series B convertible preferred stock warrants in relation to bridge loan agreement................................. -- -- -- -- Issuance of stock for legal services at $3 per share.......................................... -- -- 16,666 49,998 Net loss........................................ -- -- -- -- --------- ---------- --------- ----------- BALANCE AT DECEMBER 31, 1998.................... 1,000,000 1,000,000 4,586,815 13,704,499 Issuance of stock for exercise of stock options at $.10 to $.30 per share...................... -- -- -- -- Issuance of stock at $3 per share, net of issuance cost of $164,074...................... -- -- -- -- Issuance of 205,002 Series C convertible preferred stock warrants in relation to extension of bridge loan agreement............. -- -- -- -- Issuance of stock for the conversion of the bridge loan and accrued interest at $3 per share.......................................... -- -- -- -- Issuance of stock for legal services at $3 per share.......................................... -- -- -- -- Deferred stock compensation related to stock option grants.................................. -- -- -- -- Amortization of deferred stock compensation..... -- -- -- -- Net loss........................................ -- -- -- -- --------- ---------- --------- ----------- BALANCE AT DECEMBER 31, 1999.................... 1,000,000 1,000,000 4,586,815 13,704,499 Issuance of stock for exercise of stock options at $.30 to $.38 per share (unaudited).......... -- -- -- -- Issuance of stock upon exercise of stock warrants (unaudited)........................... -- -- 109,159 459,558 Deferred stock compensation related to stock option grants (unaudited)...................... -- -- -- -- Amortization of deferred stock compensation (unaudited).................................... -- -- -- -- Net loss (unaudited)............................ -- -- -- -- --------- ---------- --------- ----------- BALANCE AT MARCH 31, 2000 (UNAUDITED)........... 1,000,000 $1,000,000 4,695,974 $14,164,057 ========= ========== ========= =========== REDEEMABLE CONVERTIBLE PREFERRED STOCK ---------------------------------------------- SERIES C PREFERRED --------------------------- STOCK SERIES AMOUNT WARRANTS ---------- ----------- --------- BALANCE AT JANUARY 1, 1997 -- $ -- $ 103 Issuance of stock for exercise of stock options at $.10 to $.30 per share...................... -- -- -- Issuance of warrants in relation to capital lease.......................................... -- -- 22 Issuance of stock options for consulting services at fair value of $.08 per share....... -- -- -- Net loss........................................ -- -- -- ---------- ----------- -------- BALANCE AT DECEMBER 31, 1997 -- -- 125 Issuance stock for exercise of stock options at $.30 per share................................. -- -- -- Issuance of 50,000 Series B-1 convertible preferred stock warrant in relation to building agreement...................................... -- -- 4,000 Issuance of 200,001 Series B convertible preferred stock warrants in relation to bridge loan agreement................................. -- -- 242,000 Issuance of stock for legal services at $3 per share.......................................... -- -- -- Net loss........................................ -- -- -- ---------- ----------- -------- BALANCE AT DECEMBER 31, 1998.................... -- -- 246,125 Issuance of stock for exercise of stock options at $.10 to $.30 per share...................... -- -- -- Issuance of stock at $3 per share, net of issuance cost of $164,074...................... 5,899,999 17,535,923 -- Issuance of 205,002 Series C convertible preferred stock warrants in relation to extension of bridge loan agreement............. -- -- 235,750 Issuance of stock for the conversion of the bridge loan and accrued interest at $3 per share.......................................... 2,140,357 6,421,071 -- Issuance of stock for legal services at $3 per share.......................................... 16,666 49,998 -- Deferred stock compensation related to stock option grants.................................. -- -- -- Amortization of deferred stock compensation..... -- -- -- Net loss........................................ -- -- -- ---------- ----------- -------- BALANCE AT DECEMBER 31, 1999.................... 8,057,022 24,006,992 481,875 Issuance of stock for exercise of stock options at $.30 to $.38 per share (unaudited).......... -- -- -- Issuance of stock upon exercise of stock warrants (unaudited)........................... 106,106 433,239 (256,162) Deferred stock compensation related to stock option grants (unaudited)...................... -- -- -- Amortization of deferred stock compensation (unaudited).................................... -- -- -- Net loss (unaudited)............................ -- -- -- ---------- ----------- -------- BALANCE AT MARCH 31, 2000 (UNAUDITED)........... 8,163,128 $24,440,231 $225,713 ========== =========== ======== COMMON SHAREHOLDERS' DEFICIT ----------------------------------------------------------------------- COMMON STOCK TOTAL COMMON ----------------------- DEFERRED STOCK ACCUMULATED SHAREHOLDERS' SHARES AMOUNT COMPENSATION DEFICIT DEFICIT --------- ----------- -------------- ------------ ------------- BALANCE AT JANUARY 1, 1997 2,287,946 $ 244,822 $ -- $(3,362,475) $ (3,117,653) Issuance of stock for exercise of stock options at $.10 to $.30 per share...................... 121,084 12,325 -- -- 12,325 Issuance of warrants in relation to capital lease.......................................... -- -- -- -- -- Issuance of stock options for consulting services at fair value of $.08 per share....... -- 24,200 -- -- 24,200 Net loss........................................ -- -- -- (5,159,316) (5,159,316) --------- ----------- ----------- ------------ ------------ BALANCE AT DECEMBER 31, 1997 2,409,030 281,347 -- (8,521,791) (8,240,444) Issuance stock for exercise of stock options at $.30 per share................................. 1,345 404 -- -- 404 Issuance of 50,000 Series B-1 convertible preferred stock warrant in relation to building agreement...................................... -- -- -- -- -- Issuance of 200,001 Series B convertible preferred stock warrants in relation to bridge loan agreement................................. -- -- -- -- -- Issuance of stock for legal services at $3 per share.......................................... -- -- -- -- -- Net loss........................................ -- -- (10,733,841) (10,733,841) --------- ----------- ----------- ------------ ------------ BALANCE AT DECEMBER 31, 1998.................... 2,410,375 281,751 -- (19,255,632) (18,973,881) Issuance of stock for exercise of stock options at $.10 to $.30 per share...................... 126,168 33,051 -- -- 33,051 Issuance of stock at $3 per share, net of issuance cost of $164,074...................... -- -- -- -- -- Issuance of 205,002 Series C convertible preferred stock warrants in relation to extension of bridge loan agreement............. -- -- -- -- -- Issuance of stock for the conversion of the bridge loan and accrued interest at $3 per share.......................................... -- -- -- -- -- Issuance of stock for legal services at $3 per share.......................................... -- -- -- -- -- Deferred stock compensation related to stock option grants.................................. -- 1,895,160 (1,895,160) -- -- Amortization of deferred stock compensation..... -- -- 85,480 -- 85,480 Net loss........................................ -- -- -- (10,433,250) (10,433,250) --------- ----------- ----------- ------------ ------------ BALANCE AT DECEMBER 31, 1999.................... 2,536,543 2,209,962 (1,809,680) (29,688,882) (29,288,600) Issuance of stock for exercise of stock options at $.30 to $.38 per share (unaudited).......... 268,765 82,115 -- -- 82,115 Issuance of stock upon exercise of stock warrants (unaudited)........................... -- -- -- -- -- Deferred stock compensation related to stock option grants (unaudited)...................... -- 8,945,040 (8,945,040) -- -- Amortization of deferred stock compensation (unaudited).................................... -- -- 1,568,483 -- 1,568,483 Net loss (unaudited)............................ -- -- -- (2,991,438) (2,991,438) --------- ----------- ----------- ------------ ------------ BALANCE AT MARCH 31, 2000 (UNAUDITED)........... 2,805,308 $11,237,117 $(9,186,237) $(32,680,320) $(30,629,440) ========= =========== =========== ============ ============
The accompanying notes are an integral part of these financial statements. F-5 70 ATHEROGENICS, INC. STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------- ------------------------- 1997 1998 1999 1999 2000 ----------- ------------ ------------ ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net loss........................... $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.... 186,055 250,095 279,823 56,058 99,115 Amortization of deferred stock compensation................... -- -- 85,480 1,568,483 Amortization of debt discount.... -- 242,000 235,750 Stock issued for services........ 24,200 49,998 49,998 -- -- Stock issued for interest........ -- -- 271,071 -- -- Changes in operating assets and liabilities: Interest and other receivables................. 20,073 (1,181,362) 991,033 (837,195) (17,482) Unbilled receivable............ -- -- (791,653) -- (1,257,947) Prepaid expenses............... (37,134) 22,892 (13,489) (40,506) (409,075) Accounts payable............... 706,167 693,404 (770,411) 585,083 (120,062) Accrued liabilities............ -- 1,554,022 (1,028,422) 550,754 217,157 Deferred revenues.............. -- -- 4,444,444 (833,333) ----------- ------------ ------------ ----------- ----------- Net cash used in operating activities.............. (4,259,955) (9,102,792) (6,679,626) (2,436,141) (3,744,582) INVESTING ACTIVITIES Purchases of equipment and leasehold improvements........... (295,284) (62,586) (1,115,085) (70,510) (513,054) ----------- ------------ ------------ ----------- ----------- Net cash used in investing activities.............. (295,284) (62,586) (1,115,085) (70,510) (513,054) FINANCING ACTIVITIES Proceeds of capital lease.......... 192,872 99,984 -- -- 222,500 Payments on capital lease.......... (128,758) (180,951) (198,236) (48,053) (82,573) Proceeds from the issuance of preferred stock, Series C........ -- -- 17,535,923 -- -- Proceeds from the issuance and exercise of preferred stock warrants......................... 22 246,000 -- -- 636,635 Proceeds from the exercise of common stock options............. 12,325 404 33,051 844 82,115 Proceeds from bridge loan financing, net of warrants....... -- 5,758,000 150,000 150,000 -- ----------- ------------ ------------ ----------- ----------- Net cash provided by financing activities.... 76,461 5,923,437 17,520,738 102,791 858,677 ----------- ------------ ------------ ----------- ----------- (Decrease) increase in cash and cash equivalents................. (4,478,778) (3,241,941) 9,726,027 (2,403,860) (3,398,959) Cash and cash equivalents at beginning of period.............. 11,404,142 6,925,364 3,683,423 3,683,423 13,409,450 ----------- ------------ ------------ ----------- ----------- Cash and cash equivalents at end of period........................... $ 6,925,364 $ 3,683,423 $ 13,409,450 $ 1,279,563 $10,010,491 =========== ============ ============ =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid...................... $ 40,567 $ 32,622 $ 28,317 $ 7,073 $ 3,085 Conversion of bridge loan and accrued interest to preferred stock............................ -- -- 6,421,071 -- -- Warrants issued for extension of bridge loan...................... -- -- 235,750 -- --
The accompanying notes are an integral part of these financial statements. F-6 71 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION PERTAINING TO THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Description of Business AtheroGenics, Inc. (the "Company") was incorporated on November 23, 1993 (date of inception) in the State of Georgia to focus on the discovery, development and commercialization of novel drugs for the treatment of chronic inflammatory diseases, such as atherosclerosis, asthma, and arthritis. Prior to 1999, the Company's operations were focused on organizational activities, obtaining financing, recruiting personnel and conducting research and development; therefore, through 1998, the Company was considered to be a development stage company for financial reporting purposes. Unaudited Interim Financial Statements The financial statements as of March 31, 2000 and for the three month periods ended March 31, 1999 and 2000 are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the Company's management, necessary for a fair presentation of financial position, results of operations and cash flows. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company's cash equivalents consist primarily of money market accounts on deposit with several financial institutions and the carrying amounts reported in the balance sheets approximate their fair value. At December 31, 1999, $5,489,334, $5,662,567, and $1,915,026 of cash and cash equivalents were on deposit at three individual financial institutions. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation of computer and lab equipment is computed using the straight-line method over the estimated useful lives of three and five years, respectively. Amortization of leasehold improvements is recorded over the shorter of: (a) the estimated useful lives of the related assets; or (b) the lease term. Revenue Recognition License fees, which are nonrefundable, are recognized when the related license agreements specify that no further efforts or obligations are required of the Company. The Company has committed to perform certain research and development activities as part of the license agreement: accordingly, the upfront license payment is being amortized over the anticipated time period to conduct such activities. Revenues under research and development arrangements are recognized as the research and development activities are performed pursuant to the terms of the related agreements (see Note 2). These revenues are billed quarterly and the related payments are not refundable. Revenues which have not been invoiced are reflected as unbilled receivables in the accompanying balance sheets. F-7 72 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Research and Development and Patent Costs Research and development costs, including all clinical trial expenses and expenditures related to obtaining patents, are charged to expense when incurred. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued To Employees" ("APB 25"), in accounting for its stock-based employee compensation plans, rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as SFAS 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. The Company accounts for transactions in which services are received in exchange for equity instruments based on the fair value of such services received from non-employees, in accordance with SFAS 123. Income Taxes The liability method is used in accounting for income taxes; deferred income assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are anticipated to reverse. 2. LICENSE AGREEMENT On October 22, 1999 the Company entered into an exclusive license agreement (the "Agreement"), consisting of contracts with each of Schering Corporation and Schering-Plough Ltd. (collectively, "Schering-Plough"). The Agreement provides for license fees and milestone payments to be made by Schering-Plough to the Company. In November 1999, pursuant to the terms of the Agreement, the Company received a $5,000,000 non-refundable license fee for the exclusive worldwide license to patent rights and licensor know-how held by the Company. Under the Agreement, the Company granted to Schering-Plough rights to develop, make, have made, import, export, use, distribute, market, promote, offer for sale and sell AGI-1067, the Company's lead product candidate, and specified compounds. The Agreement provides for payments to the Company by Schering-Plough related to development and sales milestones. Development milestone payments to the Company will be based on the successful achievement by Schering-Plough of certain trials and regulatory approvals. Sales milestone payments shall be based on the achievement of certain sales levels of licensed product by Schering-Plough. Schering-Plough is also to make royalty payments to the Company based on licensed product sales, as defined, by Schering-Plough and its affiliates. The milestone payments discussed above will be paid to the Company regardless of the Company's involvement, if any, in the development of the licensed product as the related milestones are achieved. The Agreement states that Schering-Plough shall be responsible, at its cost and expense, and in its sole judgment, for all research and development activities necessary to obtain regulatory approval for a licensed product. Schering-Plough may choose to complete the development of the licensed product without additional help from the Company. To the extent that the Company performs additional research and development at Schering-Plough's request, the Company is to be paid for performing such research and development. The Company recognized research and development revenues of $791,653 during 1999 and $1,257,947 for the three month period ended March 31, 2000 in relation to such requests. F-8 73 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Agreement will terminate pursuant to its terms when the last patent right which is the subject of the Agreement expires. Schering-Plough has the unilateral right to terminate the Agreement at any time (giving 60 days notice to the other party). Either party may terminate the Agreement upon proper notice of certain uncured material violations of the Agreement. In addition, either party may terminate the Agreement on a product-by-product basis if Schering-Plough ceases commercialization of a licensed product. The Company may also terminate the Agreement if: (a) no licensed product is in clinical trials on a specified date; and/or (b) if a New Drug Application has not been filed with the U.S. Food and Drug Administration by a specified date. Upon certain material breaches of the Agreement by the Company, Schering-Plough may either terminate the Agreement, continue the Agreement with future milestone payments materially reduced by a specified percentage, or continue the Agreement with future royalty payments reduced by a specified percentage. Should the Agreement be terminated by either party for any reason other than a breach thereof, all right, title and interest in the licensed product, licensed compounds, licensed patents and regulatory approvals and applications and know-how relating to the preceding shall revert to the Company. 3. NET LOSS PER SHARE Net loss per share has been computed according to SFAS No. 128, "Earnings Per Share" ("SFAS 128"), which requires disclosure of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, shares subject to repurchase, warrants, and convertible securities. Diluted earnings per share includes the impact of potentially dilutive securities. The Company's potentially dilutive securities are antidilutive and, therefore, are not included in the computation of weighted average shares used in computing diluted loss per share. Following the guidance given by the Securities and Exchange Commission, common stock and preferred stock that has been issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per common share as if these shares had been outstanding for all periods presented. The Company has not issued or granted shares for nominal consideration since its formation. F-9 74 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a reconciliation of the numerator and denominator of basic and diluted net loss per share amounts:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------- ------------------------- 1997 1998 1999 1999 2000 ----------- ------------ ------------ ----------- ----------- Basic and diluted: Net loss...................... $(5,159,316) $(10,733,841) $(10,433,250) $(2,750,335) $(2,991,438) =========== ============ ============ =========== =========== Weighted average shares used in computing basic and diluted net loss per share....................... 2,292,966 2,409,948 2,443,237 2,412,125 2,635,816 =========== ============ ============ =========== =========== Basic and diluted net loss per share....................... $ (2.25) $ (4.45) $ (4.27) $ (1.14) $ (1.13) =========== ============ ============ =========== =========== Pro forma basic and diluted: Shares used above............. 2,443,237 2,635,816 Pro forma adjustment to reflect weighted average effect of assumed conversion of preferred stock.......... 10,268,792 13,696,740 ------------ ----------- Pro forma weighted average shares of common stock outstanding................. 12,712,029 16,332,556 ============ =========== Basic and diluted pro forma loss per share.............. $ (.82) $ (.18) ============ ===========
During all periods presented the Company had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been antidilutive. These outstanding securities consist of the following at the dates indicated:
DECEMBER 31, MARCH 31, ------------------------------------- ------------------------ 1997 1998 1999 1999 2000 ---------- ---------- ----------- ---------- ----------- Convertible (at one share for one share) preferred stock.................... 5,570,149 5,586,815 13,643,837 5,570,149 13,859,102 Options.................... 1,089,750 1,235,875 1,785,325 1,411,562 2,789,475 Warrants................... 12,500 262,501 467,503 262,500 250,290 ---------- ---------- ----------- ---------- ----------- Total...................... 6,672,399 7,085,191 15,896,665 7,244,211 16,898,867 ========== ========== =========== ========== =========== Weighted average exercise price of options per share.................... $ .26 $ .26 $ .28 $ .27 $ .49 ========== ========== =========== ========== =========== Weighted average exercise price of warrants per share.................... $ 3.00 $ 3.38 $ 3.21 $ 3.21 $ 3.40 ========== ========== =========== ========== ===========
4. BRIDGE LOAN The Company entered into a $6,000,000 bridge loan agreement on August 24, 1998 with various lenders, under which the Company had an obligation in the form of unsecured promissory notes (some of the lenders are also shareholders of the Company). The initial maturity date was December 31, 1998. F-10 75 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company issued the lenders warrants for 205,002 shares of Series B Redeemable Convertible Preferred Stock. These warrants became exercisable January 1, 1999 for $3.00 per share and expire on August 19, 2008. The warrants have been valued at approximately $1.21 per share based on an independent appraisal, and the principal balance of the bridge loan payable has been discounted in an amount equal to such value. Such discount was amortized as additional interest expense over the original term of the bridge loan. On February 24, 1999 the bridge loan was increased to $6,150,000. In addition, as an inducement to extend the loan maturity date from December 31, 1998 to April 30, 1999, the Company issued the lenders additional warrants to purchase 200,001 shares of Series C Redeemable Convertible Preferred Stock. These warrants became exercisable April 13, 1999 for $3.00 per share and expire on December 31, 2008. The warrants have been valued at approximately $1.15 per share based on an independent appraisal, and the principal balance of the bridge loan payable has been discounted in an amount equal to such value. Such discount was amortized as additional interest expense over the extended term of the bridge loan. Accordingly, 205,002 shares of Series B Redeemable Convertible Preferred Stock and 200,001 shares of Series C Redeemable Convertible Preferred Stock have been reserved for issuance under these warrants at December 31, 1999. During the three months ended March 31, 2000, 217,213 of these warrants were exercised. On April 13, 1999 the promissory notes were converted to 2,050,000 shares of Series C Redeemable Convertible Preferred Stock. On the date of conversion, accrued interest totaling $382,799 was paid by a combination of $111,728 in cash and the issuance of 90,357 additional shares of Series C Redeemable Convertible Preferred Stock based on the fair values of such shares as determined by the most recent arms-length stock purchase transaction. The weighted average interest rate for the bridge loan for August 24 through December 31, 1998 was 10.1%, and such rate for the period from January 1 through April 13, 1999 was 9.75%. 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK The Series A, Series B, Series B-1 and Series C Redeemable Convertible Preferred Stock are convertible into common stock at the option of each holder, or automatically upon the completion of an underwritten public offering of the Company's common stock providing net proceeds of at least $15,000,000 or an offering price of at least $7.50 per share, at a conversion rate of one-to-one, which rate is to be adjusted in the event of a subdivision or combination of stock or reorganization, consolidation, merger or sale of the Company. Any outstanding shares of Series A, Series B, Series B-1 and Series C Redeemable Convertible Preferred Stock are redeemable at the option of the holder on April 15, 2004 and on each subsequent October 15 and April 15 thereafter for the Series C Redeemable Convertible Preferred Stock, at the greater of the fair value of the shares of the Series A, Series B, Series B-1 and Series C Redeemable Convertible Preferred Stock on that date, or $1.00, $3.00, $5.00 and $3.00 per share, respectively, plus declared and accrued but unpaid dividends. The holders of shares of Series A, Series B, Series B-1 and Series C Redeemable Convertible Preferred Stock have voting rights equal to the number of shares of common stock into which such preferred shares are then convertible, and the holders of the common shares and each such Series of Redeemable Convertible Preferred Stock are each entitled to elect two members of the Board of Directors. The remaining member of the Board of Directors shall be elected by a plurality of the holders of preferred and common stocks, with each share of preferred having voting rights equal to the number of shares of common stock into which such preferred shares are then convertible. Dividends are payable as declared by the Board of Directors. In the event of liquidation of the Company, the Series A, Series B, Series B-1 and Series C Redeemable Convertible Preferred Shareholders are entitled to receive, prior to and in preference to the holders of common stock, an amount equal to $1.00, $3.00, $5.00 and $3.00 per share, respectively, plus any declared and accrued but unpaid F-11 76 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) dividends. In the event that funds are not adequate to pay the stated liquidation prices, the preferred shareholders shall be paid on a pro rata basis. On April 13, 1999 the Company authorized 5,000,000 and issued 2,333,333 shares of Series C Redeemable Convertible Preferred Stock for cash at $3.00 per share, net of issuance costs of $58,000. On May 11, 1999 the Company authorized the issuance of an additional 2,500,000 shares of Series C Redeemable Convertible Preferred Stock of which 899,999 shares were issued for cash at $3.00 per share, net of issuance costs of $45,000. On August 30, 1999 the Company authorized an additional 1,000,000 and issued 2,666,667 shares of Series C Redeemable Convertible Preferred Stock for cash at $3.00 per share, net of issuance costs of approximately $61,000. At December 31, 1999, the Company has reserved a total of 14,111,340 shares of common stock for the conversion of the Series A, Series B, Series B-1 and Series C Redeemable Convertible Preferred Stock and warrants. 6. COMMON STOCK On January 11, 1995 the Company entered into a license agreement with Emory University (the "License Agreement") under which the Company received the exclusive rights to certain patents as to which key employees of the Company were named as the inventors. In addition, the Company has an option to obtain the exclusive rights to additional patents which are currently pending. In consideration for entering into the License Agreement, the Company paid Emory University a signing fee and will be required to pay royalties upon sales of products utilizing the patented technology, and milestone payments totaling $250,000 upon the occurrence of certain specified events. In addition, the Company agreed to issue Emory University common stock up to specified limits. The Company issued 188,108 shares of common stock at $.10 per share on January 19, 1995, and, on October 31, 1995, the Company issued 54,038 shares of common stock at $.30 per share in connection with the closing of the Series B Redeemable Convertible Preferred Stock purchase agreement. These issuances completed the Company's equity obligation under the terms of the License Agreement. 7. STOCK OPTIONS During 1995 the Company established a stock option plan (the "1995 Plan") which, as amended, provides that options to purchase the Company's common stock may be granted to employees, directors, consultants or contractors at prices not less than 75% of the fair values of the shares on the dates of grant. The 1995 Plan, as amended, authorizes the grant of options for up to 1,264,084 shares of the Company's common stock, and as of December 31, 1999, the Company has reserved 433,000 shares of common stock for future issuance under the 1995 Plan. Options granted under the 1995 Plan vest immediately, but, pursuant to the terms of an equity ownership agreement, the Company may, if it chooses to do so, repurchase a declining percentage of shares issued pursuant the exercise of options F-12 77 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) during the four-year period following the grant date if the optionee's employment or affiliation with the Company is terminated. A summary of stock option activity under the 1995 Plan follows:
WEIGHTED SHARES PRICE RANGE AVERAGE PRICE -------- ----------- ------------- Outstanding at January 1, 1997.............................. 564,250 $.10-.30 $.15 Granted................................................... 342,750 .30 .30 Exercised................................................. (121,084) .10-.30 .10 Canceled.................................................. (328,916) .10-.30 .26 -------- Outstanding at January 1 and December 31, 1998......................................... 457,000 .10-.30 .20 Exercised................................................. (24,000) .10 .10 Canceled.................................................. (17,800) .30 .30 -------- Outstanding at December 31, 1999............................ 415,200 .10-.30 .20 Exercised................................................. 155,200 .30 .30 -------- Outstanding at March 31, 2000............................... 260,000 .10-.30 .15 ========
The following table summarizes information concerning outstanding and exercisable options under the 1995 Plan as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------------------- ------------------------------ WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - -------------- ----------- ---------------- ---------------- ----------- ---------------- $.10........................ 206,000 5.5 $.10 206,000 $.10 .30........................ 209,200 7.3 .30 209,200 .30 ------- ------- 415,200 6.4 .20 415,200 .20 ======= =======
Effective July 30, 1997, the Company established an equity ownership plan (the "1997 Plan") whereby options to purchase the Company's common stock may be granted to employees, directors, consultants or contractors at prices not less than the fair values of the shares on the dates of grant. The 1997 Plan authorizes the grant of options for up to 1,474,416 shares of the Company's common stock, and as of December 31, 1999, the Company has reserved 1,370,903 shares of common stock for issuance under the 1997 Plan. The 1997 Plan allows for grants of non-qualified options and incentive stock options. Non-qualified options granted under the 1997 Plan vest immediately, but, pursuant to the terms of an equity ownership agreement, the Company may, if it chooses to do so, repurchase a declining percentage of shares issued pursuant the exercise of options during the four-year period following the grant date if the optionee's employment or affiliation with the Company is terminated. Incentive stock options generally vest over four years. The majority of the stock options granted under the 1997 Plan are incentive stock options. F-13 78 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A summary of stock option activity under the 1997 Plan follows:
WEIGHTED AVERAGE SHARES PRICE RANGE PRICE --------- ----------- ---------------- Outstanding at January 1, 1997................... -- $ -- $ -- Granted........................................ 632,750 .30 .30 --------- Outstanding at December 31, 1997................. 632,750 .30 .30 Granted........................................ 151,500 .30 .30 Exercised...................................... (1,345) .30 .30 Canceled....................................... (4,030) .30 .30 --------- Outstanding at December 31, 1998................. 778,875 .30 .30 Granted........................................ 748,000 .30-.31 .30 Exercised...................................... (102,168) .30 .30 Canceled....................................... (54,582) .30 .30 --------- Outstanding at December 31, 1999................. 1,370,125 .30-.31 .30 Granted........................................ 1,277,250 .38-8.25 .70 Exercised...................................... (113,565) .30 .30 Canceled....................................... (4,335) .30 .30 --------- Outstanding, at March 31, 2000 (unaudited)....... 2,529,475 .38-8.25 .50 =========
The following table summarizes information concerning currently outstanding and exercisable options granted under the 1997 Plan as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------------ ------------------------------ WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - -------------- ----------- ---------------- ---------------- ----------- ---------------- $.30................. 1,073,125 8.25 $.30 452,801 $.30 .31................. 297,000 9.8 .31 -- -- --------- 1,370,125 8.5 .30 452,801 .30 =========
During 1999, in connection with the grant of certain options to employees, the Company recorded non-cash deferred stock compensation of $1,895,160 representing the difference between the exercise price and the deemed fair value of the Company's common stock on the dates these stock options were granted. Deferred stock compensation is included as a reduction of shareholders' equity and is being amortized to expense using the graded vesting method. The graded vesting method provides for vesting of each portion of the overall award over its respective vesting period, and results in higher vesting in earlier years than straight-line vesting. During 1999, the Company recorded amortization of deferred stock compensation of $85,480. At December 31, 1999, the Company had a total of approximately $1,800,000 remaining to be amortized over the corresponding vesting period of each respective option, generally four years. Such amortization will approximate $900,000 in 2000, $500,000 in 2001, $300,000 in 2002, and $100,000 in 2003. On January 28, 2000 the Company's board of directors authorized options as to an additional 2,250,000 shares to be granted under the 1997 Plan and granted options as to 1,222,000 shares of common stock, at an exercise price of $.38 per share, to certain employees and directors. This grant resulted in additional non-cash deferred stock compensation of approximately $9,000,000. The Company will amortize such deferred stock compensation using the graded vesting method in the approximate amounts of: $5,300,000 in 2000; $2,100,000 in 2001; $1,100,000 in 2002; and $500,000 in 2003. The amount of deferred stock compensation amortization to be recorded in future periods could decrease if options for which such deferred stock compensation has been recorded are forfeited. F-14 79 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Pro forma information regarding net income is required by FASB 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method. The fair value for these options (which are granted with an exercise price equal to fair market value as determined by the Board of Directors on the grant date) was estimated at the date of grant using the minimum value method with the following weighted-average assumptions for 1997, 1998 and 1999: risk-free interest rates of 6.01%, 4.65% and 5.75%, respectively; no dividend yield; and a weighted-average expected life of the options of 5 years. For purposes of pro forma disclosures, the estimated fair values of the options are amortized to expense over the options' vesting periods. The weighted average fair values of options granted during 1997, 1998 and 1999 equal $.08, $.06 and $2.54, respectively. The amount for 1999 was determined on the graded vesting method after giving consideration to the above mentioned $1,895,160 of deferred stock compensation. Pro forma net loss and net loss per share are as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1998 1999 ----------- ------------ ------------ Net loss...................................... $(5,168,000) $(10,744,826) $(10,503,993) Net loss per share (basic and diluted)........ (2.25) (4.45) (4.30)
Options granted to non-employees of the Company during 1997 generated $24,200 of operating expense which is included in the statement of operations. Since FASB 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect was not fully reflected until 1999. 8. INCOME TAXES At December 31, 1999 the Company has net operating loss carryforwards and research and development credit carryforwards of $24,855,283 and $1,111,891, respectively, for income tax purposes which both begin to expire in 2009. The significant components of the Company's deferred tax assets are:
DECEMBER 31, ------------------------ 1998 1999 ---------- ----------- Net operating loss carryforwards............................ $7,205,452 $ 9,445,008 Deferred revenue............................................ -- 1,688,889 Research credits............................................ 777,000 1,111,891 ---------- ----------- Total deferred tax assets......................... 7,982,452 12,245,788 Valuation allowance......................................... 7,982,452 12,245,788 ---------- ----------- Net deferred tax assets..................................... $ -- $ -- ========== ===========
Because of the Company's lack of earnings history, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased $2,063,400, $4,827,312 and $4,263,335 in 1997, 1998 and 1999, respectively. The Company's net operating loss carryforwards may be subject to certain IRC Section 382 limitations on annual utilization in the event of changes in ownership of the Company. These limitations could significantly reduce the amount of the net operating loss carryforwards available to the Company in the future. The Company has not yet completed a full analysis of IRC Section 382 limitations on the cumulative net operating loss carryforward. However, the annual limitations are not expected to prevent utilization of the net operating loss carryforward due to the significant increases in value indicated by the successive F-15 80 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) issues of preferred stock. If a change in ownership has occurred, there will be an annual accrual limitation; however, this limitation is not expected to result in a loss of the deferred tax benefit. 9. LEASES Rent expense under operating leases amounted to $86,939 in both 1997 and 1998 and $639,934 in 1999. On June 19, 1998 the Company entered into an operating lease for office and laboratory space through March 1, 2009. Monthly lease payments of approximately $60,400 began March 2, 1999, the date occupancy commenced, and are subject to increases during each successive twelve-month period based on changes in the Consumer Price Index. Future increases in monthly lease payments due to increases in the CPI are considered to be contingent rentals, and, therefore, will be charged to expense over the lease term as they become payable. The Company may extend the lease term for two successive five-year periods. The Company's other operating lease obligations are not significant. As of December 31, 1998 the Company had incurred directly approximately $1,153,000 of laboratory and office construction costs which were reimbursed to the Company by the lessor during 1999 pursuant to the lease agreement and included in the lessor costs covered by the operating lease. The Company also makes additional lease payments to the lessor of approximately $29,000 per month through March 1, 2009 related to additional expenditures made by the lessor for leasehold improvements and equipment, all of which have estimated useful lives well in excess of ten years. In conjunction with the above-described lease, the Company issued the lessor a warrant for 50,000 shares of Series B-1 Redeemable Convertible Preferred Stock. The warrant has been valued at $.08 per share based on an independent professional appraisal. The warrant became exercisable on January 1, 1999 for $5 per share and expires on January 1, 2009. On March 25, 1999 the Company entered into a sublease agreement for a portion of its new office and laboratory space with Inhibitex, Inc. and monthly lease payments of $11,923 began March 26, 1999. The lease term ends on March 31, 2009. On July 31, 1999 the Company entered into a sublease agreement for a portion of its new office space with ATV Management Corp. and monthly lease payments of approximately $6,200 began on September 1, 1999. The lease term ends on July 31, 2002. The Chairman of the Board of Directors of the Company is the President and sole shareholder of ATV Management Corp. At December 31, 1999, the Company's minimum aggregate commitments (net of sublease income) under long-term, non-cancelable operating leases are as follows:
GROSS SUBLEASE INCOME NET ----------- --------------- ---------- 2000........................................... $ 1,118,606 $ 217,848 $ 900,758 2001........................................... 1,109,136 217,848 891,288 2002........................................... 1,096,106 186,693 909,413 2003........................................... 1,084,681 143,076 941,605 Thereafter..................................... 5,674,609 751,149 4,923,460 ----------- ---------- ---------- $10,083,138 $1,516,614 $8,566,524 =========== ========== ==========
In February 1996 the Company entered into a sale leaseback agreement for up to $750,000 of equipment. Equipment in the cumulative amount of $750,000 was sold to the lessor and leased back to the Company for four-year lease terms commencing on various dates during 1996 through 1998. The capital leases have been recorded using the financing method. In addition, in February 1996, the Company issued F-16 81 ATHEROGENICS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) to the lessor warrants to purchase 12,500 shares of Series B Redeemable Convertible Preferred Stock at $3 per share. Shares of preferred stock and common stock have been reserved for the exercise and conversion, respectively, of the above-described warrants. Equipment and leasehold improvements include the following amounts for leases which have been capitalized at December 31, 1998 and 1999:
DECEMBER 31, ------------------- 1998 1999 -------- -------- Lab equipment............................................... $750,000 $750,000 Less accumulated amortization............................... 412,000 600,000 -------- -------- $338,000 $150,000 ======== ========
Amortization of leased assets is included in depreciation and amortization expense. The equipment leases provide for one-year extensions at the end of the lease terms. Future minimum lease payments under capital leases consist of the following at December 31, 1999: 2000........................................................ $114,625 2001........................................................ 57,241 2002........................................................ 2,449 -------- Total minimum lease payments...................... 174,315 Less amounts representing interest and warrants............. 11,053 -------- Present value of net minimum lease payments................. 163,262 Less current portion........................................ 101,408 -------- $ 61,854 ========
The amounts recorded as capital lease obligations approximate the estimated fair market values. 10. EMPLOYEE BENEFIT PLAN The Company has a defined contribution plan covering eligible employees which is qualified under Section 401(k) of the Internal Revenue Code. Under the provisions of the plan, eligible participating employees may elect to contribute up to 15% of their salary (up to the maximum amount of tax deferred contribution allowed by the Internal Revenue Code). The Company may make a discretionary contribution. During 1999 the Company matched 50% of employees' contributions, up to a maximum of 6% of the employees' annual base compensation. The Company's contribution to the plan for 1998 and 1999 aggregated $33,932 and $37,703, respectively. 11. CONCENTRATIONS OF SUPPLIERS The Company has contracts with two third party manufacturers which serve as sole source suppliers of bulk drug substance and formulated drug product. The Company believes that it could obtain bulk drug and formulated drug product from other manufacturers and formulators at competitive prices, if necessary. F-17 82 12. INITIAL PUBLIC OFFERING In January 2000 the Board of Directors authorized the officers of the Company to proceed with the preparation and filing of a registration statement with the Securities and Exchange Commission to register shares of its common stock in connection with a proposed Initial Public Offering. If the offering contemplated by this prospectus is consummated, the preferred stock outstanding as of the closing date will be converted into shares of the Company's common stock. The unaudited pro forma shareholders' equity in the accompanying balance sheet as of December 31, 1999 reflects conversion of the outstanding preferred stock into 13,859,102 shares of common stock. Unaudited pro forma net loss per share (see Note 3) is computed as if the outstanding preferred stock had been converted into common stock on the date of issuance. F-18 83 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6,000,000 SHARES (ATHEROGENICS LOGO) COMMON STOCK ----------------------- PROSPECTUS ----------------------- CHASE H&Q ADAMS, HARKNESS & HILL, INC. A.G. EDWARDS & SONS, INC. ------------------------ , 2000 ------------------------ 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. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. 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 OUR COMMON STOCK. NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT A PUBLIC OFFERING OF THE COMMON SHARES OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION. UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 84 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses in connection with the issuance and distribution of the securities being registered hereby: Securities and Exchange Commission registration fee......... $26,400 National Association of Securities Dealers, Inc. filing fee....................................................... 10,500 Nasdaq National Market listing fee.......................... 95,000 Printing fees............................................... * Legal fees and expenses..................................... * Accounting fees and expenses................................ * Blue sky fees and expenses.................................. * Transfer agent and registrar fees........................... * Miscellaneous fees.......................................... * ------- Total............................................. $ * =======
- --------------- * To be completed by amendment. The foregoing, except for the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the Nasdaq National Market listing fee, are estimates. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Our Fourth Amended and Restated Articles of Incorporation eliminate, as permitted by Section 14-2-202(b)(4) of the Georgia Business Corporation Code, the personal liability of directors and officers for monetary damages to the corporation or its shareholders for breach of their duty of care and other duties; provided, however, that our Articles of Incorporation and Section 14-2-202(b)(4) of the Georgia Code do not permit us to eliminate or limit liability for (1) a breach of duty involving appropriation of a business opportunity of ours; (2) an act or omission which involves intentional misconduct or a knowing violation of law; (3) any transaction from which an improper personal benefit is derived; or (4) any payments of a dividend or any other type of distribution that is illegal under Section 14-2-832 of the Georgia Code. In addition, if at any time the Georgia Code is amended to authorize further elimination or limitation of personal liability, then the liability of each of our directors and officers shall be eliminated or limited to the fullest extent permitted by such provisions, as so amended, without further action by the shareholders, unless the provisions of the Georgia Code require such action. Sections 14-2-850 to 14-2-859, inclusive, of the Georgia Code govern the indemnification of directors, officers, employees and agents. Section 14-2-851 of the Georgia Code provides for indemnification of any of our directors for liability incurred by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative and whether formal or informal, in which he may become involved by reason of being a member of our board of directors. Section 14-2-851 also provides such indemnity for directors who, at our request, act as directors, officers, partners, trustees, employees or agents of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or another enterprise. Section 14-2-851 permits indemnification if the director acted in a manner he believed in good faith to be in or not opposed to our best interest and, in addition, in criminal proceedings, if he had no reasonable cause to believe his conduct was unlawful. If the required standard of conduct is met, indemnification may include judgments, settlements, penalties, fines or reasonable expenses, including attorneys' fees, incurred with respect to a proceeding. However, if the director is adjudged liable to us in a derivative action or on the basis that personal benefit was II-1 85 improperly received by him, the director will only be entitled to such indemnification for reasonable expenses as a court finds to be proper in accordance with the provisions of Section 14-2-854. Section 14-2-852 of the Georgia Code provides that directors who are successful with respect to any claim brought against them, which claim is brought because they are or were directors, are entitled to indemnification against reasonable expenses as of right. Conversely, if the charges made in any action are sustained, the determination of whether the required standard of conduct has been met will be made, in accordance with the provisions of Section 14-2-855 of the Georgia Code, as follows: (1) if there are two or more disinterested members of the board of directors, by the majority vote of a quorum of the disinterested members of the board of directors, (2) by a majority of the members of a committee of two or more disinterested directors, (3) by special legal counsel or (4) by the shareholders, but, in such event, the shares owned by or voted under the control of directors seeking indemnification may not be voted. Section 14-2-857 of the Georgia Code provides that an officer who is not a director has the mandatory right of indemnification granted to directors under Section 14-2-852, as described above. In addition, we may, as provided by our Articles, Bylaws, general or specific actions by our board of directors, or by contract, indemnify and advance expenses to an officer, employee or agent who is not a director to the extent that such indemnification is consistent with public policy. We plan to enter into indemnification agreements with each of our directors and certain executive officers. The indemnification agreements set forth certain procedural matters relating to indemnification, including the manner in which an indemnified party may make a claim and the right of an indemnified party to court adjudication of his or her claim if we deny such indemnification. Our officers and directors are presently covered by insurance which (with certain exceptions and within certain limitations) indemnifies them against any losses or liabilities arising from any alleged "wrongful act," including any alleged breach of duty, neglect, error, misstatement, misleading statement, omissions or other act done or wrongfully attempted. We pay the cost of such insurance as permitted by our Bylaws and the laws of the State of Georgia. Reference is hereby made to Section of the underwriting agreement, the form of which will be filed as Exhibit 1.01 hereto, in which the underwriters agree to indemnify our directors and officers and certain other persons against certain civil liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the three years preceding the filing of this registration statement, we have sold and issued the following securities: 1. In April, May and August 1999, we issued an aggregate of 5,899,999 shares of Series C convertible preferred stock to 21 institutional and sophisticated investors, consisting primarily of venture capital companies, for a consideration of $3.00 per share, or an aggregate of $17,699,997 before expenses of the private placements of approximately $164,000. In accordance with the terms of the Series C convertible preferred stock, each share of Series C convertible preferred stock will be converted into one share of our common stock immediately prior to the consummation of the public offering. 2. In August and December 1998, we issued to some of the holders of our Series A and Series B convertible preferred stock $6,150,000 principal amount notes bearing interest at a rate per annum equal to the prime rate as published in The Wall Street Journal plus 2%. At that time we also issued warrants exercisable for 205,002 shares of our Series B convertible preferred stock. In April 1999 we issued warrants exercisable for 200,001 shares of our Series C convertible stock to the noteholders as consideration for extending the maturity of the notes. The notes and, at the option of the noteholders, the accrued and unpaid interest on the notes were converted into 2,140,357 shares of our Series C convertible preferred stock in April 1999. In accordance with the terms of the Series B convertible preferred stock and the Series C II-2 86 convertible preferred stock, each share of convertible preferred stock will be converted into one share of our common stock immediately prior to the consummation of the public offering. 3. From January 1, 1997 through June 27, 2000, we granted incentive stock options and nonqualified stock options to purchase an aggregate of 3,159,250 shares of our common stock at exercise prices ranging from $.30 to $8.25 per share to employees and directors under our 1995 Stock Option Plan and our 1997 Equity Ownership Plan, and issued an aggregate of 407,772 shares upon the exercise of these and previously granted options. Of these options granted, options to purchase 472,238 shares of common stock have been canceled. 4. In July 1998, we issued to Cousins Properties, Inc. a warrant to purchase 50,000 shares of our Series B-1 convertible preferred stock at an exercise price of $5.00 per share. This warrant will be converted into a warrant to purchase 50,000 shares of our common stock at an exercise price of $5.00 per share immediately prior to the consummation of the public offering in accordance with the terms of the Series B-1 convertible preferred stock. 5. In December 1998, we issued to Long Aldridge & Norman LLP 16,666 shares of Series B convertible preferred stock for consideration of $3.00 per share or an aggregate of $49,998 in legal fees incurred by AtheroGenics in 1998. In accordance with the terms of the Series B convertible preferred stock, each share of Series B convertible preferred stock will be converted into one share of our common stock prior to the consummation of the public offering. 6. In April 1999, we issued to Long Aldridge & Norman LLP 16,666 shares of Series C convertible preferred stock for consideration of $3.00 per share or an aggregate of $49,998 in legal fees incurred by AtheroGenics in 1998. In accordance with the terms of the Series C convertible preferred stock, each share of Series C convertible preferred stock will be converted into one share of our common stock prior to the consummation of the public offering. 7. In October 1997, we issued to Phoenix Leasing Incorporated a warrant to purchase 2,200 shares of Series B convertible preferred stock at an exercise price of $3.00 per share in connection with the Master Lease Agreement between Phoenix Leasing and us dated November 1, 1995. This warrant will be converted into a warrant to purchase 2,200 shares of our common stock at an exercise price of $3.00 per share immediately prior to the consummation of the public offering in accordance with the terms of the Series B convertible preferred stock. No underwriters were involved in the foregoing sales of securities. The issuance of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of such Securities Act as transactions by an issuer not involving any public offering, or, in the case of some options to purchase common stock, Rule 701 of the Securities Act. The recipients of securities in each such transaction represented their intentions 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 their relationships with us, to information about us. II-3 87 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION - --------- ----------- 1.01* -- Form of Underwriting Agreement. 3.01 -- Form of Fourth Amended and Restated Articles of Incorporation of AtheroGenics, Inc. 3.02 -- Form of Third Amended and Restated Bylaws of AtheroGenics, Inc. 4.01* -- Form of Common Stock Certificate. 4.02** -- Amended and Restated Master Rights Agreement dated October 31, 1995, as amended by First Amendment dated November 1, 1995; Second Amendment dated July 30, 1996; Third Amendment dated April 13, 1999; Fourth Amendment dated May 11, 1999; and Fifth Amendment dated August 30, 1999. 4.03* -- Applicable provisions of Fourth Amended and Restated Articles of Incorporation and Third Amended and Restated Bylaws of AtheroGenics, Inc. (to be incorporated by reference to Exhibits 3.01 and 3.02). 5.01* -- Opinion of Long Aldridge & Norman LLP (including consent). 10.01+ -- Exclusive License Agreements dated October 22, 1999 by and between AtheroGenics, Inc. and each of Schering-Plough Ltd. and Schering Corporation. 10.02+ -- Exclusive License Agreement dated July 17, 1998 between The Regents of the University of California and AtheroGenics, Inc. 10.03+ -- License Agreement dated January 11, 1995 between Emory University and AtheroGenics, Inc. 10.04+ -- Patent Purchase Agreement dated April 26, 1995 between AtheroGenics, Inc. and Sampath Parthasarathy, together with Services Agreement dated April 26, 1995 between AtheroGenics, Inc. and Sampath Parthasarathy. 10.05+++ -- Sponsored Research Agreement dated October 14, 1996 between Emory University and AtheroGenics, Inc. 10.06 -- Consulting Agreement dated May 11, 2000 between AtheroGenics, Inc. and William Scott, Ph.D. 10.07** -- AtheroGenics, Inc. 1995 Stock Option Plan, together with form of nonqualified stock option agreement. 10.08 -- AtheroGenics, Inc. 1997 Equity Ownership Plan, as amended by Amendment No. 1 and Amendment No. 2. 10.09** -- Preferred Shares Purchase Warrant dated August 24, 1998 between AtheroGenics, Inc. and certain Lenders named therein. 10.10** -- Series C Convertible Preferred Stock Purchase Warrants of AtheroGenics, Inc. 10.11** -- Promissory Note dated April 1, 1999 between Inhibitex, Inc. and AtheroGenics, Inc. 10.12**++ -- Lease Agreement dated June 19, 1998 between Cousins Properties, Inc. and AtheroGenics, Inc. 10.13**++ -- Master Equipment Lease dated November 1, 1995 between Phoenix Leasing Incorporated and AtheroGenics, Inc. 23.01 -- Consent of Ernst & Young LLP. 23.02 -- Consent of Long Aldridge & Norman LLP (to be contained in Exhibit 5.01). 23.03 -- Consent of King & Spalding. 24.01** -- Powers of Attorney. 27.01** -- Financial Data Schedule (for SEC use only).
- --------------- * To be filed by amendment. ** Previously filed. II-4 88 + Certain confidential information contained in this document has been omitted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. ++ We agree to furnish supplementally to the Commission a copy of any omitted schedule or exhibit to this agreement upon request by the Commission. (b) Financial Statement Schedules No financial statement schedules are provided, because the information called for is not required or is shown either in the financial statements or the 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 of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 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 Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information which may be omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form or prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 89 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on July 13, 2000. ATHEROGENICS, INC. By:/s/ RUSSELL M. MEDFORD, M.D., PH.D. --------------------------------------- RUSSELL M. MEDFORD, M.D., PH.D. President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
NAME TITLE DATE ---- ----- ---- PRINCIPAL EXECUTIVE OFFICER: /s/ RUSSELL M. MEDFORD President and Chief Executive July 13, 2000 - ------------------------------------------------ Officer, Director RUSSELL M. MEDFORD PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER: /s/ MARK P. COLONNESE Vice President of Finance and July 13, 2000 - ------------------------------------------------ Administration and Chief MARK P. COLONNESE Financial Officer ADDITIONAL DIRECTORS: * Director July 13, 2000 - ------------------------------------------------ MICHAEL A. HENOS * Director July 13, 2000 - ------------------------------------------------ R. WAYNE ALEXANDER * Director July 13, 2000 - ------------------------------------------------ VAUGHN D. BRYSON * Director July 13, 2000 - ------------------------------------------------ T. FORCHT DAGI * Director July 13, 2000 - ------------------------------------------------ VIJAY K. LATHI * Director July 13, 2000 - ------------------------------------------------ ARDA MINOCHERHOMJEE * Director July 13, 2000 - ------------------------------------------------ ARTHUR M. PAPPAS * Director July 13, 2000 - ------------------------------------------------ RICHARD S. SCHNEIDER [Signatures continued on following page.]
II-6 90
NAME TITLE DATE ---- ----- ---- * Director July 13, 2000 - ------------------------------------------------ WILLIAM A. SCOTT *By: /s/ MARK P. COLONNESE ------------------------------------------ Mark P. Colonnese Attorney-in-fact
II-7 EX-3.01 2 ex3-01.txt FORM OF FOURTH AMENDED AND RESTATED ARTICLES 1 EXHIBIT 3.01 FOURTH AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ATHEROGENICS, INC. I. CORPORATE NAME The name of the Corporation is AtheroGenics, Inc. (the "Corporation"). II. PURPOSE OF CORPORATION The Corporation is organized for the purpose of engaging in any and all lawful businesses not specifically prohibited to corporations for profit under the laws of the State of Georgia, and the Corporation shall have all powers necessary to conduct any such businesses and all other powers enumerated in the Georgia Business Corporation Code (the "Code") or under any act amendatory thereof, supplemental thereto or substituted therefor. III. AUTHORIZED SHARES SECTION 3.1 CAPITAL STOCK. The Corporation is authorized to issue two classes of stock designated "Common Stock" and "Preferred Stock." The number of shares of Common Stock which the Corporation is authorized to issue is one hundred million (100,000,000), the number of shares of Preferred Stock which the Corporation is authorized to issue is five million (5,000,000). SECTION 3.2. SHARES ACQUIRED BY THE CORPORATION. Shares of Common Stock that have been acquired by the Corporation shall become treasury shares and may be resold or otherwise disposed of by the Corporation for such consideration as shall be determined by the Board of Directors, unless or until the Board of Directors shall by resolution provide that any or all treasury shares so acquired shall constitute authorized, but unissued shares. 2 IV. REGISTERED OFFICE AND AGENT The street address and county of the registered office of the Corporation is Suite 5300, 303 Peachtree Street, Atlanta, Fulton County, Georgia 30308. The registered agent at such office is Leonard A. Silverstein. V. PRINCIPAL OFFICE The mailing address of the principal office of the Corporation shall be 8995 Westside Parkway, Alpharetta, Georgia 30004. VI. DIRECTORS SECTION 6.1. CLASSIFICATION OF DIRECTORS: The Board of Directors shall be divided into three classes as nearly equal in number as possible, with the term of office of one class expiring each year. In the event that the number of directors shall not be evenly divisible by three, the Board of Directors shall determine in which group or groups the remaining director or directors, as the case may be, should be included. The term of office of each director shall be three years or until the earlier of their death, resignation or removal; provided, however, that, the persons initially named as directors by resolution of the Board of Directors in Group 1 shall hold office until the 2001 annual meeting of shareholders, the persons initially named as directors by resolution of the Board of Directors in Group 2 shall hold office until the 2002 annual meeting of shareholders, and the persons initially named as directors by resolution of the Board of Directors in Group 3 shall hold office until the 2003 annual meeting of the shareholders or until the earlier of their death, resignation or removal. Election of directors need not be by ballot unless the Bylaws of the Corporation shall so provide. SECTION 6.2. VACANCY. Any director may resign at any time, upon written notice to the Corporation. The entire Board of Directors or any individual director may be removed only for cause. During the intervals between annual meetings of shareholders, any vacancy occurring in the Board of Directors caused by resignation, removal, death or other incapacity, and any newly created directorships resulting from an increase in the number of directors, shall be filled by a majority vote of the directors then in office, whether or not a quorum. Each director chosen to fill a vacancy shall hold office for the unexpired term in respect of which such vacancy occurred. Each director chosen to fill a newly created directorship shall hold office until the next election of the class for which such director shall have been chosen. When the number of directors is changed, any newly created directorships or any decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible. -2- 3 SECTION 6.3. AUTHORITY. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: a. To make, alter or repeal the Bylaws of the Corporation. b. To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation. c. To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. d. By resolution approved by the Board of Directors, to authorize the issuance of any series of Preferred Stock or any debt security of the Corporation, with full, limited or no voting power, and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be determined by the Board of Directors. e. By resolution approved by the Board of Directors, to designate one or more committees, each committee to consist of two or more of the directors of the Corporation, which, to the extent provided in the resolution or in the Bylaws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be stated in the Bylaws of the Corporation or as may be determined from time to time by resolution approved by the Board of Directors. f. When and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a shareholders' meeting duly called for that purpose to sell, lease or exchange all of the property and assets of the Corporation, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may be in whole or in part shares of stock in, and/or other securities of, any other business entity or entities, as its Board of Directors shall deem expedient and for the best interests of the Corporation. VII. LIMITATIONS ON DIRECTOR AND OFFICER LIABILITY No director or officer of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of duty of care or other duty as a director or officer, except for liability (1) for any appropriation, in violation of his duties, of any business opportunity of the Corporation; (2) for acts or omissions which involve intentional misconduct or a knowing violation of the law; (3) for the types of liability set forth in Section 14-2-832 of the -3- 4 Code; or (4) for any transaction from which the director received an improper personal benefit. If the Code is amended after the effective date of this Article to authorize corporate action further limiting the personal liability of directors or officers, then the liability of a director or officer of the Corporation shall be limited to the fullest extent permitted by the Code, as so amended. Any repeal or modification of the foregoing paragraph by the shareholders of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification. VIII ACTION WITHOUT MEETING Any action required or permitted to be taken at a shareholders' meeting may be taken without a meeting of the shareholders only if the action is evidenced by one or more written consents describing the action taken, which consents are signed by all of the shareholders who would be entitled to vote at a meeting. IX. CONSIDERATIONS AVAILABLE TO THE BOARD OF DIRECTORS The Board of Directors of the Corporation, when evaluating any offer of another person to make a tender or exchange offer for any equity security of the Corporation, to merge or consolidate the Corporation with another person, or to purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, shall, in determining what is in the best interests of the Corporation and its shareholders, give due consideration to all relevant factors, including without limitation (i) the fairness and adequacy of the consideration offered in relation to: the then current market price or fair value of the Corporation (including the estimated fair value of the Corporation in a freely negotiated transaction), historical financial results and the then current financial condition of the Corporation, historical and comparative market information (including price/earnings ratios, market trends, comparative premiums for sale of control and general economic conditions), the then current market or replacement price of the tangible and intangible assets of the Corporation, the ability of management of the Corporation, the future earnings prospects of the Corporation and the then estimated future value of the Corporation as an independent entity; (ii) the nature of the consideration offered (including the estimated present value and future earnings of any noncash consideration); (iii) the amount of the Corporation's securities sought to be acquired and, if less than all, the effect of the acquisition on the remaining shareholders (including consideration of the resulting market liquidity, stock prices and likelihood of subsequent freezeout transactions); (iv) the method of financing the proposed transaction, including the financial condition of the offeror, its ability to finance and consummate the proposed transaction, the extent to which the assets of the Corporation will be used directly or indirectly therefor, and the likelihood of success; (v) the timing of the proposed transaction; (vi) the availability of other alternatives; (vii) the legality of the proposed transaction (including possible legal and regulatory obstacles and delays); (viii) the reputation and integrity of the offeror in the business community and the perceived purpose of the proposed transaction in light of the operating history and reputation of the Corporation and its subsidiaries in the communities they serve; (ix) the social, legal and economic effects of the -4- 5 transaction on the employees, customers and other constituents of the Corporation and its subsidiaries; (x) the effects and impact of the proposed transaction on the communities in which the Corporation and its subsidiaries operate or are located; and (xi) the desirability of maintaining independence from any other person. X. AMENDMENT SECTION 10.1. AMENDMENT TO FOURTH AMENDED AND RESTATED ARTICLES OF INCORPORATION. The Corporation reserves the right, subject to Section 10.2 to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. SECTION 10.2. RESTRICTIONS. Notwithstanding the provisions of Section 10.1 and any provisions of the Bylaws of the Corporation, no amendment to these Articles of Incorporation or amendment to the Bylaws adopted by the shareholders shall amend, modify or repeal any or all of the provisions of Article VI, Article IX, or this Article X of these Articles of Incorporation or Section 1, Section 3 and Section 7 of Article I, Section 2 and Section 4 of Article II, Article V, Article VI or Section 3 of Article VII of the Bylaws of the Corporation unless adopted by the affirmative vote or consent of the holders of not less than seventy-five percent (75%) of the outstanding shares of each class of stock of the Corporation entitled to vote in elections of directors, including the affirmative vote or consent of the holders of not less than seventy-five percent (75%) of the outstanding shares of each class of stock of the Corporation entitled to vote in elections of directors other than those shares beneficially owned by any Interested Shareholder (as such term is defined in ss. 14-2-1110 of the Georgia Business Corporation Code); provided, however, that in the event the Board of Directors of the Corporation shall, by resolution duly adopted by not less than seventy-five percent (75%) of the members of the Board of Directors (including not less than seventy-five percent (75%) of the members of the Board of Directors who vote in favor of such resolution and who were duly elected and acting members of the Board of Directors prior to the time any Interested Shareholder became an Interested Shareholder), recommend to the shareholders the adoption of any such amendment, the shareholders of record holding a majority of the outstanding shares of each class of stock of the Corporation entitled to vote in elections of Directors may amend, modify or repeal any or all of such provisions. -5- 6 IN WITNESS WHEREOF, the undersigned officers have executed these Articles of Incorporation as of ___ day of _________, 2000. ATHEROGENICS, INC. By: -------------------------------- Russell M. Medford, M.D., Ph.D CEO and President ATTEST: By: --------------------------------- Mark P. Colonnese Assistant Secretary -6- EX-3.02 3 ex3-02.txt FORM OF THIRD AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.02 THIRD AMENDED AND RESTATED BYLAWS OF ATHEROGENICS, INC. I. SHAREHOLDERS 1. Meetings. The annual meeting of the shareholders of the Corporation shall be held each year at the principal place of business of the Corporation at a time specified by the President for the purposes of electing directors and of transacting such other business as properly may be brought before the meeting. Other meetings may be held upon the call of any two members of the Board of Directors, the Chief Executive Officer or, subject to Article I, Section 3 of these Bylaws, the holders of seventy-five percent (75%) of the issued and outstanding shares of stock of the Corporation upon not less than ten (10) days nor more than sixty (60) days notice at any time. Notice shall be effective when deposited in the post office with postage prepaid and directed to each shareholder at his last known residence or at such other address as any shareholder may have designated in writing. The holders of all outstanding shares may waive any notice requirement. Subject to any express provision of law or the Articles of Incorporation to the contrary, a majority of the votes entitled to be cast by all shares voting together as a group shall constitute a quorum for the transaction of business at all meetings of the shareholders and each shareholder may cast the number of votes to which he is entitled, either in person or by written proxy. To be properly brought before the meeting, business must be either (a) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (c) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have satisfied all of the conditions set forth in Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including particularly the requirement that the shareholder give timely written notice of his proposal to the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received by the Secretary of the Corporation at the executive offices of the Corporation within the time period specified in Rule 14a-8(a)(3)(i), and such notice to the Secretary shall set forth, as to each matter the shareholder proposes to bring before the annual meeting, the information required by said Rule 14a-8. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at 2 the annual meeting except in accordance with the procedures and conditions set forth in this Article I, Section 1 and said Rule 14a-8; provided, however, that nothing in this Article I, Section 1 or said Rule 14a-8 shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Article I, Section 1, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2. List of Shareholders. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of shareholders, a complete list of shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be so specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present. 3. Special Meetings. (a) Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. (b) Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any shareholder of the Corporation who (x) has given timely notice thereof meeting the requirements of Article I Section 3(c), (y) is a shareholder of record at the time of giving of such notice and (z) is entitled to vote at the meeting. (c) To be timely, a shareholder's notice referred to in Article I Section 3(b) must have been delivered to the secretary of the Corporation at the principal executive office of the Corporation not earlier than the 90th day prior to such special meeting and not later than the close of business of the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement is made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for -2- 3 election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the shareholder giving the notice and the beneficial owners, if any, on whose behalf the nomination is made, (x) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owners, if any. (d) The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before a special meeting was made in accordance with the procedures set forth in this Article I, Section 3 and, if any proposed nomination or business is not in compliance with this Article I, Section 3, to declare that such defective nomination or proposal be disregarded. Notwithstanding the foregoing provisions of this Article I, Section 3, a shareholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Article I. 4. Proxies. Any shareholder may vote his shares in person or by proxy by executing a writing which authorizes another person or persons to vote or otherwise act on the shareholder's behalf. Execution may be accomplished by means of facsimile telecommunication, either personally or by an attorney-in-fact of an individual shareholder or by an authorized officer, director, employee or agent in the case of any other shareholder. A shareholder may authorize another person or persons to act for him as proxy by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic or telecommunication transmission acceptable to the Corporation to the person who will be the holder of the proxy. 5. Quorum. The presence, in person or by proxy, of a majority of the shares entitled to vote at a meeting shall constitute a quorum for the transaction of business. Except as otherwise required by law or the Articles of Incorporation of the Corporation or these Bylaws, the acts of a majority of the shareholders present at a meeting at which a quorum is present shall be the acts of the shareholders. If a quorum is not present, a meeting of shareholders may be adjourned from time to time by either the vote of shares having a majority of the votes of the shares represented at such meeting, the Chairman of the Board or the Chief Executive Officer, until a quorum is present. If a quorum is present, a meeting of shareholders may be adjourned from time to time by either the Chairman of the Board or the Chief Executive Officer. When a quorum is present at the reconvening of any adjourned meeting, and if the requirements of this Article I have been observed, then any business may be transacted at such reconvened meeting in the same manner and to the same extent as it might have been transacted at the meeting as originally noticed. 6. Waiver of Notice. Any shareholder present at a meeting in person, or by proxy, shall be deemed to have waived notice thereof. 7. Action Without Meeting. Any action required or permitted to be taken at a -3- 4 shareholders' meeting may be taken without a meeting if the action is taken by all the shareholders entitled to vote on the action. The action must be evidenced by one or more written consents describing the action taken, signed by shareholders entitled to take action without a meeting and delivered to the Corporation for inclusion in the minutes or for filing with the corporate records. No written consent shall be valid unless the consenting shareholder has been furnished the same material that would have been required to be sent to the shareholders in a notice of a meeting at which the proposed action would have been submitted to the shareholders for action, including notice of any applicable dissenters' right, or the written consent contains an express waiver of the right to receive the material otherwise required to be furnished. II. BOARD OF DIRECTORS 1. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation managed under the direction of, the Board of Directors. 2. Number and Tenure. The Board of Directors shall consist of not less than three nor more than twelve (12) members with the precise number designated from time to time by the Board of Directors of the Corporation, divided into three classes with the apportionment determined, and the term of each class expiring, in accordance with the provisions of the Articles of Incorporation. The entire Board of Directors or any individual director may be removed only for cause. 3. Qualifications of Directors. Directors shall be natural persons who have attained the age of 25 years but need not be residents of the State of Georgia or shareholders of the Corporation. 4. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation at any annual meeting of shareholders may be made at a special meeting of shareholders, by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors, or by any shareholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Article II, Section 4. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the executive offices of the Corporation within the time period specified in Rule 14a-8(a)(3)(i) under the Exchange Act and must otherwise comply with the provisions of these Bylaws. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and -4- 5 residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Exchange Act; and (b) as to the shareholder giving the notice, (i) the name and address of the shareholder and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the shareholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 5. Committees. The Board of Directors may, by resolution, designate from among its members one or more committees, each committee to consist of one or more directors, except that committees appointed to take action with respect to indemnification of directors, directors' conflicting interest transactions or derivative proceedings shall consist of two or more directors qualified to serve pursuant to the Georgia Business Corporation Code (the "Code"). Any such committee, to the extent specified by the Board of Directors, Articles of Incorporation or Bylaws, shall have and may exercise all of the authority of the Board of Directors in the management of the business affairs of the Corporation, except that it may not (1) approve or propose to shareholders action that the Georgia Business Corporation Code requires to be approved by shareholders, (2) fill vacancies on the Board of Directors or any of its committees, (3) amend the Articles of Incorporation, (4) adopt, amend or repeal the Bylaws or (5) approve a plan of merger. 6. Meetings. The Board of Directors shall meet annually, without notice, immediately following and, unless the Chairman of the Board or the Chief Executive Officer of the Corporation determines otherwise, at the same place as the annual meeting of shareholders. Regular meetings of the Board of Directors, to be held at least quarterly, or meetings of any committee, may be held between annual meetings without notice at such time and at such place, within or without the State of Georgia, as shall be determined by the Board of Directors or committee, as the case may be. Any two directors, or the Chief Executive Officer may call a special meeting of the directors at any time by giving each director two (2) days' prior notice. Such notice may be given orally or in writing. If given in writing, it is effective when received personally or by facsimile transmission or by courier, or three (3) days after its deposit in the United States mail with first-class postage prepaid and addressed to the mailing address for such director shown in the corporate records. Neither the business to be transacted at, not the purpose of, any regular or special meeting need be specified in the notice or waiver of notice. -5- 6 7. Waiver of Notice. Whenever any notice is required to be given under provisions of the Articles of Incorporation or these Bylaws or by law, a waiver thereof, signed by the director entitled to notice and delivered to the Corporation for inclusion in the minutes or filing with the corporate records, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting and of all objections to the place or time of the meeting or the manner in which it has been called or convened, except when the director attends a meeting for the express purpose of stating, at the beginning of the meeting, any such objection and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of the directors need be specified in any written waiver of notice. 8. Quorum and Voting. At all meetings of the Board of Directors or any committee thereof, a majority of the number of directors prescribed, or if no number is prescribed, the number in office immediately before the meeting begins, shall constitute a quorum for the transaction of business. The affirmative vote of a majority of the directors present at any meeting at which there is a quorum at the time of such act shall be the act of the Board of Directors or of the committee, except as might be otherwise specifically provided by statute or by the Articles of Incorporation or Bylaws. 9. Action Without Meeting. Unless the Articles of Incorporation or Bylaws provide otherwise, any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if the action is taken by all members of the Board of Directors or committee, as the case may be. The action must be evidenced by one or more written consents describing the action taken, signed by each director, and filed with the minutes of the proceedings of the Board of Directors or committee or filed with the corporate records. 10. Remote Participation in a Meeting. Unless otherwise restricted by the Articles of Incorporation or the Bylaws, any meeting of the Board of Directors may be conducted by the use of any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. 11. Compensation of Directors. The Board of Directors may fix the compensation of the directors for their services as directors. No provision of these Bylaws shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. -6- 7 III. OFFICERS 1. Appointment. The Board of Directors at each annual meeting of directors shall elect such officers as it shall deem necessary who shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Any number of offices may be held by the same person unless the Articles of Incorporation or these Bylaws otherwise provide. The appointment of an officer does not itself create contract rights. 2. Resignation and Removal of Officers. An officer may resign at any time by delivering notice to the Corporation and such resignation is effective when the notice is delivered. The Board of Directors may remove any officer at any time with or without cause. 3. Vacancies. Any vacancy in office resulting from any cause may be filled by the Board of Directors or by any officer authorized by these Bylaws to appoint such officer. 4. Powers and Duties. Each officer has the authority and shall perform the duties set forth below or, to the extent consistent with these Bylaws, the duties prescribed by the Board of Directors or by direction of an officer authorized by the Board of Directors to prescribe the duties of other officers. (a) Chairman of the Board. The Chairman of the Board shall be chosen from among the directors of the Corporation and, when present, shall preside at all meetings of the shareholders and the Board of Directors, shall be charged with general supervision of the management and policy of the Corporation, and shall have such other powers and duties as from time to time may be assigned by the Board of Directors. (b) Chief Executive Officer. Unless otherwise provided by the Board of Directors, any officer designated as president shall be the chief executive officer of the Corporation and shall be responsible for the administration of the Corporation, including general supervision of the policies of the Corporation and the general and active management of the financial affairs of the Corporation. He shall have the power to make and execute contracts on behalf of the Corporation and to delegate such power to others. He also shall have such powers and perform such duties as are specifically imposed on him by law and as may be assigned to him by the Board of Directors. (c) Vice Presidents or Executive Vice Presidents. The vice presidents, if any, shall perform such duties as vice presidents customarily perform and shall perform such other duties and shall exercise such other powers as the president or the Board of Directors may from time to time designate. The vice president, in the absence or disability or at the direction of the president, -7- 8 shall perform the duties and exercise the powers of the president. If the Corporation has more than one vice president, the one first elected and designated as executive vice president by the Board of Directors shall act in lieu of the president, or, in the absence of any such designation, then the vice president first elected shall act in lieu of the president. (d) Secretary. The secretary shall attend all meetings of the shareholders and all meetings of the Board of Directors and shall record, unless another person is otherwise requested by the Chairman of the Board or other chairman of a meeting to record, all votes and minutes of all proceedings in books to be kept for that purpose, and shall perform like duties for the standing committees when required. He shall have custody of the corporate seal of the Corporation, shall have the authority to affix the same to any instrument the execution of which on behalf of the Corporation under its seal is duly authorized and shall attest to the same by his signature whenever required. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest to the same by his signature. The secretary shall give, or cause to be given, any notice required to be given of any meetings of the shareholders, the Board of Directors and of the standing committees when required. The secretary shall cause to be kept such books and records as the Board of Directors, the chairman of the board or the chief executive officer may require and shall cause to be prepared, recorded, transferred, issued, sealed and canceled certificates of stock as required by the transactions of the Corporation and its shareholders. The secretary shall attend to such correspondence and shall perform such other duties as may be incident to the office of a secretary of a Corporation or as may be assigned to him or her by the Board of Directors, the chairman of the board or the chief executive officer. (e) Treasurer. Unless otherwise provided by the Board of Directors, any officer designated as treasurer shall be charged with the management of financial affairs of the Corporation. He or she shall perform such duties as treasurers usually perform and shall perform such other duties and shall exercise such other powers as the Board of Directors, the chairman of the board or the chief executive officer may from time to time designate and shall render to the chairman of the board, the chief executive officer and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation. (f) Assistant Vice President, Assistant Secretary and Assistant Treasurer. Any person designated as assistant vice president, assistant secretary and assistant treasurer, in the absence or disability of any vice president, the secretary or the treasurer, respectively, shall perform the duties and exercise the powers of those offices, and, in general, they shall perform such other duties as shall be assigned to them by the Board of Directors or by the person appointing them. Specifically the assistant secretary may affix the corporate seal to all necessary documents and attest the signature of any officer of the Corporation. 5. Delegation of Authority. In case of the absence of any officer of the Corporation or for any other reason that the Board of Directors may deem sufficient, the Board of Directors may -8- 9 delegate, for the time being, any or all of the powers or duties of such officer to any other officer, assistant officer or to any director. 6. Appointment by Officers. A duly appointed officer may appoint one or more officers or assistant officers, as such officer deems necessary. IV. CAPITAL STOCK 1. Stock Certificates. The capital stock of the Corporation shall be evidenced by certificates bearing the signatures or facsimiles thereof of the Chief Executive Officer or President and the Secretary or any Assistant Secretary and countersigned by the Registrar and Transfer Agent, if any. The stock shall be transferable only on the books of the Corporation by assignment properly signed by the shareholder of record or such shareholder's duly authorized attorney-in-fact and with all taxes on the transfer having been paid. The Corporation or its transfer agent or agents shall be authorized to refuse any transfer unless and until it is furnished such evidence as it may reasonably require showing that the requested transfer is proper. The Corporation may deem and treat the registered holder of any stock as the absolute owner thereof for all purposes and shall not be required to take any notice of any right or claim of right of any other person. 2. Lost, Destroyed or Stolen Certificates. When the holder of record of a share or shares of stock of the Corporation claims that the certificate representing said share has been lost, destroyed or wrongfully taken, the Board of Directors may by resolution provide for, or may authorize such officer or agent as it may designate to provide for, the issuance of a certificate to replace the original if the holder of record so requests before the Corporation has notice that the certificate has been acquired by a bona fide purchaser, files with the Corporation a sufficient indemnity bond, if required by the Corporation, and furnishes evidence of such loss, destruction or wrongful taking satisfactory to the Corporation, in the reasonable exercise of its discretion. The Board of Directors may also authorize such officer or agent as it may designate to determine the sufficiency of such an indemnity bond and to determine reasonably the sufficiency of the evidence of loss, destruction or wrongful taking. 3. Transfer Agent and Registrar. The Board of Directors may (but shall not be required to) appoint a transfer agent or agents and a registrar or registrars to effect transfers of shares of stock, and may require that all stock certificates bear the signature of such transfer agent or of such transfer agent and registrar. 4. Record Date. The Board of Directors may fix a date (the "record date") not exceeding seventy (70) days prior to the date appointed for any meeting of the shareholders, or prior to the date -9- 10 fixed for the payment of any dividend, or for the delivery of any evidences of rights, or other distribution allowed by law or in order to make a determination of shareholders for any other proper purpose, as the record date for the determination of the shareholders entitled to participate in the aforesaid. A record date for the determination of shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof shall not be set less than 10 days prior to such meeting. Only shareholders of record on the record date shall be entitled to notice of or to participate in the aforesaid. 5. Inspection of Records. The record of shareholders, accounting records and written proceedings of the shareholders, the Board of Directors and committees of the Board of Directors shall be open for inspection and copying during regular business hours at the Corporation's principal office by a shareholder owning not less than two percent (2%) of the outstanding shares of the Corporation upon at least five (5) days written notice of his demand to inspect and copy. The right of inspection by a shareholder may be granted only if his demand is made in good faith and for a proper purpose that is reasonably relevant to his legitimate interest as a shareholder, he describes with reasonable particularity his purpose and the records he desires to inspect, the records are directly connected with his purpose and are to be used only for the stated purpose. V. INDEMNIFICATION AND INSURANCE 1. Authority to Indemnify; Third Party Actions. Every person now or hereafter serving as a director, officer or in-house legal counsel acting in a legal capacity of the Corporation and any and all former directors and officers shall be indemnified and held harmless by the Corporation from and against any and all loss, cost, liability, and expense that may be imposed upon or incurred by him in connection with or resulting from any threatened, pending, or completed claim, action, suit, or proceeding (other than an action by or in the right of the Corporation), whether civil, criminal, administrative, or investigative, in which he may become involved, as a party or otherwise, by reason of his being or having been a director or officer of the Corporation, or arising from his status as such, or that he is or was serving at the request of the Corporation as a director, officer, employee, or agent of another Corporation, limited liability corporation, partnership, limited partnership, limited liability partnership, limited liability limited partnership, joint venture, trust, or other enterprise, regardless of whether such person is acting in such capacity at the time such loss, cost, liability or expense shall have been imposed or incurred. As used herein, the term "loss, cost, liability and expense" shall include, but shall not be limited to, any and all costs, expenses (including attorneys' fees and disbursements), judgments, penalties, fines, and amounts paid in settlement incurred in connection with any such claim, action, suit, or proceeding if such person acted in good faith and, while acting in an official capacity as a director or officer, acted in a manner he reasonably believed to be in the best interest of the Corporation, and, in all other cases, acted in a manner he reasonably believed was -10- 11 not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, if such person had no reasonable cause to believe his conduct was unlawful. The termination of any claim, action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contender or its equivalent, shall not, of itself, create a presumption that the person did not act in a manner which meets the standard described in the immediately preceding sentence. If any such claim, action, suit, or proceeding is settled (whether by agreement, plea of nolo contender, entry of judgment or consent, or otherwise), the determination in good faith by the Board of Directors of the Corporation that such person acted in a manner that met the standard set forth in this paragraph shall be necessary and sufficient to justify indemnification. 2. Authority to Indemnify; Derivative Actions. The Corporation shall indemnify and hold harmless any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact he is or was a director, officer or in-house legal counsel acting in a legal capacity of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another Corporation, limited liability corporation, partnership, limited partnership, limited liability partnership, limited liability limited partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees and disbursements), judgments and any other amounts, now or hereafter permitted by applicable law, actually and reasonably incurred by him or in connection with the defense or settlement of such action or suit; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation, unless the director or officer has not been adjudged liable or subject to injunctive relief in favor of the Corporation (i) for any appropriation, in violation of his duties, of any business opportunity of the Corporation; (ii) for acts or omissions which involve intentional misconduct or a knowing violation of law; (iii) for the types of liability set forth in Code Section 14-2-832; or (iv) for any transaction from which he received an improper personal benefit, and in the event the foregoing conditions are not met, then only to the extent that the court in which such action or suit was brought or another court of competent jurisdiction shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. 3. Advancement of Expenses. Expenses incurred in any claim, action, suit, or proceeding shall be paid by the Corporation in advance of the final disposition of such claim, action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt from the director, officer or in-house legal counsel of a written affirmation of his good faith belief that he has met the relevant standard of conduct set forth under Section 14-2-851 of the Code and furnishes to the Corporation an undertaking to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation. 4. Determination of Indemnification Rights. Except as ordered by a court, the -11- 12 Corporation may not indemnify a director, officer, in-house legal counsel acting in a legal capacity, employee or agent under this Article unless authorized hereunder and a determination has been made in the specific case that indemnification of the director, officer, in-house legal counsel or employee is permissible under the circumstances because he or she has met the relevant standard of conduct set forth in either Section 1 or Section 2. The determination shall be made (i) if there are two or more disinterested directors, by the Board of Directors by a majority vote of all the disinterested directors (a majority of whom shall for such purpose constitute a quorum), or by a majority of the members of a committee of two or more disinterested directors appointed by such a vote; (ii) by special legal counsel (a) selected in the manner prescribed in clause (i) of this sentence or (b) if there are fewer than two disinterested directors, selected by the Board of Directors (in which selection directors who do not qualify as disinterested directors may participate); or (iii) by the shareholders, but shares owned by or voted under the control of a director who at the time does not qualify as a disinterested director may not be voted on the determination. 5. Consideration. The Corporation shall be obligated to provide indemnification in accordance with the provisions of this Article VI. Any person who at any time after the adoption of this Article serves or has served in the capacity of director, officer or in-house legal counsel acting in a legal capacity for or on behalf of the Corporation shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the right of indemnification provided herein. Such right shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from the provision of this Article. Any repeal or modification of these indemnification provisions shall not affect any rights or obligations existing at the time of such repeal or modification. 6. Non-Exclusive Right of Indemnification. The foregoing rights of indemnification and advancement of expenses shall not be deemed exclusive of any other right to which those indemnified may be entitled, and the Corporation may provide additional indemnity and rights to its directors, officers, employees or agents. 7. Insurance. The Corporation may purchase and maintain insurance, at its expense, on behalf of an individual who is or was a director, officer, in-house legal counsel acting in a legal capacity, employee or agent of the Corporation or who, while a director, officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against liability asserted against or incurred by him in any such capacity or arising from his status as a director, officer, employee or agent, whether or not the corporation would have power to indemnify him against the same liability under this Article. 8. Miscellaneous. The provisions of this Article VI shall cover claims, actions, suits and proceedings, civil or criminal, whether now pending or hereafter commenced and shall be retroactive to cover acts or omissions or alleged acts or omissions which heretofore have taken place. -12- 13 In the event of death of any person having a right of indemnification or advancement of expenses under the provisions of this Article VI, such right shall inure to the benefit of his heirs, executors, administrators and personal representatives. If any part of this Article VI should be found to be invalid or ineffective in any proceeding, the validity and effect of the remaining provisions shall not be affected. VI. INTERESTED SHAREHOLDER TRANSACTIONS The Corporation hereby elects to be governed by all of the requirements of the Fair Price Requirements and Business Combinations with Interested Shareholders rules set forth in Part 2 and Part 3 of Article 11 of the Code, ss.ss. 14-2-1110 through 14-2-1133; provided, however, that, notwithstanding anything to the contrary in the foregoing rules, the restrictions set forth in the foregoing rules shall not apply to any "business combination" (as such term is defined in ss.14-2-1110 or ss.14-2-1131 of the Code) with (i) any shareholder of the Corporation who was an "Interested Shareholder" (as such term is defined in ss.14-2-1110 of the Code) as of the date the Corporation adopts these Bylaws or (ii) any person or entity now existing or hereafter created that is at the time of such business combination wholly owned by such Interested Shareholder. VII GENERAL PROVISIONS 1. Seal. The Corporation may have a seal, which shall be in such form as the Board of Directors may from time to time determine. In the event that the use of the seal is at any time inconvenient, the signature of an officer of the Corporation, followed by the word "Seal" enclosed in parenthesis or brackets, shall be deemed the seal of the Corporation. 2. Voting Shares in Other Corporations. In the absence of other arrangements by the Board of Directors, shares of stock issued by another Corporation whether or not owned or controlled by the Corporation, whether in a fiduciary capacity or otherwise, may be voted by the chief executive officer, president or any vice president, in the absence of action by the chief executive officer or president, in the same order as they preside in the absence of the chief executive officer or president, or, in the absence of action by the president or any vice president, by any other officer of the Corporation, and such person may execute the aforementioned powers by executing proxies and written waivers and consents on behalf of the Corporation. 3. Amendment of Bylaws. These Bylaws may be amended or repealed and new Bylaws may be adopted by the Board of Directors at any time unless otherwise restricted by the these Bylaws, the Articles of Incorporation or the Code, or the shareholders, in amending or -13- 14 repealing the particular Bylaw, provide expressly that the Board of Directors may not amend or repeal that Bylaw. VII. EMERGENCY BYLAWS 1. Emergency Bylaws. This Article shall be operative during any emergency resulting from some catastrophic event that prevents a quorum of the Board of Directors or any committee thereof from being readily assembled (an "emergency"), notwithstanding any different or conflicting provisions set forth elsewhere in these Bylaws or in the Articles of Incorporation. To the extent not inconsistent with the provisions of this Article, the Bylaws set forth elsewhere herein and the provisions of the Articles of Incorporation shall remain in effect during such emergency, and upon termination of such emergency, the provisions of this Article shall cease to be operative. 2. Meetings. During any emergency, a meeting of the Board of Directors or any committee thereof may be called by any director, or by the chief executive officer, president, any vice president, the secretary or the treasurer (the "Designated Officers") of the Corporation. Notice of the time and place of the meeting shall be given by any available means of communication by the person calling the meeting to such of the directors and/or designated officers as may be feasible to reach. Such notice shall be given at such time in advance of the meeting as, in the judgment of the person calling the meeting, circumstances permit. 3. Quorum. At any meeting of the Board of Directors or any committee thereof called in accordance with this Article, the presence or participation of two directors, one director and a designated officer, or two designated officers shall constitute a quorum for the transaction of business. 4. Liability. Corporate action taken in good faith in accordance with the emergency Bylaws may not be used to impose liability on a director, officer, employee or agent of the Corporation. 5. Repeal or Change. The provisions of this Article shall be subject to repeal or change by further action of the Board of Directors or by action of shareholders, but no such repeal or change shall modify the provisions of the immediately proceeding Section of this Article with regard to action taken prior to the time of such repeal or change. -14- EX-10.01 4 ex10-01.txt EXCLUSIVE LICENSE AGREEMENTS 1 EXHIBIT 10.01 EXCLUSIVE LICENSE AGREEMENT BY AND BETWEEN ATHEROGENICS, INC. AND SCHERING-PLOUGH LTD. [*] Certain confidential information contained in this document, marked by an asterisk within brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. 2 TABLE OF CONTENTS EXCLUSIVE LICENSE AGREEMENT
PAGE ---- ARTICLE I - DEFINITIONS..................................................................................1 1.1 AFFILIATE.....................................................................................1 1.2 CALENDAR QUARTER..............................................................................1 1.3 CALENDAR YEAR.................................................................................2 1.4 COMBINATION PRODUCT...........................................................................2 1.5 COMPOUND LIBRARY..............................................................................2 1.6 COST OF GOODS.................................................................................2 1.7 EFFECTIVE DATE................................................................................2 1.9 FIRST COMMERCIAL SALE.........................................................................2 1.9 HRD...........................................................................................2 1.10 HSR ACT.......................................................................................2 1.11 "IMPROVEMENT".................................................................................2 1.13 LICENSED COMPOUND.............................................................................3 1.14 LICENSED PRODUCT(S)...........................................................................3 1.15 LICENSOR KNOW-HOW.............................................................................3 1.16 NDA...........................................................................................4 1.17 NET SALES.....................................................................................4 1.18 PATENT RIGHTS.................................................................................5 1.19 PRIMARY INDICATION............................................................................5 1.20 PROPRIETARY INFORMATION.......................................................................5 1.21 REGULATORY APPROVAL...........................................................................5 1.22 "SECONDARY INDICATION"........................................................................5 1.23 "SUBLICENSEE".................................................................................5 1.24 "TERRITORY"...................................................................................6 1.25 "TERM"........................................................................................6 1.26 US AGREEMENT..................................................................................6 1.27 VALID CLAIM...................................................................................6 ARTICLE II - LICENSE; DISCLOSURE OF INFORMATION; DEVELOPMENT AND COMMERCIALIZATION.......................6 2.1 EXCLUSIVE LICENSE GRANT.......................................................................6 (a) License.......................................................................................6 (a) Co-Exclusive License to Other Indications.....................................................6 (c) Right to Sublicense...........................................................................7 (d) Retained Rights...............................................................................7 (e) Third Party Agreements........................................................................7 2.2 NON-EXCLUSIVE LICENSE GRANT...................................................................7 2.3 DISCLOSURE OF INFORMATION.....................................................................8
i 3 2.4 HSR FILING AND APPROVALS......................................................................8 (a) HSR Filing....................................................................................8 (b) Licensor's Obligations........................................................................8 (c) Additional Approvals..........................................................................9 2.5 JOINT MANAGEMENT COMMITTEE....................................................................9 (a) Composition of the JMC........................................................................9 (b) JMC Meetings..................................................................................9 (c) JMC Responsibilities.........................................................................10 (d) Deadlock.....................................................................................10 2.6 SPL'S DEVELOPMENT OBLIGATIONS................................................................10 (a) SPL Diligence................................................................................10 (b) Opportunity to Cure..........................................................................10 (c) Research and Development Activities..........................................................11 (d) Licensed Product Registrations; Pricing Reimbursement Approvals..............................11 (e) Data.........................................................................................11 (f) Assistance by Licensor.......................................................................11 (g) Reimbursement of Costs by SPL................................................................12 (h) Licensor's Additional Development Obligations................................................12 (i) Adverse Event Reporting......................................................................13 2.7 INDEPENDENT DISCOVERIES BY SPL...............................................................13 2.8 EXCUSED PERFORMANCE..........................................................................13 2.9 SUPPLY OF LICENSED COMPOUND/LICENSED PRODUCT.................................................14 2.10 REPORTS......................................................................................14 2.11 NON-COMPETE PROVISION........................................................................14 ARTICLE III - PAYMENTS; ROYALTIES AND REPORTS...........................................................15 3.0 COORDINATION OF PAYMENTS UNDER THE US AGREEMENT..............................................15 3.1 LICENSE FEE..................................................................................15 (a) Development Milestones.......................................................................15 (b) Sales Milestones.............................................................................16 (c) Limitations..................................................................................16 3.3 ROYALTIES....................................................................................17 (a) Cap on Royalties Plus Cost of Goods..........................................................17 (b) Licensor's Option to Manufacture.............................................................18 (c) Royalty Reduction............................................................................18 3.4 THIRD PARTY LICENSES.........................................................................18 3.5 COMPULSORY LICENSES..........................................................................19 3.6 REPORTS AND PAYMENT OF ROYALTY; PAYMENT EXCHANGE RATE AND CURRENCY CONVERSIONS.......................................................19 (a) Royalties Paid Quarterly.....................................................................19 (b) Method of Payment............................................................................19 3.7 MAINTENANCE OF RECORDS; AUDITS...............................................................20 (a) Record Keeping by SPL........................................................................20
ii 4 (b) Underpayments/Overpayments...................................................................20 (c) Record Keeping by Sublicensee................................................................20 (d) Confidentiality..............................................................................20 (e) Binding Records..............................................................................21 3.8 INCOME TAX WITHHOLDING.......................................................................21 3.9 DIRECT AFFILIATE LICENSES....................................................................21 ARTICLE IV - PATENTS....................................................................................21 4.1 FILING, PROSECUTION AND MAINTENANCE OF PATENTS...............................................21 4.2 OPTION OF SPL TO PROSECUTE AND MAINTAIN PATENTS..............................................22 4.3 ENFORCEMENT..................................................................................22 (a) Notice and Discontinuance of Infringement....................................................22 (b) Continuance of Infringement..................................................................23 4.4 THIRD PARTY INFRINGEMENT SUIT................................................................23 (a) Defense......................................................................................23 (b) Licensing....................................................................................23 4.5 CERTIFICATION UNDER DRUG PRICE COMPETITION AND PATENT RESTORATION ACT...................................................................24 4.6 ABANDONMENT..................................................................................24 4.7 PATENT TERM RESTORATION......................................................................24 4.8 NOTICES REGARDING PATENTS....................................................................24 ARTICLE V - CONFIDENTIALITY AND PUBLICATION.............................................................25 5.1 CONFIDENTIALITY..............................................................................25 (a) Nondisclosure Obligation.....................................................................25 (b) Disclosure to Agents.........................................................................26 (c) Disclosure to a Third Party..................................................................26 5.2 PUBLICITY....................................................................................26 5.3 PUBLICATION..................................................................................27 ARTICLE VI - REPRESENTATIONS AND WARRANTIES.............................................................27 6.1 REPRESENTATIONS AND WARRANTIES OF EACH PARTY.................................................27 6.2 LICENSOR'S REPRESENTATIONS...................................................................28 6.3 CONTINUING REPRESENTATIONS...................................................................30 6.4 NO INCONSISTENT AGREEMENTS...................................................................30 6.5 REPRESENTATION BY LEGAL COUNSEL..............................................................30 6.6 ADDITIONAL OBLIGATIONS OF LICENSOR...........................................................30 ARTICLE VII - INDEMNIFICATION AND LIMITATION ON LIABILITY...............................................31 7.1 INDEMNIFICATION BY SPL.......................................................................32 7.2 INDEMNIFICATION BY LICENSOR..................................................................32 7.3 CONDITIONS TO INDEMNIFICATION................................................................32 7.4 SETTLEMENTS..................................................................................33 7.5 LIMITATION OF LIABILITY......................................................................33
iii 5 7.6 INSURANCE....................................................................................33 ARTICLE VIII - TERM AND TERMINATION.....................................................................33 8.1 TERM AND EXPIRATION..........................................................................33 8.2 TERMINATION BY SPL WITHOUT CAUSE.............................................................33 8.3 TERMINATION UPON CESSATION OF DEVELOPMENT....................................................33 (a) Termination by Either Party..................................................................34 (b) Termination by Licensor......................................................................34 8.4 TERMINATION..................................................................................34 (a) Termination for Cause........................................................................34 (b) Effect of Termination for Cause on License...................................................35 (i) Termination by SPL.......................................................................35 (ii)Termination by Licensor..................................................................35 (iii)Effect of Bankruptcy....................................................................35 8.5 EFFECT OF TERMINATION........................................................................35 8.6 REMEDIES FOR BREACH..........................................................................36 8.7 LICENSOR'S RIGHTS ON TERMINATION.............................................................36 8.8 CONCURRENT TERMINATION WITH THE US AGREEMENT.................................................37 ARTICLE IX - MISCELLANEOUS..............................................................................37 9.1 ASSIGNMENT/CHANGE OF CONTROL.................................................................37 (a) Assignment...................................................................................37 (a) Change of Control............................................................................37 9.2 GOVERNING LAW................................................................................38 9.3 WAIVER.......................................................................................38 9.4 INDEPENDENT RELATIONSHIP.....................................................................38 9.5 EXPORT CONTROL...............................................................................38 9.6 COMPLETE AGREEMENT...........................................................................38 (a) Entire Agreement; Amendment..................................................................39 (b) Relationship to US Agreement; Controlling Provisions.........................................39 9.7 NOTICES......................................................................................39 9.8 PROVISIONS FOR INSOLVENCY....................................................................40 (a) Effect on Licenses...........................................................................40 (b) Rights to Intellectual Property..............................................................41 (c) SPL's Rights.................................................................................41 (d) Deemed Grant of Rights.......................................................................41 (e) Security Interests...........................................................................42 9.9 FORCE MAJEURE................................................................................42 9.10 SEVERABILITY.................................................................................42 9.11 COUNTERPARTS.................................................................................42 9.12 CAPTIONS.....................................................................................43 9.13 RECORDING....................................................................................43 9.14 FURTHER ACTIONS..............................................................................43
iv 6 SCHEDULES SCHEDULE 1.6 COST OF GOODS SCHEDULE 1.18 PATENT RIGHTS SCHEDULE 2.1(E) THIRD PARTY AGREEMENTS SCHEDULE 2.6(H) DEVELOPMENT WORK TO BE PERFORMED BY LICENSOR SCHEDULE 2.6(I) ADVERSE EVENT REPORTING PROCEDURES SCHEDULE 3.2 DEFINITION OF SUCCESSFUL COMPLETION SCHEDULE 6.2(D) GOVERNMENT RIGHTS SCHEDULE 6.2(K) OTHER VCAM-1 INHIBITORS SCHEDULE 9.2 ARBITRATION PROVISIONS v 7 EXCLUSIVE LICENSE AGREEMENT THIS EXCLUSIVE LICENSE AGREEMENT (the "Agreement") is made as of October 22, 1999 by and between ATHEROGENICS, INC., a Georgia corporation having its principal place of business at 8995 Westside Parkway, Alpharetta, Georgia 30004 (hereinafter referred to as "Licensor") and SCHERING-PLOUGH LTD., a corporation organized and existing under the laws of Switzerland and having its principal place of business at Toepferstrasse 5, CH 6004 Lucerne Switzerland (hereinafter referred to as "SPL"). Licensor and SPL are sometimes referred to herein individually as a Party and collectively as the Parties. References to "SPL" and "Licensor" shall include their respective Affiliates (as hereinafter defined). WHEREAS, Licensor has developed certain Licensor Know-How and has rights to Patent Rights relating to soluble analogs of probucol, including without limitation the Licensed Compound (each as hereinafter defined); and WHEREAS, SPL, together with its Affiliates (as hereinafter defined) possesses extensive capabilities in the development and commercialization of pharmaceutical products on a worldwide basis; and WHEREAS, SPL desires to obtain and Licensor is willing to grant to SPL, an exclusive license under the Patent Rights and to use the Licensor Know-How, upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, SPL and Licensor hereby agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following initially capitalized terms, whether used in the singular or plural, shall have the respective meanings set forth below: 1.1 "Affiliate" shall mean any individual or entity directly or indirectly controlling, controlled by or under common control with, a Party to this Agreement. For purposes of this Agreement, the direct or indirect ownership of fifty percent (50%) or more of the outstanding voting securities of an entity, or the right to receive fifty percent (50%) or more of the profits or earnings of an entity shall be deemed to constitute control. Such other relationship as in fact results in actual control over the management, business and affairs of an entity shall also be deemed to constitute control. 1.2 "Calendar Quarter" shall mean the respective periods of three (3) consecutive calendar months ending on March 31, June 30, September 30 or December 31, for so long as this Agreement is in effect. 8 1.3 "Calendar Year" shall mean each successive period of twelve (12) months commencing on January 1 and ending on December 31, for so long as this Agreement is in effect. 1.4 "Combination Product" shall mean any form or dosage of pharmaceutical composition or preparation in final form for sale by prescription, over-the-counter or any other method and which comprises two (2) or more active ingredients within the same pharmaceutical formulation, at least one (1) of which is Licensed Compound and/or any other compound from the Compound Library. 1.5 "Compound Library" shall mean the collection of compounds (including, without limitation, the Licensed Compound) which as of the Execution Date is specifically and/or generically covered by one or more claims in U.S. Patent No. 5,262,439, entitled "Soluble Monoesters of Probucol", or any corresponding foreign patents or patent applications. The Compound Library shall include such compounds in any form, including any salt, hydrate or crystalline structure thereof. 1.6 "Cost of Goods" shall mean SPL's fully allocated manufacturing cost of goods as determined in accordance with Schedule 1.6. 1.7 "Effective Date" shall mean the next business day following the last to occur of (i) expiration or earlier termination of any notice and waiting period under the HSR Act; or (ii) the date of delivery of fully executed counterparts of this Agreement (the "Execution Date"). 1.8 "First Commercial Sale" shall mean, with respect to any Licensed Product, the first sale by SPL to any third party, not an Affiliate or Sublicensee, of such Licensed Product for an indication for which SPL has obtained Regulatory Approval. 1.9 "HRD" shall mean a health registration dossier or its equivalent, submitted to a national government or a supranational governmental authority, consisting of the chemical, pharmaceutical and biological documentation; the toxicological and pharmacological documentation; and the clinical documentation respectively, and covering a Licensed Product which is filed in any country outside the United States and which is analogous to a new drug application, product license application or its equivalent filed with the United States Food and Drug Administration seeking approval to market and sell a Licensed Product in the Territory and including, where applicable, applications for pricing, pricing reimbursement approval, labeling and Regulatory Approval. 1.10 "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 1.11 "Improvement" shall mean any enhancement in the formulation, preparation, presentation, means of delivery, dosage, packaging of, manufacture, or any new or expanded 9 therapeutic indications(s) for, Licensed Product or Licensed Compound, in each case which is developed prior to or during the Term of this Agreement by or on behalf of Licensor. 1.12 [Section Reserved] 1.13 "Licensed Compound" shall mean the soluble analog of probucol AGI-1067, having the chemical name butanedioic acid, mono[4-[[1-[3,5-bis(1,1- dimethyethyl)-4-hydroxyphenyl]thio]-1-[methylethylthio]-2,6-bis(1,1- dimethylethyl)-phenyl]ester, and any stereoisomers, salts, hydrates and/or crystalline forms thereof. 1.14 "Licensed Product(s)" shall mean any form or dosage of pharmaceutical composition or preparation in final form for sale by prescription, over-the-counter or any other method, which contains as an active ingredient the Licensed Compound and/or any other compound from the Compound Library, including, without limitation, Combination Products; provided, however, that Licensed Product shall not include topical dermatological products as described in Section 2.11(c). 1.15 "Licensor Know-How" shall mean any of Licensor's information and materials specifically relating to the research, development, registration, manufacture, marketing, use or sale of Licensed Compound and/or Licensed Product and/or the Compound Library, and which prior to or during the Term of this Agreement are developed by or at the request of Licensor, or those of its Affiliates involved in the performance of development of Licensed Product under Article 2, or are in Licensor's or such Affiliates' possession or control through license or otherwise (provided that Licensor is permitted to make disclosure thereof to SPL without violating the terms of any third party agreement), and which are not generally known. Licensor Know-How shall include, without limitation, discoveries, practices, methods, knowledge, Improvements, processes, formulas, data, ideas, skill, experience, inventions, know-how, technology, trade secrets, manufacturing procedures, purification and isolation techniques, instructions, test data and other intellectual property, patentable or otherwise, relating to Licensed Compound, Licensed Product or any Improvements. Licensor Know-How shall also include, without limitation: (i) all biological, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical, clinical, safety, manufacturing and quality control data and information related thereto; (ii) compositions of matter, assays and biological materials specifically relating to development, manufacture, use or sale of any Licensed Compound, Licensed Product or Improvement; and (iii) all applications, registrations, licenses, authorizations, approvals and correspondence submitted to or received from any regulatory authorities with jurisdiction in the Territory over an investigational drug containing Licensed 3 10 Compound and/or Licensed Product (including, without limitation, minutes and meeting notes relating to any communications with any regulatory authority with jurisdiction in the Territory over an investigational drug containing Licensed Compound and/or Licensed Product). 1.16 "NDA" shall mean a New Drug Application or its equivalent filed with the United States Food and Drug Administration seeking approval to market and sell a Licensed Product in the United States. 1.17 "Net Sales" shall mean the amounts actually received on all sales of Licensed Product by SPL, its Affiliates or Sublicensees to an unaffiliated third party, and exclusive of intercompany transfers or inter-company sales, less the following reasonable and customary deductions from such gross amounts (to the extent actually taken): (i) normal and customary trade, cash and quantity discounts, allowances and credits; (ii) credits or allowances actually granted for damaged goods, returns or rejections of Licensed Product and retroactive price reductions; (iii) sales taxes, duties or other taxes with respect to such sales (including duties or other governmental charges levied on, absorbed or otherwise imposed on the sale of Licensed Product including, without limitation, value added taxes or other governmental charges otherwise measured by the billing amount, when included in billing); (iv) insurance, postage, customs duties and transportation costs, when included in billing; (v) charge back payments and rebates granted to managed health care organizations or to federal, state and local governments, their agencies, and purchasers and reimbursers or to trade customers, including but not limited to, wholesalers and chain and pharmacy buying groups; and (vi) rebates (or equivalents thereof) granted to or charged by national, state or local governmental authorities in countries other than the United States. In determining Net Sales of a Licensed Product any of the above discounts shall be accounted for and apportioned based on the list price of each such Licensed Product. In the event that Licensed Product is sold in the form of a Combination Product containing Licensed Compound and one or more other active ingredients then Net Sales for such Combination Product will be calculated by multiplying actual Net Sales of such Combination Product by the fraction A/(A+B) where: A is the invoice price of the Licensed Compound 4 11 contained in the Combination Product if sold separately by SPL, an Affiliate or Sublicensee and B is the invoice price of any other active component or components in the Combination Product if sold separately by SPL, an Affiliate or Sublicensee. In the event that the Licensed Product is sold in the form of a Combination Product containing one or more active ingredients other than Licensed Compound and one or more such active ingredients of the Combination Product are not sold separately, then the above formula shall be modified such that A shall be the total cost to SPL, its Affiliate or Sublicensee(s) of the Licensed Compound and B shall be the total cost to SPL, its Affiliate or Sublicensee of any other active component or components in the combination. 1.18 "Patent Rights" shall mean all patents and patent applications in the Territory which during the Term of this Agreement are owned or controlled (with the right to grant sublicenses) by Licensor and which contain one or more claims covering Licensed Compound(s), Licensed Product(s), one or more compounds contained in Compound Library, or any uses, formulations, processes or methods of preparing any of the foregoing, or any Improvements, including, but not limited to, those set forth in Schedule 1.18, any and all substitutions, divisions, continuations, continuations-in-part, reissues, renewals, registrations, confirmations, re-examinations, extensions, supplementary protection certificates or any like filing thereof, and provisional applications of any such patents and patent applications and any international equivalent of any of the foregoing. 1.19 "Primary Indication" shall mean the treatment and prevention of [ * ]. 1.20 "Proprietary Information" shall mean all other scientific, clinical, regulatory, marketing, financial and commercial information or data, whether communicated in writing, verbally or electronically, which is provided by one Party to the other Party in connection with this Agreement including, without limitation, Licensor Know-How. When Propriety Information is disclosed in a manner other than in writing, it shall be reduced to written form, marked "Confidential" and transmitted to the receiving Party within twenty (20) business days of disclosure to the receiving Party. 1.21 "Regulatory Approval" shall mean any approvals, including any NDA's, HRD's, supplements, amendments, pre- and post-approvals, marketing authorizations based upon such approvals (including any prerequisite manufacturing approvals or authorizations related thereto) and labeling approval(s), technical, medical and scientific licenses, registrations or authorizations of any national, regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity, necessary for the development, manufacture, distribution, marketing, promotion, offer for sale, use, import, export or sale of Licensed Product(s) and/or Licensed Compound(s) in the Territory. 1.22 "Secondary Indication" shall mean [ * ] 1.23 "Sublicensee" shall mean any party not an Affiliate of SPL, which party is 5 12 authorized by SPL or its Affiliates through express or implied license or consent to import, export, use, distribute, market, promote, offer for sale and sell Licensed Product(s) under Section 2.1(b). 1.24 "Territory" shall mean the entire world, except for the United States and its territories, possessions and commonwealths. 1.25 "Term" shall mean the period described in Section 8.1 of the Agreement. 1.26 "US Agreement" shall mean that certain exclusive license agreement by and between Licensor and Schering Corporation entered into concurrently herewith. 1.27 "Valid Claim" shall mean a composition of matter claim, or method of use claim (or its equivalent) for the Primary Indication and/or the Secondary Indication, of an issued and unexpired patent in a country in the Territory which covers the Licensed Compound and/or any other compound from the Compound Library, which is included within the Patent Rights, and which (i) has not been revoked or held unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal; or (ii) has not been abandoned, disclaimed, or admitted to be invalid or unenforceable through reissue or disclaimer or otherwise. ARTICLE II LICENSE; DISCLOSURE OF INFORMATION; DEVELOPMENT AND COMMERCIALIZATION 2.1 Exclusive License Grant. (a) License. Subject to the terms and conditions of this Agreement, Licensor hereby grants to SPL, as of the Effective Date, an exclusive license (exclusive even as to Licensor) under the Patent Rights and Licensor Know-How in the Territory to develop, make, have made, import, export, use, distribute, market, promote, offer for sale and sell: (i) Licensed Compound(s) and/or Licensed Product(s) containing Licensed Compound; and (ii) compound(s) in the Compound Library other than Licensed Compound, and/or Licensed Product(s) containing such compound(s) for the Primary Indication and the Secondary Indication. (b) Co-Exclusive License to Other Indications Subject to the terms and conditions of this Agreement, Licensor hereby grants to SPL, as of the Effective Date, a co-exclusive license under the Patent Rights and Licensor Know-How in the Territory to develop, make, have made, import, export, use, distribute, market, promote, offer for sale and sell compound(s) in the Compound Library other than Licensed Compound, and/or Licensed Product(s) containing such compound(s), for any and all indications other than 6 13 the Primary Indication and Secondary Indication. The term "co-exclusive license" shall mean that with respect to the rights granted to SPL under this Section 2.1(b), Licensor retains the same rights as are granted to SPL. With respect to a given compound, indication or territory, each of Licensor and SPL may either directly exercise and exploit its co-exclusive rights or grant a co-exclusive license under such rights, either in whole or in part, to one (1) third party or Affiliate. (c) Right to Sublicense. The licenses granted to SPL under Sections 2.1(a) and 2.1(b) shall include the right to grant sublicenses to Affiliates and/or any third party (to the extent provided therein), provided that SPL remains responsible to Licensor under this Agreement for the performance of its Sublicensees. (d) Retained Rights Subject to the restrictions set forth in Section 2.11, Licensor retains all rights under the Patent Rights not expressly granted to SPL by this Section 2.1, and the right to use Licensor Know-How pursuant to Sections 2.6(h) and 5.1(c) below. (e) Third Party Agreements. As of the Execution Date, Licensor is a party to certain agreements (as listed in Schedule 2.1(e), redacted copies of which have been provided to SPL) with third parties pursuant to which Licensor has acquired rights to certain patent applications, patents and technology, which agreements are relevant to the Patent Rights and/or Licensor Know-How. The parties acknowledge that the licenses granted to SPL under this Agreement are, or may be, subject to the specific rights retained by or granted to the U.S. Government, and/or the rights for research use retained by such third parties, under those agreements. In the event that on or after the Execution Date and during the Term of this Agreement, Licensor acquires any additional Patent Rights or Licensor Know-How from any third parties, by assignment, license or otherwise, Licensor shall promptly notify SPL in writing to that effect, and provide SPL with a copy (which may be redacted) of the agreement(s) with such third party. To the extent that the copies of the agreements listed in Schedule 2.1(e) which were provided to SPL, or any other agreements provided to SPL under this Section 2.1(e), have been redacted, Licensor represents and warrants that the redacted portions of such agreements have no material effect on the scope of the licenses or other rights granted to SPL under this Agreement. Nothing herein shall be construed as granting to SPL any greater rights under the Patent Rights and/or Licensor Know-How than those held by Licensor 2.2 Non-Exclusive License Grant. In the event that the development, making, having made, importing, exporting, use, distribution, marketing, promotion, offering for sale or sale by SPL, its Affiliates and/or Sublicensees of Licensed Product in the Territory would infringe during the Term of this Agreement a claim of an issued letters patent, and/or any patent rights which Licensor owns or has the rights to license and which patents are not covered by the grant in Section 2.1, Licensor hereby grants to SPL and its Affiliates, to the extent Licensor is legally able to do so, a non-exclusive, royalty-free license in the Territory under such issued letters patent 7 14 solely for SPL, its Affiliates and/or Sublicensees to discover, develop, make, have made, use, distribute, market, promote, offer for sale and sell Licensed Compound and/or Licensed Product(s) in the Territory. 2.3 Disclosure of Information. Promptly after the Effective Date, Licensor shall, at its own cost, disclose to SPL in writing, or via mutually acceptable electronic media, copies or reproductions of all existing Licensor Know-How not previously disclosed to SPL in order to enable SPL to exploit its rights granted under Section 2.1 and, if applicable, Section 2.2 of this Agreement. In addition, during the Term of this Agreement, Licensor shall promptly disclose to SPL in writing, or via mutually acceptable electronic media, on an ongoing basis copies or reproductions of all new Licensor Know-How that is reasonably necessary for research, development, registration, manufacture, marketing, use or sale of Licensed Compound and/or Licensed Product. Such Licensor Know-How and other information shall be automatically deemed to be within the scope of the licenses granted herein without payment of any additional compensation. Upon SPL's request but reasonably subject to Licensor's other business requirements, Licensor shall provide reasonable technical assistance to enable SPL to utilize such additional Licensor Know-How, provided, that SPL shall promptly reimburse Licensor for reasonable out-of-pocket costs and expenses incurred by Licensor in providing such technical assistance. Licensor shall invoice SPL for such costs and expenses, and shall provide documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) [ * ] after receipt by SPL of the invoice provided, however, that such cost and out-of-pocket expenses must be identified prior to being committed to by Licensor and provided to SPL to determine whether SPL agrees to have the technical assistance provided at such cost and the final amount sought to be reimbursed shall not exceed [ * ] of the estimated cost without SPL's prior written consent. SPL shall be under no obligation to reimburse Licensor for out-of-pocket costs and expenses incurred by Licensor without SPL's agreement. SPL shall have the right to use for all purposes in connection with obtaining any Regulatory Approval for the Licensed Product(s) all Licensor Know-How and other information, disclosed pursuant to this Section and under this Agreement. 2.4 HSR Filing and Approvals. (a) HSR Filing. To the extent necessary, each of Licensor and SPL shall file, within ten (10) days after the date of this Agreement, with the Federal Trade Commission (the "FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division") any notification and report form (the "Report") required of it in the reasonable opinion of either or both Parties under the HSR Act with respect to the transactions as contemplated hereby and shall cooperate with the other Party to the extent necessary to assist the other Party in the preparation of its Report and to proceed to obtain necessary approvals under the HSR Act, including but not limited to the expiration or earlier termination of any and all applicable waiting periods required by the HSR Act. (b) Licensor's Obligations. Licensor shall use good faith reasonable efforts to 8 15 assist SPL in eliminating any concern on the part of any court or government authority regarding the legality of the proposed transaction, including, if required by federal or state antitrust authorities, SPL's promptly taking all reasonable steps to secure government antitrust clearance. Licensor shall cooperate in good faith at its own cost with any government investigation and promptly produce documents and information demanded by a second request for documents and of witnesses if requested. (c) Additional Approvals. Each of Licensor and SPL will cooperate and use all reasonable efforts to make all other registrations, filings and applications, to give all notices and to obtain as soon as practicable all governmental or other consents, transfers, approvals, orders, qualifications authorizations, permits and waivers, if any, and to do all other things reasonably necessary or desirable in SPL's opinion for the consummation of the transactions as contemplated hereby (including, without limitation, those acts required to obtain necessary approvals under any foreign equivalent antitrust statute to the HSR Act or regulation from any government or regulatory authority having the requisite jurisdiction; provided, however, that SPL shall promptly reimburse Licensor for reasonable out-of-pocket costs and expenses incurred by Licensor in providing such cooperation. Licensor shall invoice SPL for such costs and expenses, and shall provide supporting documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) [ * ] days after receipt by SPL of the invoice. 2.5 Joint Management Committee. The Parties shall establish a Joint Management Committee (the "JMC") to oversee the development and commercialization program for Licensed Product for the Primary Indication and the Secondary Indication, and to facilitate the exchange of information between the Parties. The JMC will generally serve in an advisory capacity with respect to the development and commercialization activities to be performed by SPL under this Agreement, with SPL retaining final decision making authority with respect to all such matters. (a) Composition of the JMC. The JMC shall be composed of up to three (3) representatives from each of SPL and Licensor, and a quorum shall consist of at least one (1) JMC representative from each Party. In any matter before the JMC, each Party shall have one (1) vote, with decisions being made by unanimous decision. SPL shall seriously consider the recommendations and decisions of the JMC. A Party's representatives to the JMC shall serve at the discretion of such Party and may be substituted for or replaced at any time by such Party. The JMC shall be chaired by a representative of SPL. The Chairperson shall be responsible for calling meetings, preparing agendas and preparing and issuing minutes of each meeting within [ * ] thereafter. (b) JMC Meetings. The JMC shall meet at least once each Calendar Quarter during the Term of this Agreement, until such time as the Parties agree to a more or less frequent meeting schedule. The site of such meetings shall alternate between the offices of SPL and Licensor (or any other site mutually agreed upon by the Parties) and each 9 16 Party shall bear its own costs of attending such meetings. All meetings of the JMC shall be summarized in writing and sent to both Parties and countersigned by both Parties. (c) JMC Responsibilities. The JMC will be generally responsible for monitoring the status of SPL's development and commercialization activities with respect to Licensed Product and for preparing recommendations for implementation by SPL with regard to: (i) selection of Licensed Compounds for development by SPL as Licensed Products for the Primary Indication; (ii) preclinical and clinical development plans; (iii) development timelines and scheduling; (iv) strategies for obtaining and maintaining Regulatory Approvals; (v) marketing and sales strategies for Licensed Product. (d) Deadlock. In the event that the JMC is unable to reach a decision by unanimous vote with respect to any matter, then SPL shall have final decision making authority with respect thereto. 2.6 SPL's Development Obligations. (a) SPL Diligence. SPL shall, at SPL's expense, and subject to Licensor's compliance with its obligations under Sections 2.3 and 2.4, use good faith reasonable efforts to develop, obtain Regulatory Approval for, and commercialize the Licensed Product(s) in the Territory for the Primary Indication. SPL shall have the option, in its sole discretion, to seek Regulatory Approval for the Licensed Product for any additional indications it determines are desirable, but shall have no diligence obligations to Licensor with respect thereto with the exception of those expressly set forth in Section 2.11(d). The Parties acknowledge and agree that all business decisions including, without limitation, decisions relating to SPL's research, development, registration, manufacture, sale, commercialization, design, price, distribution, marketing and promotion of Licensed Products covered under this Agreement, shall be within the sole discretion of SPL. Licensor acknowledges that SPL is in the business of developing, manufacturing and selling pharmaceutical products and, subject to the provisions of this Section, nothing in this Agreement shall be construed as restricting such business or imposing on SPL the duty to market and/or sell and exploit Licensed Compound or Licensed Product for which royalties are payable hereunder to the exclusion of, or in preference to, any other product, or in any way other than in accordance with its normal commercial practices. (b) Opportunity to Cure. If, in Licensor's reasonable opinion, SPL fails to comply with any of its diligence obligations under Sections 2.6(a) and (c), then Licensor shall have the right to give SPL written notice thereof stating in reasonable detail the particular failure(s). SPL shall have a period [ * ] days from the receipt of such notice to correct the failure or, in the event that the failure cannot be reasonably cured within a [ * ] day period, then SPL shall initiate actions reasonably expected to cure the failure within [ * ] days of receiving notice and shall thereafter diligently pursue such actions to cure 10 17 the failure (even if requiring longer than the [ * ] days specified in Section 8.4(a)(i)). In the event of a dispute as to whether or not SPL has failed to exercise due diligence under Sections 2.6(a) and 2.6(c), or whether SPL is diligently pursuing actions reasonably expected to cure such failure under this Section 2.6(b), such dispute shall be resolved through binding arbitration in accordance with Section 9.2. (c) Research and Development Activities. As of the Effective Date, SPL shall be responsible, at its cost and expense, and in its sole judgment, for all research and development activities which are necessary to obtain Regulatory Approval for a Licensed Product in the Territory for the Primary Indication and any post-approval studies required as a condition of obtaining any Regulatory Approval for a Licensed Product for the Primary Indication. The parties acknowledge and agree that SPL's obligations under this Section 2.6(c) shall include all of the costs of conducting the CART Study (whether incurred before or after the Effective Date) which are estimated at [ * ]. In addition, SPL shall be responsible for any other studies (or portions of studies) necessary or desirable, in its sole judgment, for maintaining any Regulatory Approval (for the Primary Indication or any other indication for which SPL, in its sole discretion, may decide to seek Regulatory Approval) in the Territory, as well as any pre-marketing studies prior to such Regulatory Approval and post-marketing studies conducted following a Regulatory Approval. (d) Licensed Product Registrations; Pricing Reimbursement Approvals. Subject to its diligence obligations set forth in Section 2.6(a), SPL shall be responsible, at its cost and expense, and in its sole judgment, for determining the appropriate regulatory strategy, for obtaining and maintaining all Regulatory Approvals and for obtaining and maintaining any pricing and reimbursement approvals required for the sale of Licensed Product in the Territory. Each Regulatory Approval and each pricing and reimbursement approval shall be placed in SPL's name or the name of a SPL Affiliate unless applicable law requires, or Licensor and SPL otherwise agree, that an approval be solely or jointly in the name of Licensor or a designated Licensor Affiliate. Licensor agrees that notwithstanding such Regulatory Approval or pricing and reimbursement approval in its name, SPL retains the exclusive rights to make, have made, import, export, use, distribute, promote, offer for sale and sell Licensed Compound and/or Licensed Product(s) as granted SPL in Section 2.1. (e) Data. SPL shall own all data arising out of studies performed by or on behalf of SPL under this Article II. (f) Assistance by Licensor. In connection with any NDA, HRD or other application for Regulatory Approval relating to Licensed Product, Licensor shall, at SPL's request, provide to SPL in a prompt manner responses to questions which have been raised by any regulatory authority in connection with such application for Regulatory Approval and further provide to SPL estimates of Licensor's [ * ] costs for 11 18 rendering such assistance. Licensor shall assist SPL from time to time, at SPL's request, in the design and implementation of clinical studies. Subject to Licensor's rights under Section 3.3(b), Licensor shall assist SPL to enable SPL to self-source bulk material for the manufacture of Licensed Compound and/or Licensed Product; provided, however, that SPL shall have no obligation whatsoever to purchase any bulk material or Licensed Compound from Licensor. (g) Reimbursement of Costs by SPL (i) SPL shall reimburse Licensor for its reasonable [ * ] costs and expenses incurred in rendering assistance under Section 2.6(f) (but no more than [ * ] of those costs which Licensor estimated, as provided above, that the work would cost unless SPL provides written approval). Licensor shall invoice SPL for such costs and expenses, and shall provide documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) [ * ] days after receipt by SPL of the invoice, provided, however, that SPL shall be under no obligation to reimburse Licensor for [ * ] costs and expenses incurred by Licensor without SPL's agreement. (ii) SPL shall reimburse Licensor for its reasonable [ * ] costs and expenses incurred in performing research and development activities under Section 2.6 (h) (but no more than [ * ] of those costs which Licensor estimated, as provided below, that the work would cost unless the JMC provides written approval). Licensor shall invoice SPL for such costs and expenses, and shall provide documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) [ * ] days after receipt by SPL of the invoice, provided, however, that SPL shall be under no obligation to reimburse Licensor for research and development costs and expenses incurred by Licensor without the prior approval of the JMC. (h) Licensor's Additional Development Obligations. In addition to Licensor's obligations under Section 2.6(f), the JMC will assign to Licensor the responsibility to conduct, on SPL's behalf and at SPL's expense, certain of the research and development activities, including clinical studies involving Licensed Product, for which SPL is responsible under Section 2.6(c). The nature and extent of the research and development activities to be conducted by Licensor is generally set forth in Schedule 2.6(h). The JMC shall determine the specific aspects of such activities, including the timing and costs of the work to be performed by Licensor. Licensor agrees to use good faith reasonable efforts to complete such activities in the manner determined by the JMC, and shall have the right to utilize contract research organizations and other third party contractors in the performance of such activities, provided that Licensor shall remain responsible for the performance of all such contractors. To the extent that Licensor utilizes third party contractors to perform such activities, Licensor shall enter into suitable agreements with 12 19 such contractors, which agreements shall incorporate provisions consistent with the terms and conditions of this Agreement, including, without limitation, provisions governing confidentiality, ownership of data, inventions and other intellectual property arising from such activities, financial obligations and termination rights. Licensor shall keep the JMC informed with regard to such third party contracts and shall provide SPL with a copy of all such agreements. Any research and development activities conducted by Licensor or its contractors pursuant to this Section 2.6(h) shall be performed in accordance with good laboratory practices and good clinical practices, and in compliance with all applicable laws, rules and regulations in the U.S. and the EU, and shall meet current regulatory standards. SPL shall promptly notify Licensor in the event that SPL reasonably determines that all or any part of the work performed by Licensor and/or its contractors under this Section 2.6(h) fails to meet such standards. If Licensor reasonably disagrees with such determination, the parties shall refer the matter to an independent expert (selected by mutual agreement of the parties) to determine whether or not the study must be repeated to support Regulatory Approval for Licensed Product. In the event that Licensor and/or the independent expert agrees with SPL's determination and such studies are repeated, then SPL shall have the right to deduct the [ * ] costs of repeating such work from [ * ] payments due Licensor under this Agreement. (i) Adverse Event Reporting Licensor shall promptly report to SPL any information regarding adverse events related to the use of the Licensed Product in accordance with the Adverse Event Reporting Procedures (as may be amended from time to time upon mutual agreement) set forth in Schedule 2.6(i) and incorporated herein by reference. To the extent that Licensor holds any INDs or otherwise has any adverse event reporting obligations with respect to Licensed Product, SPL shall promptly report to Licensor any information regarding adverse events related to the use of Licensed Product in accordance with such Adverse Event Reporting Procedures. 2.7 Independent Discoveries by SPL. Licensor acknowledges that SPL and/or its Affiliates have ongoing research programs which may now or in the future independently discover, develop and/or acquire technologies and/or products relating to treatment and prevention of any disease, disorder or condition in humans or animals. Licensor agrees that such technologies and products, to the extent discovered without use of Licensor Know-How, will not be deemed to be Licensor Know-How and are outside the scope of this Agreement. 2.8 Excused Performance. In addition to the provisions of Article VIII and Section 9.9, the obligations of SPL with respect to a Licensed Product under Sections 2.6(a), 2.6(c), 2.6(d) and 2.11(d) are expressly conditioned upon the continuing absence of any adverse condition or event which warrants a delay in commercialization of a Licensed Product including, but not limited to, an adverse condition or event relating to the safety or efficacy of a Licensed Product or unfavorable labeling, pricing or pricing reimbursement approvals, or lack of Regulatory Approval, and the obligation of SPL to develop or market any such Licensed Product shall be delayed or suspended so long as in SPL's reasonable opinion any such condition or event exists. 13 20 2.9 Supply of Licensed Compound/Licensed Product. Licensor shall be responsible, at Licensor's expense, for supplying SPL with Licensed Compound (in the form of bulk active), from Licensor's existing inventory of Licensed Compound, to enable SPL to perform [ * ]. In addition, Licensor has the limited option to supply all of SPL's requirements of Licensed Products as set forth in Section 3.3(b). All Licensed Compound to be supplied by Licensor hereunder shall be delivered FCA (Kenilworth, New Jersey) (Incoterms 1990) via a carrier to be specified by SPL. Licensor warrants and represents that all supplies of Licensed Compound provided to SPL by Licensor shall conform to the applicable specifications for such Licensed Compound and were prepared in accordance with current Good Manufacturing Practices ("cGMPs") and other applicable federal, national, state and local laws and regulations in effect at the time of manufacture. SPL shall be responsible for the formulation and packaging of the Licensed Compound provided by Licensor hereunder, and for manufacture and supply of all Licensed Compound and/or Licensed Product necessary for the performance of [ * ] and for supplying all commercial quantities of Licensed Compound and Licensed Products. Licensor shall transfer to SPL all Licensor Know-How relating to the manufacture of Licensed Compound, and at SPL's request and expense shall provide reasonable technical support to facilitate the implementation of such manufacturing technology at SPL. 2.10 Reports. SPL shall provide Licensor with quarterly reports of the status of the research and development activities and progress of any application for Regulatory Approval, as applicable, in connection with Licensed Product in the Territory. Further, SPL shall inform Licensor of commencement, completion, and results of the major phases of clinical development of Licensed Product, including but not limited to Phase II and Phase III clinical trials, NDA and HRD submissions, NDA and HRD filings, approvable and approval letters, and launch. 2.11 Non-Compete Provision. Subject to the terms of Section 9.1(b), Licensor and its Affiliates shall be subject to the non-compete obligations set forth in this Section 2.11. (a) During the Term of this Agreement, Licensor shall not undertake a development program for, or commercialize, either on its own or in collaboration with any third party: (i) Licensed Compound or any product containing Licensed Compound for any indication; and/or (ii) any compound in the Compound Library for the Primary Indication and/or the Secondary Indication; and/or (iii) any other compound for the Primary Indication. (b) For the period extending from the Effective Date until the earlier of five (5) years after the First Commercial Sale of Licensed Product in the Territory or December 31, 2010, Licensor shall not, either on its own or in collaboration with any third party: (i) commercialize any compound in the Compound Library for any indication; and/or (ii) commercialize any other compound for the Secondary Indication. (c) The foregoing notwithstanding, Licensor shall at all times retain the right to develop and commercialize topical products containing any compound other than the 14 21 Licensed Compound for the treatment or prevention of dermatological conditions, diseases or disorders. In addition, Licensor shall have the right at all times to enter into agreements with third parties relating to the performance by Licensor of pre-clinical research activities with respect to compounds owned or controlled by such third parties, provided that such compounds do not compete through the same mechanism of action with the Licensed Compound (as determined using the same criteria as set forth in Section 6.2(k)) with respect to the Primary Indication and/or the Secondary Indication. (d) Licensor's non-compete obligations under Section 2.11(b)(ii) are expressly conditioned upon SPL's initiating a development program for Licensed Product for the Secondary indication within four (4) years after the Effective Date, and thereafter using good faith reasonable efforts to develop and commercialize one or more Licensed Products for the Secondary Indication. ARTICLE III PAYMENTS; ROYALTIES AND REPORTS 3.0 Coordination of Payments under the US Agreement. The license fee, milestone payments and royalties payable by SPL under this Article III are in consideration for the rights and licenses granted to SPL under this Agreement and are in addition to any amounts payable to Licensor under the US Agreement. It is understood and agreed that, with respect to the development milestone payable under Section 3.2(a)(i) and the sales milestones payable under Section 3.2(b) the occurrence of one or more of such milestone events will result in milestone payment obligations under both this Agreement and the corresponding provisions of the US Agreement. It is further understood that SPL's financial obligations with respect to development costs under Article II shall be [ * ] apportioned between SPL and the corresponding obligations of Schering Corporation under the US Agreement. 3.1 License Fee. In partial consideration for the licenses and other rights granted to SPL hereunder, SPL shall pay to Licensor a license fee ("License Fee") [ * ], which payment shall be due within [ * ] business days following the Effective Date. 3.2 Milestone Payments. In partial consideration for the licenses and other rights granted to SPL hereunder, SPL shall promptly notify Licensor in writing upon the occurrence of an event triggering one of the milestone payments set forth in this Section 3.2, and within thirty (30) days after the occurrence of such event pay to Licensor the applicable milestone payment. (a) Development Milestones: (i) [ * ] upon the successful completion (as defined in Schedule 3.2) by Licensor of the Canadian Anti-oxidant Restenosis Trial (the "CART Study") using the Licensed Compound AGI-1067; (ii) [ * ] upon the first to occur of initiation of a Phase III clinical trial (i.e., dosing of the first patient) in the European Union, or the filing of an application for Regulatory Approval in the European Union, for the Licensed Compound AGI-1067; (iii) [ * ] upon initiation of a Phase III clinical trial (i.e., dosing of the first patient) in Japan for the Licensed Compound AGI-1067; (iv) [ * ] upon SPL's receipt of written documentation of Regulatory Approval for the Licensed Product in the European Union; (v) [ * ] upon SPL's receipt of written documentation of Regulatory Approval for the Licensed Product in Japan; 15 22 (iii) (iv) (v) (b) Sales Milestones: (i) [ * ] upon the first achievement of [ * ] in annual worldwide sales of the Licensed Product during a single Calendar Year; (ii) [ * ] upon the first achievement of [ * ] in annual worldwide sales of the Licensed Product during a single Calendar Year; (iii) [ * ] upon the first achievement of [ * ] in annual worldwide sales of the Licensed Product during a single Calendar Year; (iv) [ * ] upon the first achievement of [ * ] in annual worldwide sales of the Licensed Product during a single Calendar Year. The foregoing sales milestone payments are in addition to any royalty payments due Licensor under Section 3.3 with respect to sales of Licensed Product. For purposes of clarity, the parties acknowledge that (1) the first achievement of more than one of the above sales milestones in the same Calendar Year shall not affect SPL's obligation to make the relevant sales milestone payments to Licensor, and (2) annual worldwide sales of the Licensed Product shall be determined based upon the aggregate total of sales in the Territory under this Agreement and sales in countries outside the Territory under the International Agreement. (c) Limitations. Except as expressly set forth below, each development milestone payment under Section 3.2(a) and each sales milestone payment under Section 3.2(b) shall be payable one (1) time only on the first occurrence of the indicated event regardless of the number of times the event triggering the payment of such milestone occurs. If the triggering event for a given milestone payment does not occur prior to the effective date of termination, or the expiration, of this Agreement, SPL shall have no obligation to pay such milestone payment to Licensor. The Parties acknowledge and agree that nothing herein shall be construed as representing an estimate or projection of anticipated sales or the actual value of Licensed Compounds or Licensed Products, and the figures set forth in Section 3.2(b) are merely intended to define SPL's obligations to Licensor in the event such sales performance is achieved. 3.3 Royalties. In further consideration for the licenses granted to SPL hereunder, for so long as the Licensed Product is covered by a Valid Claim in the Territory at the time of sale by SPL, and subject to the provisions of Section 3.3 (a)-(c), SPL shall pay to Licensor royalties on a country-by-country basis of [ * ] of SPL's, its Affiliates' or its Sublicensees' Net Sales of Licensed Product in the Territory. With respect to countries in the Territory where no such Valid Claim exists, the royalty rate shall be [ * ], and such royalties shall be paid for [ * ] years from 16 23 the first commercial sale of Licensed Product in such country. No royalties shall be due upon the sale or other transfer among SPL, its Affiliates or Sublicensees, but in such cases the royalty shall be due and calculated upon SPL's or its Affiliates' or its Sublicensees' Net Sales to the first independent third party. No royalties shall accrue on the disposition of Licensed Product by SPL, its Affiliates or Sublicensees as samples (promotion or otherwise) or as donations (for example, to non-profit institutions or government agencies for a non-commercial purpose) or for clinical studies. Such dispositions by SPL shall not be included in the determination of Net Sales during the period of time in which such third party sales are occurring. (a) Cap on Royalties Plus Cost of Goods. The parties acknowledge and agree that the total of (i) royalties payable by SPL to Licensor under this Agreement, and (ii) the Cost of Goods of Licensed Product manufactured by SPL and/or paid by SPL to third parties for the manufacture of Licensed Product, shall not exceed [ * ] of Net Sales of Licensed Product. SPL shall use good faith reasonable efforts to keep the Cost of Goods of Licensed Product from exceeding [ * ] of Net Sales. SPL shall determine the Cost of Goods for the Licensed Product in a timely manner, and in no event later than the date of filing of the first NDA for the Licensed Product in the United States. In the event that notwithstanding such efforts by SPL the Cost of Goods for Licensed Product does exceed [ * ] of Net Sales, then SPL shall notify Licensor in writing to that effect. Following receipt of such notice, Licensor shall have the right to have an independent auditor review SPL's relevant records and make an independent determination of the Cost of Goods for the Licensed Product. Any such audit shall be conducted under terms and conditions essentially the same as those set forth in Section 3.7. (b) Licensor's Option to Manufacture. In the event that SPL's Cost of Goods for the Licensed Product is correctly determined to exceed [ * ] of Net Sales, Licensor shall have the right to manufacture and supply, or to seek a third party supplier able to manufacture and supply, SPL's requirements of Licensed Product at a Cost of Goods equal to or less than [ * ] of Net Sales for Licensed Product. If Licensor is able, or locates a third supplier able, to manufacture and supply Licensed Product at a Cost of Goods equal to or less than [ * ] of Net Sales, SPL shall in good faith negotiate and enter into a suitable supply agreement with Licensor or such third party, as appropriate, for the manufacture and supply of Licensed Product. Any such agreement shall include terms obligating SPL to purchase, and Licensor or the third party to manufacture and supply, all of SPL's requirements of Licensed Product at a Cost of Goods to be agreed upon, not to exceed [ * ] of Net Sales of Licensed Product. All supplies of Licensed Product to be provided to SPL by Licensor or such third party manufacturer pursuant to this Section 3.3(b) shall be manufactured at a qualified manufacturing site, shall conform to the applicable specifications for Licensed Product and shall be prepared in accordance with cGMPs and all applicable federal, national, state and local laws and regulations in effect at the time of manufacture. 17 24 (c) Royalty Reduction. In the event that SPL's Cost of Goods for Licensed Product are correctly determined to exceed [ * ] of Net Sales of Licensed Product and Licensor is unable to identify a third party capable of supplying SPL's requirements of Licensed Product at a price equal to or less than [ * ] of Net Sales of Licensed Product, then SPL shall remain responsible for the manufacture and supply of Licensed Product and the royalty rate to be paid by SPL under this Section 3.3 shall be reduced so that the total of (i) royalties payable by SPL to Licensor under this Agreement, and (ii) the Cost of Goods of Licensed Product manufactured by SPL and/or paid by SPL to third parties for the manufacture of Licensed Product, is equal to [ * ] of Net Sales of Licensed Product. Notwithstanding the foregoing, the royalty payable to Licensor under this Agreement shall not be reduced pursuant to this Section 3.3(c) to less then [ * ] where a Valid Claim exists, or [ * ] where no Valid Claim exists. 3.4 Third Party Licenses. In the event that SPL's outside patent counsel determines that patent licenses from third parties are required by SPL, its Affiliates or its Sublicensees in order to discover, develop, make, have made, import, export, use, distribute, promote, market, offer for sale or sell Licensed Compound and/or Licensed Product (hereinafter "Third Party Licenses"), SPL shall provide Licensor with written notice to that effect and shall be solely responsible for acquiring such licenses at SPL's sole discretion. SPL may reduce any royalty otherwise due Licensor hereunder to reimburse it for royalties and or license fees actually paid to such third parties under any Third Party Licenses of patent claims which would be infringed by the manufacture, use, import, export or sale of Licensed Compound and/or Licensed Product in the Territory. SPL shall have no right to reduce any royalty due Licensor hereunder for any amounts paid to a third party under any Third Party License to the extent it is a license to technology (other than Licensor Know-How) or materials (other than Licensed Compound) selected by SPL for use in connection with the Licensed Product. The amount of reduction of royalties due Licensor and the amount of reimbursement to SPL shall be equal to [ * ] of the royalties or license fees paid to such third parties in consideration for the Third Party License but in no event shall the royalty due Licensor for any Licensed Product in any country be thereby reduced to less than [ * ] of the royalty rate otherwise due Licensor hereunder for such Licensed Product in such country. 3.5 Compulsory Licenses. If a compulsory license is granted under the Patent Rights to a third party with respect to Licensed Compound and/or Licensed Product in any country in the Territory with a royalty rate lower than the royalty rate provided for under Section 3.3, then the royalty rate to be paid by SPL on Net Sales in that country under Section 3.3 shall be reduced to the rate paid by the compulsory licensee for so long as such compulsory license is in effect. 3.6 Reports; Payment of Royalty; Payment Exchange Rate and Currency Conversions. (a) Royalties Paid Quarterly. Within [ * ] calendar days following the close of each Calendar Quarter, following the First Commercial Sale of a Licensed Product, SPL shall furnish to Licensor a written report for the Calendar Quarter showing the Net 18 25 Sales of Licensed Product(s) sold by SPL, its Affiliates and its Sublicensees in the Territory during such Calendar Quarter and the royalties payable under this Agreement for such Calendar Quarter. Simultaneously with the submission of the written report, SPL shall pay to Licensor, for the account of SPL or the applicable Affiliate or Sublicensee, as the case may be, a sum equal to the aggregate royalty due for such Calendar Quarter calculated in accordance with this Agreement (reconciled for any previous overpayments or underpayments). (b) Method of Payment. Payments to be made by SPL to Licensor under this Agreement shall be paid by bank wire transfer in immediately available funds to such bank account as is designated in writing by Licensor from time to time. Royalties shall be deemed payable by the entity making the Net Sales from the country in which earned in local currency and subject to foreign exchange regulations then prevailing. Royalty payments shall be made in United States dollars to the extent that free conversions to United States dollars is permitted. The rate of exchange to be used in any such conversion from the currency in the country where such Net Sales are made shall be the rate of exchange used by Schering Corporation for reporting such sales for United States financial statement purposes. If, due to restrictions or prohibitions imposed by national or international authority, payments cannot be made as aforesaid, the Parties shall consult with a view to finding a prompt and acceptable solution, and SPL will deal with such monies as Licensor may lawfully direct at no additional out-of-pocket expense to SPL. Notwithstanding the foregoing, if royalties in any country cannot be remitted to Licensor for any reason within [ * ] after the end of the Calendar Quarter during which they are earned, then SPL shall be obligated to deposit the royalties in a bank account in such country in the name of Licensor. 3.7 Maintenance of Records; Audits. (a) Record Keeping by SPL. SPL and its Affiliates shall keep complete and accurate records in sufficient detail to enable the royalties payable hereunder to be determined. Upon [ * ] days prior written notice from Licensor, SPL shall permit an independent certified public accounting firm of nationally recognized standing selected by Licensor, at Licensor's expense, to have access during normal business hours to examine pertinent books and records of SPL and/or its Affiliates as may be reasonably necessary to verify the accuracy of the royalty reports hereunder. The examination shall be limited to pertinent books and records for any year ending not more than [ * ] months prior to the date of such request. An examination under this Section 3.7(a) shall not occur more than once in any Calendar Year. SPL may designate competitively sensitive information, which such auditor may not disclose to Licensor; provided, however, that such designation shall not encompass the auditor's conclusions. The accounting firm shall disclose to Licensor only whether the royalty reports are correct or incorrect and the specific details concerning any discrepancies. No other information shall be provided to Licensor. All such accounting firms shall sign a confidentiality agreement (in form and 19 26 substance reasonably acceptable to SPL) as to any of SPL's or its Affiliate's confidential information which they are provided, or to which they have access, while conducting any audit pursuant to this Section 3.7(a). (b) Underpayments/Overpayments. If such accounting firm correctly concludes that additional royalties were owed during such period, SPL shall pay the additional royalties within [ * ] days of the date Licensor delivers to SPL such accounting firm's written report so correctly concluding. If such underpayment exceeds [ * ] of the royalty correctly due Licensor then the fees charged by such accounting firm for the work associated with the underpayment audit shall be paid by SPL. Any overpayments by SPL will be credited against future royalty obligations. In the event that SPL disagrees with the audit report and the chief financial officers of SPL and Licensor (or their designees) fail to resolve such disagreement, the dispute will be resolved through the dispute resolution mechanism set forth in Section 9.2. (c) Record Keeping by Sublicensee. SPL shall include in each sublicense granted by it pursuant to this Agreement a provision requiring the Sublicensee to make reports to SPL, to keep and maintain records of sales made pursuant to such sublicense and to grant access to such records by Licensor's independent accountant to the same extent required of SPL under this Agreement. (d) Confidentiality. Licensor shall treat all financial information subject to review under this Section 3.7, or under any sublicense agreement, in accordance with the confidentiality provisions of this Agreement, and shall cause its accounting firm to enter into an acceptable confidentiality agreement with SPL obligating it to retain all such financial information in confidence pursuant to such confidentiality agreement. (e) Binding Records. Upon the expiration of [ * ] months following the end of any Calendar Year, the calculation of royalties payable under this Agreement with respect to such year shall be binding and conclusive upon the Parties, and SPL, its Affiliates and its Sublicensees shall be released from any liability or accountability with respect to royalties for such Calendar Year. 20 27 3.8 Income Tax Withholding. If at any time, any jurisdiction within the Territory requires the withholding of income taxes or other taxes imposed upon payments set forth in this Article III, SPL shall make such withholding payments as required and subtract such withholding payments from the payments set forth in this Article III, or if applicable, Licensor will promptly reimburse SPL or its designee(s) of the amount of such payments, it being understood that such withholding taxes are the obligation of Licensor. SPL shall provide Licensor with documentation of such withholding and payment in a manner that is satisfactory for purposes of the U.S. Internal Revenue Service. Any withholdings paid when due hereunder shall be for the account of Licensor and shall not be included in the calculation of Net Sales. Payments of withholding taxes made by SPL pursuant to this Section 3.8 will be made based upon financial information to be provided to SPL by Licensor and, to the extent that such information is incorrect or incomplete, Licensor shall be liable for any fine, assessment or penalty, or any deficiency, imposed by any taxing authority in the Territory for any deficiency in the amount of any such withholding or the failure to make such withholding payment. If SPL is required to pay any such deficiency, or any such fine, assessment or penalty for any such deficiency, Licensor shall promptly reimburse SPL for such payments, which shall not be included in the calculation of Net Sales. 3.9 Direct Affiliate Licenses. Whenever SPL shall reasonably demonstrate to Licensor that, in order to facilitate direct royalty payments by an Affiliate, it is desirable that a separate license agreement be entered into between Licensor and such Affiliate, Licensor will grant such licenses directly to such Affiliate by means of an agreement which shall be consistent with all of the provisions hereof, provided that SPL guarantees the Affiliate's obligations thereunder. ARTICLE IV PATENTS 4.1 Filing, Prosecution and Maintenance of Patents. Licensor agrees to diligently file, prosecute and maintain in the Territory, at Licensor's expense, all Patent Rights owned in whole or in part by Licensor and licensed to SPL under this Agreement, including without limitation, any Patent Rights covering any Improvement(s). SPL shall determine the country(ies) in the Territory with respect to which SPL desires Licensor to perform such activities and will promptly notify Licensor to that effect. All such determinations shall be made by SPL in accordance with its standard practices with respect to the filing, prosecution and maintenance of patents, and Licensor's obligation to file, prosecute and maintain each patent application or patent within the Patent Rights under this Section 4.1 shall be limited to those countries selected by SPL for such patent application or patent. Licensor shall supply SPL with a copy of the applications as filed, together with notice of its filing date and serial number. Licensor shall keep SPL regularly advised of the status of pending patent applications (including, without limitation, the grant of any Patent Rights), and upon the written request of SPL shall provide copies of any substantive papers provided to or received from government patent authorities related to the filing, prosecution and maintenance of such patent filings. SPL shall treat all information, papers, and 21 28 other materials provided by Licensor pursuant to this Section 4.1 in accordance with the confidentiality provisions of this Agreement. 4.2 Option of SPL to Prosecute and Maintain Patents. Licensor shall give [ * ] days prior written notice to SPL of any desire to cease prosecution and/or maintenance of a particular Patent Right and, in such case, shall permit SPL, at its sole discretion, to continue prosecution or maintenance at its own expense. If SPL elects to continue prosecution or maintenance, Licensor shall execute such documents and perform such acts, at SPL's expense, as may be reasonably necessary to effect an assignment of such Patent Rights to SPL. Any such assignment shall be completed in a timely manner to allow SPL to continue such prosecution or maintenance. Any patents or patent applications so assigned shall not be considered Patent Rights. 4.3 Enforcement. (a) Notice and Discontinuance of Infringement. In the event that either SPL or Licensor becomes aware of any third party infringement within the Territory of any Valid Claim, it will notify the other Party in writing to that effect. Any such notice shall include evidence to support an allegation of infringement by such third party. Licensor shall have a period of six (6) months from the date of said notice to obtain a discontinuance of such infringement or bring suit against the third party infringer. Licensor shall bear all the expenses of any suit brought by it. SPL shall have the right, prior to commencement of the trial, suit or action brought by Licensor, to join any such suit or action, and in such event shall pay one-half of all costs of such suit or action. In the event that SPL has joined in the action and shared in the costs thereof as set forth above, no settlement, consent judgment or other voluntary final disposition of the suit may be entered into without the consent of SPL. In the event that SPL has not joined the suit or action, SPL will reasonably cooperate with Licensor in any such suit or action and shall have the right to consult with Licensor and be represented by its own counsel, provided that Licensor shall periodically reimburse SPL for its out-of-pocket costs (excluding the costs of retaining its own outside counsel) incurred in cooperating with Licensor. Any recovery or damages derived from any suit under this Section 4.3(a) where SPL has joined and shared costs shall be used first to reimburse each of Licensor and SPL for its documented out-of-pocket legal expenses relating to the suit, shall be used second to reimburse Licensor for royalties lost as a result of reduced sales of Licensed Product, shall be used third to reimburse SPL for amounts attributed to SPL's lost profits, with any remaining amounts, including but not limited to punitive, exemplary, or other enhanced damages, to be shared equally by the Parties. Any recovery or damages derived from a suit which SPL has not joined shall be retained by Licensor. (b) Continuance of Infringement. If Licensor has neither obtained a discontinuance of such infringement nor brought suit against such infringer after the expiration of the six month period specified in Subsection 4.3(a), SPL shall have the right, but not the obligation, to bring suit against such infringer under the Patent Rights and join 22 29 Licensor as a party plaintiff, provided that SPL shall bear all the expenses of such suit. Licensor shall cooperate with SPL in any such suit for infringement of a Patent Right brought by SPL against a third party, and shall have the right to consult with SPL and to participate in and be represented by independent counsel in such litigation at its own expense. SPL shall periodically reimburse Licensor for its out of pocket costs (excluding Licensor's costs of retaining independent counsel) incurred in cooperating with SPL. SPL shall incur no liability to Licensor as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any of the Patent Rights invalid or unenforceable, except that SPL shall indemnify and hold Licensor harmless for any monetary judgment or award against or penalty levied upon either Licensor or SPL arising out of SPL's acts in the enforcement of such Patent Rights. In the event that SPL recovers any sums through litigation under this Section 4.3(b) by way of damages or in settlement thereof, SPL shall retain all such sums. 4.4 Third Party Infringement Suit. (a) Defense. In the event that a third party sues SPL alleging that SPL's, its Affiliates' or its Sublicensees' making, having made, importing, exporting, using, distributing, marketing, promoting, offering for sale or selling Licensed Compound and/or Licensed Product in one or more countries in the Territory infringes or will infringe said third party's patent, then SPL may elect to defend such suit at its sole expense and discretion. To the extent that the alleged infringement is based upon the use of Licensed Compound, another compound from the Compound Library or the Licensor Know-How, SPL shall have no obligation to pay royalties to Licensor under Section 3.3 with respect to sales of Licensed Product in such country(ies) during the pendency of any such suit. Upon SPL's request and in connection with SPL's defense of any such third party infringement suit, Licensor shall cooperate with SPL for such defense provided, that SPL shall promptly reimburse Licensor for reasonable out-of-pocket costs and expenses incurred by Licensor in providing such cooperation (excluding Licensor's costs of retaining independent counsel). Licensor shall invoice SPL for such costs and expenses, and shall provide documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) thirty (30) days after receipt by SPL of the invoice. (b) Licensing. SPL shall have the right to negotiate with said third party for a suitable license or assignment of rights under the relevant patents. In the event that such negotiation results in a consummated agreement, then any lump sum payment and/or royalty payments to be made thereunder shall be paid by SPL and shall be offset against any royalties due Licensor in accordance with the terms of Article 3.4. 4.5 Certification Under Drug Price Competition and Patent Restoration Act. Licensor and SPL each shall immediately give written notice to the other of any certification of which they become aware filed pursuant to 21 U.S.C. ss.355(b)(2)(A)(iv) and 355(j)(2)(A)(vii), or any amendment or successor statute thereto, claiming that Patent Rights covering Licensed 23 30 Compound and/or Licensed Product(s) are invalid or that infringement will not arise from the manufacture, use or sale of a product containing Licensed Compound or otherwise equivalent to Licensed Product by a third party. Notwithstanding any provision to the contrary, in the event that the Patent Rights at issue are owned and/or controlled by Licensor and Licensor has failed to bring an infringement action against such third party at least fourteen (14) business days prior to expiration of the forty five (45) day period set forth in 21 U.S.C. ss.355(c)(3)(C) (or any amendment or successor statute thereto), SPL shall have the right to bring such an infringement action, in its sole discretion and at its own expense, in its own name and/or in the name of Licensor. At SPL's request, Licensor shall, at its own expense, provide SPL reasonable assistance to conduct such infringement action, including, without limitation, causing the execution of such legal documents as SPL may deem necessary for the prosecution of such action. SPL shall periodically reimburse Licensor for its out-of-pocket costs (excluding any of Licensor's costs of retaining independent counsel) incurred in assisting SPL. SPL shall incur no liability to Licensor as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any of the Patent Rights invalid or unenforceable, except that SPL shall indemnify and hold Licensor harmless for any monetary judgment or award against or penalty levied upon either Licensor or SPL arising out of SPL's acts in the enforcement of such Patent Rights. In the event that SPL recovers any sums in such litigation by way of damages or in settlement thereof, SPL shall have the right to retain all such sums to offset its costs, losses and expenses. 4.6 Abandonment. Subject to SPL's rights pursuant to Section 4.2, Licensor shall at the earliest known date give notice to SPL of the grant, lapse, revocation, surrender, invalidation or abandonment of any Patent Rights licensed to SPL for which Licensor is responsible for the filing, prosecution and maintenance under this Agreement. 4.7 Patent Term Restoration. The Parties hereto shall cooperate with each other in obtaining patent term restoration or its equivalent in the Territory where applicable to Patent Rights. In the event that elections with respect to obtaining such patent term restoration are to be made, SPL shall have the right to make the election and Licensor agrees to abide by such election. 4.8 Notices Regarding Patents. All notices, inquiries and communications in connection with this Article IV shall be sent in the manner set forth in Section 9.7 to the Parties at the addresses and facsimile numbers indicated below. If to Licensor: AtheroGenics, Inc. 8995 Westside Parkway Alpharetta, Georgia 30004 Attn.: Vice President, Business Development (with a copy to: President) Fax No.: (678) 336-2501 24 31 If to SPL: Schering Corporation 2000 Galloping Hill Road Kenilworth, New Jersey 07033 Attn.: Staff Vice President - Patents and Trademarks Fax No.: (908) 298-5388 ARTICLE V CONFIDENTIALITY AND PUBLICATION 5.1 Confidentiality. (a) Nondisclosure Obligation. Each of Licensor and SPL shall use only in accordance with this Agreement, and shall not disclose to any third party, any of the other Party's Proprietary Information received by it pursuant to this Agreement without the prior written consent of the other Party. The foregoing obligations shall survive the expiration or termination of this Agreement for a period of five (5) years. These obligations shall not apply when and to the extent Proprietary Information : (i) is known by the receiving Party at the time of its receipt, and not through a prior disclosure by the disclosing Party, as documented by business records; (ii) is at the time of disclosure or thereafter becomes published or otherwise part of the public domain without breach of this Agreement by the receiving Party; (iii) is subsequently disclosed to the receiving Party by a third party that has the right to make such disclosure; (iv) is developed by the receiving Party independently of Proprietary Information or other information received from the disclosing Party and such independent development can be documented by the receiving Party; (v) is disclosed to any institutional review board of any entity conducting clinical trials, or any governmental or other regulatory agencies in order to obtain patents, to gain approval to conduct clinical trials or to market Licensed Compound and/or Licensed Product, but such disclosure may be made only to the extent reasonably necessary to obtain such patents or authorizations; or (vi) is required by law, regulation, rule, act or order of any governmental authority or agency to be disclosed by a Party, provided that notice is promptly delivered to the other Party in order to provide an opportunity to seek 25 32 a protective order or other similar order with respect to such Proprietary Information and thereafter the disclosing Party discloses to the requesting entity only the minimum Proprietary Information required to be disclosed in order to comply with the request, whether or not a protective order or other similar order is obtained by the other Party. (b) Disclosure to Agents. Notwithstanding the provisions of Section 5.1(a), SPL shall have the right to disclose Licensor's Proprietary Information to its Sublicensees, agents, consultants, Affiliates or other third parties (collectively "Agents") in accordance with this Section 5.1(b). Such disclosure shall be limited only to those Agents directly involved in the research, development, manufacture, marketing or promotion of Licensed Compound or Licensed Product (or for such Agents to determine their interest in performing such activities) in accordance with this Agreement. Any such Agents must agree in writing to be bound by confidentiality and non-use obligations essentially the same as those contained in this Agreement. The term of confidentiality and non-use obligations for such Agents shall be no less than ten (10) years. SPL shall be jointly and severally liable for any disclosure of Licensor Proprietary Information by Agents. (c) Disclosure to a Third Party. Licensor shall have the right to use and disclose any Licensor Know-How at its sole option and discretion for the limited purpose of filing, prosecuting, and supporting Patent Rights. Subject to the terms of Section 5.2, either Party may publish Licensor Know-How under the terms of Section 5.3 below. Licensor shall not otherwise disclose, provide or transfer any Licensor Know-How to any third party without the prior written approval of SPL. 5.2 Publicity. Except as provided in Section 5.1 and this Section 5.2, a Party may not use the name of the other Party in any publicity, advertising or in any other public way and, may not issue press releases or otherwise publicize or disclose any information related to the existence of this Agreement, the terms or conditions of this Agreement, or any information relating to the subject matter hereof, without the prior written consent of the other Party. The Parties shall agree upon an initial press release to announce the execution of this Agreement, together with a corresponding Q&A outline for use in responding to inquiries about the Agreement. Following such initial press release, Licensor may use the specific information contained therein, or in any subsequent public announcements or publications made by SPL or by mutual agreement of the Parties, in Licensor's investor relations and public relations activities. Licensor shall make no public announcement, either written, oral or in any medium relating to the safety of Licensed Compound and/or Licensed Product, except for statements in official correspondence with government patent authorities in support of Patent Rights as provided for in Section 5.1(c). Nothing in the foregoing, however, shall prohibit a Party from making disclosures to the extent required under applicable federal or state securities laws or any rule or regulation of any nationally recognized securities exchange, provided same is accurate and complete. In such event, however, the disclosing Party shall use good faith efforts to consult with the other Party prior to such disclosure and, where applicable, shall request confidential treatment to the extent available. 5.4 Publication. SPL and Licensor each acknowledge the potential benefit in publishing results of certain studies to obtain recognition within the scientific community and to advance the state of scientific knowledge. Each Party also recognizes the mutual interest in obtaining valid patent protection and in protecting business interests and trade secret information. No publication of Licensor Know-How or Patent Rights may be made without the prior written consent of Licensor. The Parties agree that SPL, its Affiliates, employees or consultants shall be free to make any publication which does not disclose Licensor Know-How or Patent Rights. In the event that any proposed publication (as defined below) discloses Licensor Know-How or Patent Rights, the following procedure shall apply: Either Party, its Affiliates, employees or consultants wishing to make a publication shall deliver to the other Party a copy of the proposed written publication or an outline of an oral disclosure at least thirty (30) days prior to submission for publication or presentation. For purposes of this Agreement, the term "publication" shall include, without limitation, abstracts and manuscripts for publication, slides and texts of oral or other public presentations, and texts of any transmission through any electronic media, e.g. any computer access system such as the Internet, including the World Wide Web. The reviewing Party shall have the right (i) to propose modifications to the publication for patent reasons, trade secret reasons or business reasons or (ii) to request delay of the publication or presentation in order to protect patentable information. If the reviewing Party requests a delay, the publishing Party shall delay submission or presentation for a period of up to eighteen (18) months from the filing date of the first patent application in the Territory covering the information contained in the proposed publication or presentation. If the reviewing Party requests modifications to the publication, the publishing Party may edit such publication to prevent disclosure of trade secret or proprietary business information prior to submission of the publication or presentation. 26 33 publishing results of certain studies to obtain recognition within the scientific community and to advance the state of scientific knowledge. Each Party also recognizes the mutual interest in obtaining valid patent protection and in protecting business interests and trade secret information. No publication of Licensor Know-How or Patent Rights may be made without the prior written consent of Licensor. The Parties agree that SPL, its Affiliates, employees or consultants shall be free to make any publication which does not disclose Licensor Know-How or Patent Rights. In the event that any proposed publication (as defined below) discloses Licensor Know-How or Patent Rights, the following procedure shall apply: Either Party, its Affiliates, employees or consultants wishing to make a publication shall deliver to the other Party a copy of the proposed written publication or an outline of an oral disclosure at least [ * ] days prior to submission for publication or presentation. For purposes of this Agreement, the term "publication" shall include, without limitation, abstracts and manuscripts for publication, slides and texts of oral or other public presentations, and texts of any transmission through any electronic media, e.g. any computer access system such as the Internet, including the World Wide Web. The reviewing Party shall have the right (i) to propose modifications to the publication for patent reasons, trade secret reasons or business reasons or (ii) to request delay of the publication or presentation in order to protect patentable information. If the reviewing Party requests a delay, the publishing Party shall delay submission or presentation for a period of up to [ * ] from the filing date of the first patent application in the Territory covering the information contained in the proposed publication or presentation. If the reviewing Party requests modifications to the publication, the publishing Party may edit such publication to prevent disclosure of trade secret or proprietary business information prior to submission of the publication or presentation. ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1 Representations and Warranties of Each Party. Each of Licensor and SPL hereby represents, warrants and covenants to the other Party hereto that as of the Execution date it has complied, and during the period extending from the Execution Date until the expiration or termination of this Agreement it shall comply, with all applicable material laws and regulations relating to its activities under this Agreement. Each of Licensor and SPL further represents, warrants and covenants to the other Party hereto that as of the Execution Date: (a) it is a corporation or entity duly organized and validly existing under the laws of the state or other jurisdiction of its incorporation or formation; (b) the execution, delivery and performance of this Agreement by such Party has been duly authorized by all requisite corporate action, subject only to receipt of requisite approval of its board of directors; (c) it has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder; 27 34 (d) the execution, delivery and performance by such Party of this Agreement and its compliance with the terms and provisions hereof does not and will not conflict with or result in a breach of any of the terms and provisions of or constitute a default under (i) a loan agreement, guaranty, financing agreement, agreement affecting a product or other agreement or instrument binding or affecting it or its property; (ii) the provisions of its charter or operative documents or bylaws; or (iii) any order, writ, injunction or decree of any court or governmental authority entered against it or by which any of its property is bound; (e) except for the governmental and Regulatory Approvals required to market Licensed Product in the Territory and any filings or approvals referred to in Section 2.4, the execution, delivery and performance of this Agreement by such Party does not require the consent, approval or authorization of, or notice, declaration, filing or registration with, any governmental or regulatory authority and the execution, delivery or performance of this Agreement will not violate any law, rule or regulation applicable to such Party; (f) this Agreement has been duly authorized, executed and delivered and constitutes such Party's legal, valid and binding obligation enforceable against it in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to the availability of particular remedies under general equity principles; (g) to the best of its knowledge there are no third party pending patent applications (excluding the Patent Rights) which, if issued, may cover the development, manufacture, use or sale of any Licensed Compound or Licensed Product. 6.2 Licensor's Representations. Licensor hereby represents, warrants and covenants to SPL that as of the Execution Date: (a) to the best of its knowledge, the Patent Rights and Licensor Know-How are subsisting and are not invalid or unenforceable, in whole or in part; (b) it has the full right, power and authority to grant all of the right, title and interest in the licenses granted to SPL under Article II hereof; (c) to the best of its knowledge, it has not previously assigned, transferred, conveyed or otherwise encumbered its right, title and interest in the Licensed Compound, Licensed Product, the Patent Rights, or Licensor Know-How ; (d) except as specifically set forth in Schedule 6.2(d), it is the sole and exclusive owner and/or licensee of the Patent Rights and Licensor Know-How, all of which are free and clear of any liens, charges and encumbrances, and to the best of its knowledge no other person, corporation or other private entity, or governmental entity or 28 35 subdivision thereof, has or shall have any claim of ownership with respect to the Patent Rights or Licensor Know-How, whatsoever; (e) to the best of its knowledge, the Patent Rights and Licensor Know-How, and the development, manufacture, use, distribution, marketing, promotion and sale of Licensed Products do not interfere or infringe (as applicable) on any intellectual property rights owned or possessed by any third party; (f) there are no claims, judgments or settlements against or amounts with respect thereto owed by Licensor, and to the best of its knowledge no pending or threatened claims or litigation against Licensor relating to Licensed Compound, the Patent Rights and Licensor Know-How; (g) to the best of its knowledge, there are no circumstances that would adversely affect the commercial utility or the use of the Licensed Product; (h) it has provided to Schering Corporation a summary of all material adverse events known to it relating to the Licensed Compound; (i) there are no collaborative, licensing, material transfer, supply, distributorship or marketing agreements or arrangements or other similar agreements to which it or any of its Affiliates are a party relating to Licensed Compound, Licensed Product or Patent Rights which would materially limit the rights granted to SPL under this Agreement with respect to the Licensed Compound, Licensed Product or Patent Rights; (j) there are no trademark(s) chosen, owned or controlled by Licensor or its Affiliates specifically in connection with the Licensed Compound and/or the Licensed Product in the Territory; and (k) except as set forth in Schedule 6.2(k), it has not identified any compounds outside of the Compound Library which exhibit both (1) similar or better VCAM-1 inhibition than the Licensed Compound as determined using Licensor's currently available in vitro screens for VCAM-1 inhibitory activity (i.e., the human aortic endothelial cell based screen) and (2) histologically or morphologically demonstrated anti-atherosclerotic properties similar or better than Licensed Compound in the Licensor's animal models (i.e., the hypercholesterolemic rabbit). Licensor further represents, warrants and covenants to SPL that: (l) during the period extending from the Execution Date until the expiration or termination of this Agreement it will use reasonable efforts not to diminish the rights under the Patent Rights and Licensor Know-How granted to SPL hereunder, including 29 36 without limitation, by not committing or permitting any actions or omissions which would cause the breach of any license or other agreements between itself and third parties which provide for licenses, assignments or other rights to any Patent Rights or Licensor Know-How, that it will provide SPL promptly with notice of any such alleged breach, and that as of the Execution Date, it is in compliance in all material respects with any such licenses or other agreements with third parties; (m) as of the Execution Date, and to the best of its knowledge, all data summaries provided in writing to SPL by Licensor prior to the Execution Date relating to pre-clinical and clinical studies of the Licensed Compound accurately represent the raw data underlying such summaries; and (n) Licensor shall not seek or file for any trademark for use in connection with the Licensed Compound and/or the Licensed Product in the Territory during the period extending from the Execution Date until the expiration or termination of this Agreement. 6.3 Continuing Representations. The representations and warranties of each Party contained in Sections 6.1 and 6.2 shall survive the execution of this Agreement. 6.4 No Inconsistent Agreements. Neither Party has in effect and after the Effective Date neither Party shall enter into any oral or written agreement or arrangement that would be inconsistent with its obligations under this Agreement. 6.5 Representation by Legal Counsel. Each Party hereto represents that it has been represented by legal counsel in connection with this Agreement and acknowledges that it has participated in the drafting hereof. In interpreting and applying the terms and provisions of this Agreement, the Parties agree that no presumption shall exist or be implied against the Party which drafted such terms and provisions. 6.6 Additional Obligations of Licensor The Parties acknowledge and agree that all data and information provided by Licensor to SPL arising out of or relating to any preclinical and/or clinical studies involving the Licensed Compound and/or Licensed Product conducted by or on behalf of Licensor (the "Studies"), or relating to any patent applications or patents having claims covering the Licensed Compound and/or Licensed Product, are of material importance to the development and commercialization of the Licensed Compound and/or Licensed Product and to SPL's decision to enter into this Agreement. (a) Licensor represents and warrants that, to the best of its knowledge and based upon Licensor's diligence in the performance of the relevant activities, as of the Execution Date it (and its subcontractors and/or collaborators, if any): (i) has fully complied with all applicable laws, rules and regulations, in the preparation, filing and prosecution of patent applications or patents; 30 37 (ii) has fully complied with all applicable laws, rules and regulations, in the conduct and evaluation of the Studies and with regard to all applications or submissions for Regulatory Approval in the Territory, if any; (iii) knows of no irregularities or information suggesting any irregularities in connection with the preparation, filing or prosecution of patent applications or patents which may have a material adverse effect with respect thereto; and (iv) knows of no irregularities or information suggesting any irregularities in connection with the conduct and evaluation of the Studies which may have a material adverse effect with respect thereto. (b) To the extent of Licensor's obligations under this Agreement, Licensor shall undertake to perform the following in accordance with all applicable laws, rules and regulations: (i) to prepare, file, prosecute and maintain, or ensure that its subcontractors, collaborators and/or agents prepare, file, prosecute and maintain, any patent applications or patents relating to the Licensed Compound and/or Licensed Product; and (ii) to conduct, or ensure that its subcontractors and/or collaborators, if any, shall conduct, any Studies. (c) In the event Licensor becomes aware of any known or suspected impropriety or misconduct relating to the preparation, filing, prosecution or maintenance of patent applications or patents, and/or the performance, analysis or reporting of any Studies, or any application or submission for Regulatory Approval, Licensor shall, within twenty-four (24) hours notify SPL of such event in writing. ARTICLE VII INDEMNIFICATION AND LIMITATION ON LIABILITY 7.1 Indemnification by SPL. SPL shall indemnify, defend and hold harmless Licensor and its Affiliates, and each of its and their respective employees, officers, directors and agents (each, a "Licensor Indemnified Party") from and against any and all third party claims, demands, lawsuits, proceedings, settlement amounts, liability, loss, damage, cost, and expense (including reasonable attorneys' fees), (collectively, a "Liability") which may be asserted against the Licensor Indemnified Party or which the Licensor Indemnified Party may incur, suffer or be required to pay resulting from or arising out of (i) the discovery, development, manufacture, promotion, distribution, use, testing, marketing, sale or other disposition of Licensed Compound 31 38 and/or Licensed Product(s) by SPL, its Affiliates or Sublicensees (including without limitation any personal injury, death, or other injuries suffered by users of Licensed Compound or Licensed Product), or (ii) the breach by SPL of any covenant, representation or warranty contained in this Agreement; or (iii) the successful enforcement by a Licensor Indemnified Party of its rights under this Section 7.1. Notwithstanding the foregoing, SPL shall have no obligation under this Agreement to indemnify, defend or hold harmless any Licensor Indemnified Party with respect to any Liability which results from the willful misconduct or negligent acts or omissions of Licensor, its Affiliates, or any of their respective employees, officers, directors or agents. 7.2 Indemnification by Licensor. Licensor shall indemnify, defend and hold harmless SPL and its Affiliates, and each of its and their respective employees, officers, directors and agents (each, a "SPL Indemnified Party") from and against any Liability which the SPL Indemnified Party may incur, suffer or be required to pay resulting from or arising out of (i) the breach by Licensor of any covenant, representation or warranty contained in this Agreement; or (ii) the successful enforcement by a SPL Indemnified Party of its rights under this Section 7.2. Notwithstanding the foregoing, Licensor shall have no obligation under this Agreement to indemnify, defend or hold harmless any SPL Indemnified Party with respect to any Liability which results from willful misconduct or negligent acts or omissions of SPL, its Affiliates, or any of their respective employees, officers, directors or agents. 7.3 Conditions to Indemnification. Each Party agrees to promptly give the other Party notice of any claim for which indemnification may be sought. Failure of an indemnified Party to provide notice of a claim to the indemnifying Party shall affect the indemnified Party's right to indemnification only to the extent that such failure has a material adverse effect on the indemnifying Party's ability to defend or the nature or the amount of the Liability. Subject to the provisions of Article IV, the indemnifying Party shall have the right to assume the defense of any suit or claim related to the Liability if it has assumed responsibility for the suit or claim in writing; provided, however, that if in the reasonable judgment of the indemnified Party, such suit or claim involves an issue or matter which could have a materially adverse effect on the business operations or assets of the indemnified Party, the indemnified Party may waive its rights to indemnity under this Agreement and control the defense or settlement thereof, but in no event shall any such waiver be construed as a waiver of any indemnification rights such Party may have at law or in equity. If the indemnifying Party defends the suit or claim, the indemnified Party may participate in (but not control) the defense thereof at its sole cost and expense. 7.4 Settlements. Subject to the provisions of Article IV, neither Party may settle a claim or action related to a Liability without the consent of the other Party if such settlement would impose any monetary obligation on the other Party or require the other Party to submit to an injunction or otherwise limit the other Party's rights under this Agreement, provided that such consent shall not be unreasonably withheld or delayed. Any payment made by a Party to settle any such claim or action shall be at its own cost and expense. 7.5 Limitation of Liability. With respect to any claim by one Party against the other 32 39 arising out of the performance or failure of performance of the other Party under this Agreement, the Parties expressly agree that the liability of such Party to the other Party for such breach shall be limited under this Agreement or otherwise at law or equity to direct damages only and in no event shall a Party be liable for, punitive, exemplary or consequential damages suffered or incurred by the other Party. 7.6 Insurance. Each Party acknowledges and agrees that during the Term of this Agreement it shall maintain adequate insurance and/or a self-insurance program for contractual liability insurance to cover such Party's obligations under this Agreement. Each Party shall provide the other Party with evidence of such insurance and/or self-insurance program, upon request. ARTICLE VIII TERM AND TERMINATION 8.1 Term and Expiration. This Agreement shall be effective as of the Effective Date and unless terminated earlier by mutual written agreement of the Parties or pursuant to Sections 8.2, 8.3 or 8.4 below, the Term of this Agreement shall continue in effect on a product-by-product and country-by-country basis until the expiration of the last to expire Patent Right incorporating a Valid Claim covering the Licensed Product, or in countries where no such Patent Rights exist until the tenth anniversary of the First Commercial Sales of Licensed Product in such country. Upon expiration of this Agreement, SPL's licenses pursuant to Section 2.1 and 2.2 shall become fully paid-up, perpetual licenses. 8.2 Termination by SPL Without Cause. SPL shall have the unilateral right to terminate this Agreement on a product-by-product basis (without cause) at any time by giving sixty (60) days advance written notice to Licensor. In the event of the exercise of such termination rights, the rights and licenses granted to SPL under Sections 2.1 and 2.2 shall terminate and all rights to Licensor Know-How, Licensed Compounds and Licensed Products with respect to the applicable product which are granted pursuant to this Agreement shall revert to Licensor. 8.3 Termination Upon Cessation of Development. (a) Termination by Either Party Either Party shall have the unilateral right to terminate this Agreement on a product-by-product basis at any time by giving sixty (60) days advance written notice to the other Party if SPL ceases development or commercialization of Licensed Compound or Licensed Product pursuant to Sections 2.6(a) and (c), subject to Section 2.6(b). In the event of the exercise of such termination rights, the rights and licenses granted to SPL under Sections 2.1 and 2.2 shall terminate and all rights to Licensor Know-How, Licensed Compounds and Licensed Products with respect to the applicable product which are granted pursuant to this Agreement shall revert to Licensor. 33 40 (b) Termination by Licensor Licensor shall have the unilateral right to terminate this Agreement by giving [ * ] days written notice to SPL in the event that: (i) [ * ] (ii) [ * ] In the event of the exercise of such termination rights, the rights and licenses granted to SPL under Sections 2.1 and 2.2 shall terminate and all rights to Licensor Know-How, Licensed Compounds and Licensed Products with respect to the applicable product which are granted pursuant to this Agreement shall revert to Licensor. 8.4 Termination. (a) Termination for Cause. This Agreement may be terminated by written notice at any time during the Term of this Agreement: (i) by either Party, subject to Section 9.2, if the other Party is in breach of its material obligations with respect to such product hereunder and has not cured such breach within sixty (60) days (thirty (30) days with respect to payment obligations under Article III) after written notice requesting cure of the breach with reasonable detail of the particulars of the alleged breach, or within sixty (60) days of receiving notice initiated actions reasonably expected to cure the cited failure and thereafter diligently pursued such actions to cure the failure (even if requiring longer than the sixty (60) days set forth in this subsection); or (ii) by either Party upon the filing or institution of bankruptcy, reorganization (in connection with any insolvency), liquidation or receivership proceedings, or upon an assignment of a substantial portion of the assets for the benefit of creditors by the other Party, or in the event a receiver or custodian is appointed for such other Party's business, or if a substantial portion of such other Party's business is subject to attachment or similar process; provided, however, that in the case of any involuntary bankruptcy proceeding such right to terminate shall only become effective if the proceeding is not dismissed within sixty (60) days after the filing thereof. (b) Effect of Termination for Cause on License. (i) Termination by SPL. In the event SPL terminates this Agreement under Section 8.4(a)(i), due to a breach by Licensor of its material obligations under Section 2.1(a), 2.1(b) or 2.11(a) of this Agreement, then SPL's licenses pursuant to Sections 2.1 and 2.2 shall become fully paid-up, perpetual licenses. 34 41 (ii) Termination by Licensor. In the event that Licensor terminates this Agreement under Section 8.4(a)(i), then the rights and licenses granted to SPL under Sections 2.1 and 2.2 shall terminate and all rights to Licensor Know-How, Licensed Compounds and Licensed Products granted pursuant to this Agreement shall revert to Licensor. (iii) Effect of Bankruptcy. In the event SPL terminates this Agreement under Section 8.4(a)(ii) or this Agreement is otherwise terminated under Section 8.4(a)(ii), the Parties agree that SPL, as a licensee of rights to intellectual property under this Agreement, shall retain and may fully exercise all of its rights and elections under the Insolvency Statute including as set forth in Section 9.8 hereof. 8.5 Effect of Termination. Expiration or termination of the Agreement shall not relieve the Parties of any obligation accruing prior to such expiration or termination, and the provisions of Articles V and VII shall survive the expiration of the Agreement. With regard to reimbursement for development costs incurred by Licensor, including, without limitation, the costs of clinical studies, SPL's obligations under Section 2.6 shall upon termination be limited to the costs for actual work performed in accordance with the relevant research plans or protocols up to the effective date of such termination, or any irrevocable financial commitments made by Licensor prior to the date of notice of termination. Any expiration or early termination of this Agreement shall be without prejudice to the rights of either Party against the other accrued or accruing under this Agreement prior to termination, including the obligation to pay royalties for Licensed Product(s) or Licensed Compound sold prior to such termination. In the event of termination of this Agreement, SPL shall have the right to continue to sell its existing inventory of Licensed Product during the six (6) month period immediately following such termination, provided that SPL shall continue to make royalty payments with respect to such sales. 8.6 Remedies for Breach. In addition to any and all other remedies that SPL may have under this Agreement, or otherwise under law and/or equity, in the event that Licensor materially breaches its obligations under Sections 6.6(a) or (b) of this Agreement and/or materially breaches its representation, warranties and covenants under Section 6.2(m), then SPL shall have the right, at SPL's sole discretion, upon written notice to Licensor to either: (i) deduct [ * ] of the remaining unpaid milestone(s) in Section 3.2; (ii) permanently reduce by [ * ] the royalty rates provided for in Section 3.3; or (iii) immediately terminate the Agreement. 8.7 Licensor's Rights on Termination. In the event that Licensor terminates this Agreement under Section 8.3 or 8.4(a)(i), or SPL terminates this Agreement under Section 8.2 or 8.3, SPL shall provide to Licensor the following: (i) all existing Regulatory Approvals and/or applications for Regulatory Approval for the applicable Licensed Product(s) in the Territory; (ii) access, including the right to make copies, of all preclinical, clinical, 35 42 pharmacokinetic, toxicology or other data owned or controlled by SPL which is necessary to support any of the Regulatory Approvals provided to Licensor under Section 8.7(i); (iii) subject to the terms of Section 8.7 (iv), all preclinical and clinical supplies of the applicable Licensed Product(s), and/or Licensed Compound or other Compound Library compounds, in SPL's possession or control; (iv) access to all manufacturing information relating to the Licensed Product, including assigning, sublicensing or otherwise making available, as appropriate, any third party manufacturing agreements relied upon by SPL for the manufacture of Licensed Product, in each case to the extent reasonably necessary for Licensor to manufacture the Licensed Product following such termination; (v) to the extent that termination occurs after the First Commercial Sale of the applicable Licensed Product(s) and subject to the terms of Section 8.5, Licensor shall have the right to purchase SPL's remaining inventory of the applicable Licensed Product(s) and/or Licensed Compound or other Compound Library compounds for sale in the Territory at [ * ] of SPL's fully absorbed manufacturing costs. In addition, in the event of such termination, SPL shall grant to Licensor a paid-up, non-exclusive, non-transferable license in the Territory under any issued patents, or pending patent applications, owned or controlled by SPL which would otherwise be infringed by the manufacture, use or sale of the applicable Licensed Product(s) in the Territory, which license shall be restricted to the sole purpose of making, having made, importing, exporting, using, distributing, marketing, promoting, offering for sale and selling such Licensed Product(s). 8.8 Concurrent Termination with the US Agreement. In the event of any termination of the US Agreement by either Licensor or Schering Corporation under the provisions of Sections 8.2, 8.3 or 8.4 of the US Agreement, this Agreement shall automatically terminate concurrently under the corresponding Section 8.2, 8.3 or 8.4 of this Agreement. ARTICLE IX MISCELLANEOUS 9.1 Assignment/Change of Control. (a) Assignment. Neither this Agreement nor any or all of the rights and obligations of a Party hereunder shall be assigned, delegated, sold, transferred, sublicensed (except as expressly permitted hereunder) or otherwise disposed of, by operation of law or otherwise, to any third party (other than an Affiliate of an assigning Party under the condition that the assignor remain responsible to the other Party under 36 43 this Agreement), without the prior written consent of the other Party. Any attempted assignment, delegation, sale, transfer, sublicense or other disposition, by operation of law or otherwise, of this Agreement or of any rights or obligations hereunder contrary to this Section 9.1 shall be a material breach of this Agreement by the attempting Party, and shall be void and without force or effect; provided, however, either Party may, without such consent, assign the Agreement and its rights and obligations hereunder to an Affiliate or in connection with the transfer or sale of all or substantially all of its assets related to the division or the subject business, or in the event of its merger or consolidation or change in control or similar transaction. This Agreement shall be binding upon, and inure to the benefit of, each Party, its Affiliates, and its permitted successors and assigns. Each Party shall be responsible for the compliance by its Affiliates with the terms and conditions of this Agreement. (b) Change of Control. In the event the ownership or control of Licensor is acquired by another pharmaceutical company that has an ongoing development program or commercializes (directly or through any Affiliate) any compound or product for the Primary Indication and/or the Secondary Indication, Licensor shall promptly notify SPL in writing to that effect. Licensor's obligations under Section 2.11 shall not extend to any such compound or product. Effective upon such notice, the JMC shall be disbanded and SPL will assume and thereafter be responsible for all of the rights and obligations of the JMC. Licensor, and following the change of control the acquiring party, shall use best efforts to ensure that such acquiring party does not have any access to any of SPL's Proprietary Information or other proprietary information relating to the development and commercialization of Licensed Product. Such best efforts shall include, without limitation: (i) ensuring that the acquiring party does not have access to any such information prior to the change of control of Licensor; and (ii) promptly destroying or returning to SPL all such information in Licensor's possession or control upon completion of the change of control. The acquiring party shall have no rights to use any Licensor Know-How relating to the Primary Indication or the Secondary Indication in connection with the development and commercialization of its own compound or product for the Primary and/or Secondary Indication. All of SPL's obligations under Article II to provide Licensor and/or the JMC with reports or to otherwise keep Licensor informed with respect to the development and commercialization of Licensed Compound, any other compound within the Compound Library and/or Licensed Product shall immediately terminate; provided, however, that SPL shall provide such acquiring party with an annual summary of its activities in developing and commercializing Licensed Product. 9.2 Governing Law. This Agreement shall be governed, interpreted and construed in accordance with the laws of the State of New Jersey, without giving effect to conflict of law principles. All disputes under this Agreement shall be governed by binding arbitration pursuant to the mechanism set forth in Schedule 9.2 attached hereto and incorporated hereby. The Parties expressly exclude application of the United Nations Convention for the International Sale of Goods. 37 44 9.3 Waiver. Any delay or failure in enforcing a Party's rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such Party's rights to the future enforcement of such rights under this Agreement, nor operate to bar the exercise or enforcement thereof at any time or times thereafter, excepting only as to an express written and signed waiver as to a particular matter for a particular period of time. 9.4 Independent Relationship. Nothing in this Agreement shall be deemed to create an employment, agency, joint venture or partnership relationship between the Parties hereto or any of their respective Affiliates, agents or employees, or any other legal arrangement that would impose liability upon one Party for the act or failure to act of the other Party. Neither Party shall have any power to enter into any contracts or commitments or to incur any liabilities in the name of, or on behalf of, the other Party, or to bind the other Party in any respect whatsoever. 9.5 Export Control. This Agreement is made subject to any restrictions concerning the export of products or technical information from the United States of America which may be imposed upon or related to Licensor or SPL from time to time by the government of the United States of America. Furthermore, SPL agrees that it will not export, directly or indirectly, any technical information acquired from Licensor under this Agreement or any products using such technical information to any country for which the United States government or any agency thereof at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the Department of Commerce or other agency of the United States government when required by an applicable statute or regulation. 9.6 Complete Agreement. (a) Entire Agreement; Amendment. This Agreement, including the Exhibits and Schedules hereto and all the covenants, promises, agreements, warranties, representations, conditions and understandings contained herein sets forth the complete, final and exclusive agreement between the Parties with respect to the subject matter hereof and supersedes and terminates all prior and contemporaneous agreements and understandings between the Parties, whether oral or in writing. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as are set forth herein. No subsequent alteration, amendment, change, waiver or addition to this Agreement shall be binding upon the Parties unless reduced to writing and signed by an authorized officer of each Party. Each Party in deciding to execute this Agreement has not relied on any understanding, agreement, representation or promise by the other Party which is not explicitly set forth herein. (b) Relationship to US Agreement; Controlling Provisions. The parties acknowledge and agree that this Agreement together with the US Agreement is intended to operate together as a single worldwide agreement governing the rights and 38 45 obligations of Licensor, SPL and Schering Corporation. For purposes of clarity and avoidance of doubt, the parties agree that Sections 2.3 and 2.5 of this Agreement shall be subject to and governed by the corresponding provisions of the US Agreement. The parties further agree that SPL's rights and obligations with respect to the filing, prosecution, maintenance and enforcement of patents and patent applications under Article IV of this Agreement shall be exercised and performed by the employees and/or agents of Schering Corporation having responsibility for Schering Corporation's rights and obligations under Article IV of the US Agreement, and that all such activities will be performed in a coordinated manner. 9.7 Notices. Except as provided under Section 4.8 hereof, any notice required or permitted to be given or sent under this Agreement shall be hand delivered or sent by express delivery service or certified or registered mail, postage prepaid, or by facsimile transmission (with written confirmation copy by registered first-class mail) to the Parties at the addresses and facsimile numbers indicated below. If to Licensor, to: AtheroGenics, Inc. 8995 Westside Parkway Alpharetta, Georgia 30004 Attn.: Vice President, Business Development Fax No.: (678) 336-2501 If to SPL to: Schering-Plough Ltd. Toeperstrasse 5 CH 6004 Lucerne, Switzerland Attn.: President Fax No.: 41-41-418-1626 with copies to: Schering Corporation 2000 Galloping Hill Road Kenilworth, New Jersey 07033 Attn.: Vice President, Business Development Fax No.: (908) 298-5379 and Attn.: Law Department - Staff Vice President, Licensing Fax No.: (908) 298-2739 Any such notice shall be deemed to have been received on the date actually received. Either Party may change its address or its facsimile number by giving the other Party written notice, delivered in accordance with this Section. 39 46 9.8 Provisions for Insolvency. (a) Effect on Licenses. All rights and licenses granted under or pursuant to this Agreement by Licensor to SPL are, for all purposes of Section 365(n) of Title 11 of the United States Code (together with its foreign equivalent, the "Insolvency Statute"), licenses of rights to "intellectual property" as defined in the Insolvency Statute. Licensor agrees that SPL, as licensee of such rights under this Agreement shall retain and may fully exercise all of its rights and elections under the Insolvency Statute provided that SPL makes all royalty payments under this Agreement. Licensor agrees during the Term of this Agreement to create and maintain current copies or, if not amenable to copying, detailed descriptions or other appropriate embodiments, to the extent feasible, of all such intellectual property. If a case is commenced by or against Licensor under the Insolvency Statute, Licensor (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, an Insolvency Statute trustee) shall, (i) as SPL may elect in a written request, immediately upon such request: (A) perform all of the obligations provided in this Agreement to be performed by Licensor including, where applicable and without limitation, providing to SPL portions of such intellectual property (including embodiments thereof) held by Licensor and such successors and assigns or otherwise available to them; or (B) provide to SPL all such intellectual property (including all embodiments thereof) held by Licensor and such successors and assigns or otherwise available to them; and (ii) not interfere with the rights of SPL under this Agreement, or any agreement supplemental hereto, to such intellectual property (including such embodiments), including any right to obtain such intellectual property (or such embodiments) from another entity. (b) Rights to Intellectual Property. If an Insolvency Statute case is commenced by or against Licensor, and this Agreement is rejected as provided in the Insolvency Statute, and SPL elects to retain its rights hereunder as provided in the Insolvency Statute, then Licensor (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, an Insolvency Statute trustee) shall provide to SPL all such intellectual property (including all embodiments thereof) held by Licensor and such successors and assigns, or otherwise available to them, immediately upon SPL's written request. Whenever Licensor or any of its successors or assigns provides to SPL any of the intellectual property licensed hereunder (or any embodiment thereof) pursuant to this Section 9.8, SPL shall have the right to perform the obligations 40 47 of Licensor hereunder with respect to such intellectual property, but neither such provision nor such performance by SPL shall release Licensor from any such obligation or liability for failing to perform it. (c) SPL's Rights. All rights, powers and remedies of SPL provided herein are in addition to and not in substitution for any and all other rights, powers and remedies now or hereafter existing at law or in equity (including, without limitation, the Insolvency Statute) in the event of the commencement of an Insolvency Statute case by or against Licensor. SPL, in addition to the rights, power and remedies expressly provided herein, shall be entitled to exercise all other such rights and powers and resort to all other such remedies as may now or hereafter exist at law or in equity (including, without limitation, the Insolvency Statute) in such event. The Parties agree that they intend the foregoing SPL rights to extend to the maximum extent permitted by law, including, without limitation, for purposes of the Insolvency Statute: (i) the right of access to any intellectual property (including all embodiments thereof) of Licensor, or any third party with whom Licensor contracts to perform an obligation of Licensor under this Agreement, and, in the case of the third party, which is necessary for the development, registration, manufacture and marketing of Licensed Compound and/or Licensed Product(s); and (ii) the right to contract directly with any third party described in (i) to complete the contracted work. (d) Deemed Grant of Rights. In the event of any insolvency of Licensor and if any statute and/or regulation in any country in the Territory requires that there be a specific grant or specific clause(s) in order for SPL to obtain the rights and benefits as licensee under this Agreement which are analogous to those rights under Section 365(n) of Title 11 of the United States Code, then this Agreement shall be deemed to include any and all such required grant(s), clause(s) and/or requirements. (e) Security Interests. In addition to any other rights granted to SPL hereunder, with respect to any country in the Territory in which SPL reasonably determines that its rights set forth in this Section 9.8 are nonexistent or inadequate to protect SPL's interests in the licenses granted hereunder, Licensor shall, upon SPL's request, execute a security agreement, or any foreign equivalent, for each country in the Territory, granting SPL a secured interest in all intellectual property licensed to SPL under this Agreement. 41 48 9.9 Force Majeure. Failure of any Party to perform its obligations under this Agreement (except the obligation to make payments when properly due) shall not subject such Party to any liability or place them in breach of any term or condition of this Agreement to the other Party if such failure is due to any cause beyond the reasonable control of such non-performing Party ("force majeure"), unless conclusive evidence to the contrary is provided. Causes of non-performance constituting force majeure shall include, without limitation, acts of God, fire, explosion, flood, drought, war, riot, sabotage, embargo, strikes or other labor trouble, failure in whole or in part of suppliers to deliver on schedule materials, equipment or machinery, interruption of or delay in transportation, a national health emergency or compliance with any order or regulation of any government entity acting with color of right. The Party affected shall promptly notify the other Party of the condition constituting force majeure as defined herein and shall exert reasonable efforts to eliminate, cure and overcome any such causes and to resume performance of its obligations with all possible speed; provided, however, that nothing contained herein shall require any Party to settle on terms unsatisfactory to such Party any strike, lock-out or other labor difficulty, any investigation or proceeding by any public authority, or any litigation by any third party. If a condition constituting force majeure as defined herein exists for more than ninety (90) consecutive days, the Parties shall meet to negotiate a mutually satisfactory resolution to the problem, if practicable. 9.10 Severability. If any provision of this Agreement is declared illegal, invalid or unenforceable by a court having competent jurisdiction, it is mutually agreed that this Agreement shall endure except for the part declared invalid or unenforceable by order of such court; provided, however, that in the event that the terms and conditions of this Agreement are materially altered, the Parties will, in good faith, renegotiate the terms and conditions of this Agreement to reasonably substitute such invalid or unenforceable provisions in light of the intent of this Agreement. 9.11 Counterparts. This Agreement shall become binding when any one or more counterparts hereof, individually or taken together, shall bear the signatures of each of the Parties hereto. This Agreement may be executed in any number of counterparts, each of which shall be an original as against either Party whose signature appears thereon, but all of which taken together shall constitute but one and the same instrument. 9.12 Captions. The captions of this Agreement are solely for the convenience of reference and shall not affect its interpretation. 9.13 Recording. Each Party shall have the right, at any time, to record, register, or otherwise notify this Agreement in appropriate governmental or regulatory offices anywhere in the world, and each Party shall provide reasonable assistance to the other in effecting such recording, registering or notifying. Notwithstanding the foregoing, prior to recording, registering, or otherwise notifying this Agreement, the Party desiring to so record, register, or notify shall provide a copy of all materials to be filed for review, comment, and approval by the other Party, such approval not unreasonably to be withheld or delayed. 42 49 9.14 Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement including, without limitation, any filings with any antitrust agency which may be required. IN WITNESS WHEREOF, this Agreement has been executed by the duly authorized representatives of the Parties as of the date set forth below. ATHEROGENICS, INC. SCHERING-PLOUGH LTD. By: Russell Medford By: David Poorvin ------------------------ --------------------------- Title: President & CEO Title: Prokurist ------------------------ --------------------------- Date: 22 October 1999 Date: 21 October 1999 ------------------------ --------------------------- 43 50 SCHEDULE 1.6 Elements of Fully Absorbed Manufacturing Cost of Goods The following expenses are included in manufacturing costs: 1. Direct Materials Materials used in the manufacturing process that are traced directly to the completed product, such as: - Inert raw materials or excipients - Active substances/ingredients - Packaging components such as bottles, caps, labels, etc. 2. Direct Labor The cost of employees engaged in production activities that are directly identifiable with product costs. Excludes supervision, which is included in indirect labor, and production support activities such as inspection, plant and equipment maintenance labor, and material handling personnel. Direct Labor cost includes: - Base pay, overtime, vacation and holidays, illness, personal time with pay and shift differential. - Cost of employee fringe benefits such as health and life insurance, payroll taxes, welfare, pension and profit sharing. 3. Indirect Manufacturing Costs Costs which are ultimately allocated to product based on standard direct labor hours of the operating departments. These costs include: - Indirect Production Labor - salaries of employees engaged in production activities who are not classified as direct labor, including supervision, clerical, etc. - Costs of Direct Labor - employees not utilized for the manufacturing of product such as training, downtime and general duties. - Indirect Materials - supplies and chemicals which are used in the manufacturing process and are not assigned to specific products but are included in manufacturing overhead costs. Includes supplies for which direct assignment to products is not practical. i 51 - Utilities - expenses incurred for fuel, electricity and water in providing power for production and other plant equipment. - Maintenance and Repairs - amount of expense incurred in-house or purchased to provide services for plant maintenance and repairs of facilities and equipment. - Other Services - purchased outside services and rentals such as the cost of security, ground maintenance, etc. - Depreciation - of plant and equipment utilizing the straight-line method of calculation. - Insurance - cost of comprehensive and other insurance necessary for the safeguard of manufacturing plant and equipment. - Taxes - expense incurred for taxes on real and personal property (manufacturing site, buildings and the fixed assets of equipment, furniture and fixtures, etc.). If manufacturing site includes other operations (marketing, R&D, etc.), taxes are allocated to manufacturing on the basis of total real and personal property. - Cost of manufacturing, service departments - such as: (where applicable) - Packaging Engineering - Manufacturing Maintenance - Industrial Engineering - Receiving and Warehousing - Purchasing and Accounting - Production Scheduling - Inventory Management - Plant Materials Management - Central Weigh - Manufacturing Administration - Allocated costs of services provided to manufacturing including: (where applicable) - Cafeteria - Personnel Operations - Health and Safety Services - Division Engineering and Operations Services - Plant Services (housekeeping) - Manufacturing Information Systems - Plant Power - Office of V.P. Manufacturing Various bases are used for allocating these costs to manufacturing operating departments including headcount, square feet, metered utilities use, estimated ii 52 services rendered, EDP computer hours, etc. 4. Quality Assurance Costs Direct labor and indirect costs for Quality Assurance departments testing and approving materials used in manufacturing and completed manufacturing batches and finished products. This includes all manufacturing in-process testing and testing of finished materials. Excluded from product costs are QA costs related to research and development, stability testing, and other costs customarily excluded from such Quality Assurance costs. The following expenses are not included in manufacturing costs: a) Inventory Carrying Costs b) Regulatory Affairs Costs c) Pilot plant costs, research batches and other similar costs prior to turnover to manufacturing. These are handled as development costs and expensed to R&D. This excludes commercial goods produced by a research facility. d) Costs incurred by Manufacturing for special projects (e.g. requests by Schering-Plough Research Institute) to establish and certify new production processes, batch sizes and product line improvements, and new vendor certification of equipment and primary materials components. These costs are expensed to R&D. e) Manufacturing start-up costs and initial one-time extraordinary manufacturing costs incurred prior to plant operation and achievement of a normal production activity level. Includes costs of training, testing, qualification/validation of new equipment and facilities and initial, trial batches. These costs are deferred and then amortized to Other Production Costs over five years. f) Significant idle capacity is eliminated from factory overhead and product cost. Idle or excess capacity costs are culled out of the Manufacturing Budget and expensed as a period cost to Other Production Costs. g) Finished goods warehousing, shipping and other distribution costs. These are included in distribution costs. h) Product liability and/or business interruption insurance expenses. i) Intercompany profit. 5. Other Production Costs Three major types of expense are included in the Other Production Costs classification. a) Variances from standard cost the difference between the actual and standard cost of inventory purchased and produced during the period less any portion applicable to on-hand inventory which has been capitalized. (i) Materials purchase price variance iii 53 (ii) Materials usage/yield variances (iii) Direct labor efficiency/inefficiency - reflects the cost difference between the standard and actual number of direct labor hours used for actual production. (iv) Overhead - reflects all other labor and overhead cost variances including activity and spending production related and support. With the exception of overhead, all of the other variances can be identified by product and can be added (if unfavorable) or subtracted (if favorable) to determine actual manufacturing costs of a product. (b) Non-standard costs: Cost of miscellaneous production related operations for which standards are not established due to the nature of the function, such as manufacturing start-up operations, stock conversions and reclaiming (processing and returning to finished goods inventory) of products returned by customers. Also includes miscellaneous expenses incurred in connection with the production of inventory which for various reasons (e.g., cyclical, non-recurring) are not included in standard costs. Examples include excess/idle capacity not included in standards, abnormal waste or rework, experiments, unallocated production costs, tooling and package design costs. Some of the above costs may be incurred for specific products, e.g., rework, experiments, tooling, but the majority are general to all products produced. (c) Inventory adjustments: Consists of charges or credits due to adjustments to inventory concerning revaluation to new standards, stock conversions, capitalized/amortized production variances, shortages or overages, and damage or obsolescence of regular on-hand inventory or products returned by customers. Each of these charges or credits can be identified to a specific product. iv 54 Schedule 1.18 PATENT RIGHTS ATHEROGENICS, INC. U.S. PATENT PORTFOLIO AGI 1067 Updated July 1999
DOCKET MATTER NO. TITLE SERIAL FILING PATENT ISSUE RELATED LAST NAME NO. NO. DATE NO. DATE CASES ACTION - ---------- ---------- ------------------------- ---------- -------- --------- -------- ---------- -------- ATH100 105001 Treatment for 07/969,934 10/30/92 5,380,747 01/10/95 Patented (EMU110) Atherosclerosis and other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH100 105023 Treatment for 08/722,438 10/17/96 5,877,203 3/2/99 FWC of Patented DIV Atherosclerosis and 08/257,821 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH101 105012 Treatment for 08/486,239 06/07/95 5,792,787 8/11/98 CON of Patented DIV CON Atherosclerosis and 08/257,821 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH101 105009 Treatment for 08/477,881 06/07/95 5,783,56 7/21/98 DIV of Patented DIV2 Atherosclerosis and 08/240,858 (ATH101 other Cardiovascular and DIV2) Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105004 Treatment for 08/317,399 10/04/94 5,807,884 9/15/98 CIP of Patented EMU110CIP2 Atherosclerosis and 08/240,858 other Cardiovascular and and CIP of Inflammatory Diseases 07/969,934 - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105008 Treatment for 08/483,335 06/07/95 5,811,449 9/22/98 DIV OF Patented DIV1 Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105028 Treatment for 08/474,530 06/07/95 5,750,351 5/12/98 CON OF Patented CON(1) Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105006 Treatment for 08/484,059 06/07/95 5,773,209 6/30/98 CON of Patented CON(3) Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105011 Treatment for 08/473,272 06/07/95 5,773,231 6/30/98 CON of Patented CON(4) Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105010 Treatment for 08/471,537 06/07/95 5,846,959 12/8/98 CON of Patented CON(5) Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH103 105016 Soluble Analogs of 07/876,557 04/30/92 5,262,439 11/16/93 Patented Probucol - --------------------------------------------------------------------------------------------------------------------------------- [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------------------------------------------- [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------------------------------------------- [*] [*] [*] [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------
ATHEROGENICS, INC. FOREIGN PATENT PORTFOLIO Updated July 1999
DOCKET TITLE COUNTRY SERIAL NO. FILING PUBLICATION LAST NAME & DATE NO. ACTION - ------ ------------------- ------- ---------- -------- ----------- --------- [*] - ------------------------------------------------------------------------------------------------------ EMU110 Treatment of Hungary P9603041 05/10/95 Published CIP(2) Atherosclerosis and 11/28/97 other Cardiovascular 105005 and Inflammatory Pending Diseases - ------------------------------------------------------------------------------------------------------ [*] - ------------------------------------------------------------------------------------------------------ 105015 - ------------------------------------------------------------------------------------------------------
55 Schedule 2.1(e) Third Party Agreements License Agreement between Emory University and Atherogenics, Inc., dated January 11, 1995. License to the United States Government dated March 27, 1995. Patent Purchase Agreement between Sampath Parthasarathy, Ph.D. and Atherogenics, Inc., dated April 26, 1995. 56 Schedule 2.6(h) Development Work to be Performed by Licensor Pre-clinical: [ * ] 57 SCHEDULE 2.6(i) ADVERSE EVENT REPORTING PROCEDURES FOR PRODUCTS The Parties understand and agree that these procedures are intended to comply with 21 CFR 314.80(b) and 21 CFR 310.305(a) concerning standard written procedures for adverse event reporting in the United States. These procedures may be amended by the Parties at any time, at the request of either Party, to ensure that they fully and accurately reflect the procedures in place for surveillance, receipt, evaluation and reporting of adverse drug experiences by the pharmacovigilance departments of the Parties and comply with applicable laws and regulations in the countries in which the product(s) is marketed and/or is under investigation. In that regard, upon the written request of either Party, the Parties shall meet to renegotiate in good faith, all or some of these procedures. Each Party may request such a meeting no more often than once in any twelve (12) month period. 1. Definitions: (a) An Adverse Event ("AE") is defined as: i) any experience which is adverse, including what are commonly described as adverse or undesirable experiences, adverse events, adverse reactions, side effects, or death due to any cause associated with, or observed in conjunction with the use of a drug, biological product, or device in humans, whether or not considered related to the use of that product: - occurring in the course of the use of a drug, biological product or device, - associated with, or observed in conjunction with product overdose, whether accidental or intentional, - associated with, or observed in conjunction with product abuse, - associated with, or observed in conjunction with product withdrawal ii) Any significant failure of expected pharmacological or biologic therapeutical action (with the exception of in clinical trials). (b). Associated with or related to the use of the drug is defined as: A 58 reasonable possibility exists that the AE was caused by the drug. (c) Expected or unexpected are defined as: i) Expected ("labeled") AE - An AE which is included in the Investigators' Brochure for clinical trials, included in local labeling (e.g., summary of product characteristics) for Marketed Drugs, or in countries with no local labeling, in the Company Core Data Sheet (CCDS). ii) Unexpected ("unlabeled") AE - An AE that does not meet the criteria for an expected AE or an AE which is listed but differs from that event in terms of severity or specificity. (d) IND Holder is defined as: A "Sponsor" as defined in 21 CFR Part 312.2(b) of an investigational new drug in any regulatory jurisdiction, including a holder of a foreign equivalent thereto. (e) Life-threatening is defined as: any adverse drug experience that places the patient, in the view of the initial reporter, at immediate risk of death from the adverse drug experience as it occurred, i.e., it does not include an AE that, had it occurred in more severe form, might have caused death. (f) NDA Holder is defined as: An "Applicant" as defined in 21 CFR Part 314.3(b), for regulatory approval of a Licensed Product in any regulatory jurisdiction, including a holder of a foreign equivalent thereto. (g) Serious or Non-Serious are defined as: i) Any adverse drug experience occurring at any dose that results in any of the following outcomes: Death, a life-threatening adverse drug experience, inpatient hospitalization or prolongation of existing hospitalization, a persistent or significant disability/incapacity, or a congenital anomaly/birth defect. Important medical events that may not result in death, be life-threatening, or require hospitalization may be considered serious when, based upon appropriate medical judgment, they may jeopardize the patient or subject and may require medical or surgical intervention to prevent one of the outcomes listed in this definition. Examples of such medical events include allergic bronchospasm requiring intensive treatment in an emergency room or at home, blood dyscrasias or convulsions that do not result in inpatient hospitalization, or the development of drug dependency or drug abuse. 59 ii) A Non-serious AE is any AE which does not meet the criteria for a serious AE. (h) Not associated or unrelated to the use of the drug means it does not meet the definition of "associated." 2. Capitalized terms not defined in this Appendix shall have the meaning assigned thereto in the Agreement. 3. With respect to all Licensed Products: All initial reports (oral or written) for any and all serious AEs as defined above which become known to either Party (other than from disclosure by or on behalf of the other Party) must be communicated by telephone, telefax or electronically directly to the other Party, NDA Holder, and/or IND Holder (individually and collectively referred to as "Holders") within five (5) calendar days of receipt of the information. Written confirmation of the Serious AE received by the Party should be sent to the other Party and the Holders as soon as it becomes available, but in any event within two (2) business days of initial report of the Serious AE by such Party. All Parties and Holders should exchange Medwatch and/or CIOMS forms and other health authority reports within two (2) business days of submission to any regulatory agency. All initial reports and follow-up information received for all non-serious AEs for marketed Licensed Products which become known to a Party (other than from disclosure by or on behalf of the other Party) must be communicated in writing, by telefax or electronically to the other Party and all Holders on a monthly basis, on Medwatch or CIOMs forms (where possible). All follow-up on any AE reports forwarded to either Party by FDA must be submitted to FDA. Each Party shall coordinate and cooperate with the other whenever practicable to prepare a single written report regarding all Serious AEs, provided, however, that neither Party shall be obligated to delay reporting or any AE in violation of applicable law or regulations regarding the reporting of adverse events. 4. The Parties further agree that: (a) a written report for AEs for animal studies which suggest a potential significant risk for humans shall be forwarded to the other Party within two (2) business days of receipt by the Party making the report, 60 (b) each Party will give the other Party a print-out or computer disk of all AEs reported to it relating to Products within the preceding 365 days/calendar year, within [ * ] days of receipt of a request from the other Party; (c) upon request of a Party, the other Party shall make available its AE records relating to Licensed Products (including computer disks) for viewing and copying by the other Party, (d) disclosure of information hereunder by a Party to the other Party shall continue as long as either Party continues to clinically test or market product(s) containing Licensed Products or holds an open IND, NDA or foreign equivalent thereto. (e) all written regulatory reports, including periodic NDA, annual IND, safety updates, or foreign equivalents thereto, etc. should be sent by a Party to the other Party within 2 business days of submission to the appropriate regulatory agency. The Parties shall agree on a procedure for preparing these reports (e.g. electronic mail, facsimile transmission, overnight service, etc.). 5. Each Party shall diligently undertake the following further obligations where both Parties are or will be commercializing products hereunder and/or performing clinical trials with respect to Licensed Product: (a) to immediately consult with the other Party, with respect to the investigation and handling of any serious AE disclosed to it by the other Party or by a third Party, including government agencies, and to allow the other Party to review the serious AE and to participate in the follow-up investigation; (b) to immediately advise the other Party of any Product safety communication received from a health authority and consult with the other Party with respect to any proposed change to product warnings, labeling or an Investigator's Brochure involving safety issues, including, but not limited to, safety issues agreed to by the Parties; (c) to diligently handle in a timely manner the investigation and resolution of each AE reported to it; and (d) to provide the other Party reasonable annual audit rights of its AE reporting system and documentation, upon prior notice, during normal business hours, at the expense of the auditing Party and under customary confidentiality obligations. (e) to meet in a timely fashion from time to time as may be reasonably required to implement the adverse event reporting and consultation procedures described in this Appendix, including identification of those individuals in each Party's pharmacovigilance group who will be responsible for reporting to and receiving AE information from the other Party, and the development of a written standard operating 61 procedure with respect to adverse event reporting responsibilities, including reporting responsibilities to investigators; (f) where possible, to transmit all data electronically; (g) to report to each other any addenda, revisions or changes to this Agreement (e.g., change in territories, local regulations, addition of new licensors/licensees to the agreement, etc.) which might alter the adverse event reporting responsibilities hereunder; (h) to utilize English as the language of communication and data exchange between the Parties; (i) to develop a system of exchange of documents and information in the event that the Agreement involves more than two Holders. 62 Schedule 3.2 DEFINITION OF SUCCESSFUL COMPLETION CART STUDY: Schering recognizes that Licensor's Phase II Study 027, commonly referred to as the CART Study, is pivotal to the determination of proof-of-activity in man. Determination by the JMC of "successful completion" of this study will be based upon the study achieving all of the following three points, as reflected in the final study report: [ * ] 63 Schedule 6.2(d) GOVERNMENT RIGHTS Pursuant to that certain Assignment agreement between Licensor and Sampath Parthasarathy dated May 2, 1995, U.S. Patent No. 5,262,439 is subject to a license of rights to the United States Government, as specifically set forth in the License to the United States Government attached hereto as Exhibit A. 64 Schedule 6.2(k) Other VCAM-1 Inhibitors [ * ] 65 Schedule 9.2 ARBITRATION PROVISIONS (a) Scope. Subject to and in accordance with the terms of this Agreement and this Schedule 9.2, all differences, disputes, claims or controversies arising out of or in any way connected or related to this Agreement, whether arising before or after the expiration of the Term of this Agreement, and including, without limitation, its negotiation, execution, delivery, enforceability, performance, breach, discharge, interpretation and construction, existence, validity and any damages resulting therefrom or the rights, privileges, duties and obligations of the Parties under or in relation to this Agreement (including any dispute as to whether an issue is arbitrable) shall be referred to binding arbitration in accordance with the rules of the American Arbitration Association, as in effect at the time of the arbitration. (b) Parties to Arbitration. For the purposes of each arbitration under this Agreement, SPL shall constitute one party to the arbitration and Licensor shall constitute the other party to the arbitration. (c) Notice of Arbitration. A Party requesting arbitration hereunder shall give a notice of arbitration to the other Party containing a concise description of the matter submitted for arbitration, including references to the relevant provisions of the Agreement and a proposed solution (a "Notice of Arbitration"). Notice of Arbitration shall be delivered to the other Party in accordance with Section 9.7 of the Agreement. (d) Response. The non-requesting Party must respond in writing within forty-five (45) days of receiving a Notice of Arbitration with an explanation, including references to the relevant provisions of the Agreement and a response to the proposed solution and suggested time frame for action. The non-requesting Party may add additional issues to be resolved. (e) Meeting. Within fifteen (15) days of receipt of the response from the non-requesting Party pursuant to Paragraph (d), the Parties shall meet and discuss in good faith options for resolving the dispute. The requesting Party must initiate the scheduling of this resolution meeting. Each Party shall make available appropriate personnel to meet and confer with the other Party during such fifteen-(15) day period. (f) Selection of Arbitrator. Any and all disputes that cannot be resolved pursuant to Paragraphs (c), (d) and (e) shall be submitted to an arbitrator (the "Arbitrator") to be selected by mutual agreement of the Parties. The Arbitrator shall be a retired judge of a state or federal court, to be chosen from a list of such retired judges to be prepared jointly by the Parties, with each Party entitled to submit the names of three such retired judges for inclusion in the list. No Arbitrator appointed or selected hereunder shall be an employee, director or shareholder of, or otherwise have any current or previous relationship with, any Party or its respective Affiliates. If the Parties fail to 66 agree on the selection of the Arbitrator, the Arbitrator shall be designated by a judge of the Federal District Court in New York upon application by either Party. (g) Powers of Arbitrator. The Arbitrator may determine all questions of law and jurisdiction (including questions as to whether a dispute is arbitrable) and all matters of procedure relating to the arbitration. The Arbitrator shall have the right to grant legal and equitable relief (including injunctive relief) and to award costs (including reasonable legal fees and costs of arbitration) and interest. Nothing contained herein shall be construed to permit the Arbitrator to award punitive, exemplary or any similar damages. (h) Arbitration Procedure. In the event that SPL is the Party requesting arbitration, the arbitration shall take place in the State of Georgia, unless otherwise agreed by the Parties, at such place and time as the Arbitrator may fix for the purpose of hearing the evidence and representations that the Parties may present. In the event that Licensor is the Party requesting arbitration, the arbitration shall take place in the State of New Jersey, unless otherwise agreed by the Parties, at such place and time as the Arbitrator may fix for the purpose of hearing the evidence and representations that the Parties may present. The arbitration proceedings shall be conducted in the English language. The law applicable to the arbitration shall be the law of the State of New Jersey. No later than twenty (20) business days after hearing the representations and evidence of the Parties, the Arbitrator shall make its determination in writing and deliver one copy to each of the Parties. (i) Discovery and Hearing. During the meeting referred to in Paragraph (e), the Parties shall negotiate in good faith the scope and schedule of discovery, relating to depositions, document production and other discovery devices, taking into account the nature of the dispute submitted for resolution. If the Parties are unable to reach agreement as to the scope and schedule of discovery, the Arbitrator may order such discovery as it deems necessary. To the extent practicable taking into account the nature of the dispute submitted for resolution, such discovery shall be completed within sixty (60) days from the date of the selection of the Arbitrator. At the hearing, which shall commence within twenty (20) days after completion of discovery unless the Arbitrator otherwise orders, the Parties may present testimony (either live witness or deposition), subject to cross-examination, and documentary evidence. To the extent practicable taking into account the nature of the dispute submitted for resolution and the availability of the Arbitrator, the hearing shall be conducted over a period not to exceed thirty (30) consecutive business days, with each Party entitled to approximately half of the allotted time unless otherwise ordered by the Arbitrator. Each Party shall have sole discretion with regard to the admissibility of any evidence and all other matters relating to the conduct of the hearing. (j) Witness Lists. At least twenty (20) business days prior to the date set for the hearing, each Party shall submit to the other Party and the Arbitrator a list of all documents on which such Party intends to rely in any oral or written presentation to the Arbitrator and a list of all witnesses, if any, such Party intends to call at such hearing and 67 a brief summary of each witness' testimony. At least five (5) business days prior to the hearing, each Party must submit to the Arbitrator and serve on each other Party a proposed findings of fact and conclusions of law on each issue to be resolved. Following the close of hearings, the Parties shall each submit such post-hearing briefs to the Arbitrator addressing the evidence and issues to be resolved as may be required or permitted by the Arbitrator. (k) Confidentiality. The arbitration proceedings shall be confidential and, except as required by law, no Party shall make, or instruct the Arbitrator to make, any public announcement with respect to the proceedings or decision of the Arbitrator without the prior written consent of the other Party. The existence of any dispute submitted to arbitration and the award of the Arbitrator shall be kept in confidence by the Parties and the Arbitrator, except as required in connection with the enforcement of such award or as otherwise required by law. (l) Awards and Appeal. Subject to the provisions of this Schedule 9.2, the decision of the Arbitrator shall be final and binding upon the Parties in respect of all matters relating to the arbitration, the conduct of the Parties during the proceedings, and the final determination of the issues in the arbitration. There shall be no appeal from the final determination of the Arbitrator to any court, except in the case of fraud or bad faith on the part of the Arbitrator or any Party to the arbitration proceeding in connection with the conduct of such proceedings. Judgment upon any award rendered by the Arbitrator may be entered in any court having jurisdiction thereof. (m) Costs of Arbitration. The costs of any arbitration hereunder shall be borne by the Parties in the manner specified by the Arbitrator in its determination. (n) Performance of the Agreement. During the pendency of the arbitration proceedings, the matter which is the subject of such arbitration proceedings shall be performed by the Parties (A) in the manner determined by SPL in its sole discretion if it is a matter relating to SPL's development of Licensed Product, and (B) in the manner determined by Licensor in its sole discretion if it is a matter involving payment of License Fees under Section 3.1 and royalty payments under Sections 3.2 or 3.3. Notwithstanding the foregoing, in the event that SPL makes payments pursuant to Sections 3.1, 3.2 or 3.3 and it is subsequently determined by the Arbitrator that SPL was not required to make such payment(s) then Licensor shall promptly repay to SPL all such payments. Further notwithstanding the foregoing, the time periods set forth in Section 2.6(b) of the Agreement shall be suspended during the pendency of the arbitration proceedings. For purposes of this Paragraph (n) the term "pendency of the arbitration proceeding" shall mean the period starting on the date on which arbitration proceedings are commenced by a Party in accordance with Paragraph (c) of this Schedule 9.2 and ending on the date on which the Arbitrator delivers its final determination in writing to the Parties. 68 EXCLUSIVE LICENSE AGREEMENT BY AND BETWEEN ATHEROGENICS, INC. AND SCHERING CORPORATION [*] Certain confidential information contained in this document, marked by an asterisk within brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. 69 TABLE OF CONTENTS EXCLUSIVE LICENSE AGREEMENT
PAGE ---- ARTICLE I - DEFINITIONS..................................................................................1 1.1 AFFILIATE.....................................................................................1 1.2 CALENDAR QUARTER..............................................................................1 1.3 CALENDAR YEAR.................................................................................2 1.4 COMBINATION PRODUCT...........................................................................2 1.5 COMPOUND LIBRARY..............................................................................2 1.6 COST OF GOODS.................................................................................2 1.7 EFFECTIVE DATE................................................................................2 1.9 FIRST COMMERCIAL SALE.........................................................................2 1.9 HRD...........................................................................................2 1.10 HSR ACT.......................................................................................2 1.11 "IMPROVEMENT\.................................................................................2 1.12 "INTERNATIONAL AGREEMENT\.....................................................................3 1.13 LICENSED COMPOUND.............................................................................3 1.14 LICENSED PRODUCT(S)...........................................................................3 1.15 LICENSOR KNOW-HOW.............................................................................3 1.16 NDA...........................................................................................4 1.17 NET SALES.....................................................................................4 1.18 PATENT RIGHTS.................................................................................5 1.19 PRIMARY INDICATION............................................................................5 1.20 PROPRIETARY INFORMATION.......................................................................5 1.21 REGULATORY APPROVAL...........................................................................5 1.22 SECONDARY INDICATION..........................................................................6 1.23 "SUBLICENSEE\.................................................................................6 1.24 TERRITORY.....................................................................................6 1.25 "TERM\........................................................................................6 1.26 VALID CLAIM...................................................................................6 ARTICLE II - LICENSE; DISCLOSURE OF INFORMATION; DEVELOPMENT AND COMMERCIALIZATION.......................6 2.1 EXCLUSIVE LICENSE GRANT.......................................................................6 (a) License.......................................................................................6 (a) Co-Exclusive License to Other Indications.....................................................6 (c) Right to Sublicense...........................................................................7 (d) Retained Rights...............................................................................7 (e) Third Party Agreements........................................................................7 2.2 NON-EXCLUSIVE LICENSE GRANT...................................................................7 2.3 DISCLOSURE OF INFORMATION.....................................................................8
i 70 2.4 HSR FILING AND APPROVALS......................................................................8 (a) HSR Filing....................................................................................8 (b) Licensor's Obligations........................................................................9 (c) Additional Approvals..........................................................................9 2.5 JOINT MANAGEMENT COMMITTEE....................................................................9 (a) Composition of the JMC........................................................................9 (b) JMC Meetings.................................................................................10 (c) JMC Responsibilities.........................................................................10 (d) Deadlock.....................................................................................10 2.6 SCHERING'S DEVELOPMENT OBLIGATIONS...........................................................10 (a) Schering Diligence...........................................................................10 (b) Opportunity to Cure..........................................................................11 (c) Research and Development Activities..........................................................11 (d) Licensed Product Registrations; Pricing Reimbursement Approvals..............................11 (e) Data.........................................................................................12 (f) Assistance by Licensor.......................................................................12 (g) Reimbursement of Costs by Schering...........................................................12 (h) Licensor's Additional Development Obligations................................................13 (i) Adverse Event Reporting......................................................................13 2.7 INDEPENDENT DISCOVERIES BY SCHERING..........................................................14 2.8 EXCUSED PERFORMANCE..........................................................................14 2.9 SUPPLY OF LICENSED COMPOUND/LICENSED PRODUCT.................................................14 2.10 REPORTS......................................................................................14 2.11 NON-COMPETE PROVISION........................................................................15 ARTICLE III - PAYMENTS; ROYALTIES AND REPORTS...........................................................16 3.0 COORDINATION OF PAYMENTS UNDER THE INTERNATIONAL AGREEMENT...................................16 3.1 LICENSE FEE..................................................................................16 (a) Development Milestones.......................................................................16 (b) Sales Milestones.............................................................................16 (c) Limitations..................................................................................17 3.3 ROYALTIES....................................................................................17 (a) Cap on Royalties Plus Cost of Goods..........................................................18 (b) Licensor's Option to Manufacture.............................................................18 (c) Royalty Reduction............................................................................18 3.4 THIRD PARTY LICENSES.........................................................................19 3.5 COMPULSORY LICENSES..........................................................................19 3.6 REPORTS AND PAYMENT OF ROYALTY; PAYMENT EXCHANGE RATE AND CURRENCY CONVERSIONS...............19 (a) Royalties Paid Quarterly.....................................................................19 (b) Method of Payment............................................................................20 3.7 MAINTENANCE OF RECORDS; AUDITS...............................................................20 (a) Record Keeping by Schering...................................................................20
ii 71 (b) Underpayments/Overpayments...................................................................21 (c) Record Keeping by Sublicensee................................................................21 (d) Confidentiality..............................................................................21 (e) Binding Records..............................................................................21 3.8 INCOME TAX WITHHOLDING.......................................................................21 3.9 DIRECT AFFILIATE LICENSES....................................................................22 ARTICLE IV - PATENTS....................................................................................22 4.1 FILING, PROSECUTION AND MAINTENANCE OF PATENTS...............................................22 4.2 OPTION OF SCHERING TO PROSECUTE AND MAINTAIN PATENTS.........................................22 4.3 ENFORCEMENT..................................................................................23 (a) Notice and Discontinuance of Infringement....................................................23 (b) Continuance of Infringement..................................................................23 4.4 THIRD PARTY INFRINGEMENT SUIT................................................................24 (a) Defense......................................................................................24 (b) Licensing....................................................................................24 4.5 CERTIFICATION UNDER DRUG PRICE COMPETITION AND PATENT RESTORATION ACT........................24 4.6 ABANDONMENT..................................................................................25 4.7 PATENT TERM RESTORATION......................................................................25 4.8 NOTICES REGARDING PATENTS....................................................................25 ARTICLE V - CONFIDENTIALITY AND PUBLICATION.............................................................26 5.1 CONFIDENTIALITY..............................................................................26 (a) Nondisclosure Obligation.....................................................................26 (b) Disclosure to Agents.........................................................................27 (c) Disclosure to a Third Party..................................................................27 5.2 PUBLICITY....................................................................................27 5.3 PUBLICATION..................................................................................28 ARTICLE VI - REPRESENTATIONS AND WARRANTIES.............................................................28 6.1 REPRESENTATIONS AND WARRANTIES OF EACH PARTY.................................................28 6.2 LICENSOR'S REPRESENTATIONS...................................................................29 6.3 CONTINUING REPRESENTATIONS...................................................................31 6.4 NO INCONSISTENT AGREEMENTS...................................................................31 6.5 REPRESENTATION BY LEGAL COUNSEL..............................................................31 6.6 ADDITIONAL OBLIGATIONS OF LICENSOR...........................................................31 ARTICLE VII - INDEMNIFICATION AND LIMITATION ON LIABILITY...............................................32 7.1 INDEMNIFICATION BY SCHERING..................................................................32 7.2 INDEMNIFICATION BY LICENSOR..................................................................33 7.3 CONDITIONS TO INDEMNIFICATION................................................................33 7.4 SETTLEMENTS..................................................................................34 7.5 LIMITATION OF LIABILITY......................................................................34
iii 72 7.6 INSURANCE....................................................................................34 ARTICLE VIII - TERM AND TERMINATION.....................................................................34 8.1 TERM AND EXPIRATION..........................................................................34 8.2 TERMINATION BY SCHERING WITHOUT CAUSE........................................................34 8.3 TERMINATION UPON CESSATION OF DEVELOPMENT....................................................35 (a) Termination by Either Party..................................................................35 (b) Termination by Licensor......................................................................35 8.4 TERMINATION..................................................................................35 (a) Termination for Cause........................................................................35 (b) Effect of Termination for Cause on License...................................................36 (i) Termination by Schering..................................................................36 (ii)Termination by Licensor..................................................................36 (iii)Effect of Bankruptcy....................................................................36 8.5 EFFECT OF TERMINATION........................................................................36 8.6 REMEDIES FOR BREACH..........................................................................37 8.7 LICENSOR'S RIGHTS ON TERMINATION.............................................................37 8.8 CONCURRENT TERMINATION WITH THE INTERNATIONAL AGREEMENT......................................38 ARTICLE IX - MISCELLANEOUS..............................................................................38 9.1 ASSIGNMENT/CHANGE OF CONTROL.................................................................38 (a) Assignment...................................................................................38 (a) Change of Control............................................................................38 9.2 GOVERNING LAW................................................................................39 9.3 WAIVER.......................................................................................39 9.4 INDEPENDENT RELATIONSHIP.....................................................................39 9.5 EXPORT CONTROL...............................................................................39 9.6 ENTIRE AGREEMENT; AMENDMENT..................................................................40 9.7 NOTICES......................................................................................40 9.8 PROVISIONS FOR INSOLVENCY....................................................................41 (a) Effect on Licenses...........................................................................41 (b) Rights to Intellectual Property..............................................................41 (c) Schering's Rights............................................................................42 (d) Deemed Grant of Rights.......................................................................42 (e) Security Interests...........................................................................42 9.9 FORCE MAJEURE................................................................................43 9.10 SEVERABILITY.................................................................................43 9.11 COUNTERPARTS.................................................................................43 9.12 CAPTIONS.....................................................................................43 9.13 RECORDING....................................................................................43 9.14 FURTHER ACTIONS..............................................................................44
iv 73 SCHEDULES SCHEDULE 1.6 COST OF GOODS SCHEDULE 1.18 PATENT RIGHTS SCHEDULE 2.1(E) THIRD PARTY AGREEMENTS SCHEDULE 2.6(H) DEVELOPMENT WORK TO BE PERFORMED BY LICENSOR SCHEDULE 2.6(I) ADVERSE EVENT REPORTING PROCEDURES SCHEDULE 3.2 DEFINITION OF SUCCESSFUL COMPLETION SCHEDULE 6.2(D) GOVERNMENT RIGHTS SCHEDULE 6.2(K) OTHER VCAM-1 INHIBITORS SCHEDULE 9.2 ARBITRATION PROVISIONS v 74 EXCLUSIVE LICENSE AGREEMENT THIS EXCLUSIVE LICENSE AGREEMENT (the "Agreement") is made as of October 22, 1999 by and between ATHEROGENICS, INC., a Georgia corporation having its principal place of business at 8995 Westside Parkway, Alpharetta, Georgia 30004 (hereinafter referred to as "Licensor") and SCHERING CORPORATION, a corporation organized and existing under the laws of New Jersey and having its principal place of business at 2000 Galloping Hill Road, Kenilworth, New Jersey 07033 (hereinafter referred to as "Schering"). Licensor and Schering are sometimes referred to herein individually as a Party and collectively as the Parties. References to "Schering" and "Licensor" shall include their respective Affiliates (as hereinafter defined). WHEREAS, Licensor has developed certain Licensor Know-How and has rights to Patent Rights relating to soluble analogs of probucol, including without limitation the Licensed Compound (each as hereinafter defined); and WHEREAS, Schering, together with its Affiliates (as hereinafter defined) possesses extensive capabilities in the development and commercialization of pharmaceutical products on a worldwide basis; and WHEREAS, Schering desires to obtain and Licensor is willing to grant to Schering, an exclusive license under the Patent Rights and to use the Licensor Know-How, upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, Schering and Licensor hereby agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following initially capitalized terms, whether used in the singular or plural, shall have the respective meanings set forth below: 1.1 "Affiliate" shall mean any individual or entity directly or indirectly controlling, controlled by or under common control with, a Party to this Agreement. For purposes of this Agreement, the direct or indirect ownership of fifty percent (50%) or more of the outstanding voting securities of an entity, or the right to receive fifty percent (50%) or more of the profits or earnings of an entity shall be deemed to constitute control. Such other relationship as in fact results in actual control over the management, business and affairs of an entity shall also be deemed to constitute control. 1.2 "Calendar Quarter" shall mean the respective periods of three (3) consecutive calendar months ending on March 31, June 30, September 30 or December 31, for so long as this Agreement is in effect. 75 1.3 "Calendar Year" shall mean each successive period of twelve (12) months commencing on January 1 and ending on December 31, for so long as this Agreement is in effect. 1.4 "Combination Product" shall mean any form or dosage of pharmaceutical composition or preparation in final form for sale by prescription, over-the-counter or any other method and which comprises two (2) or more active ingredients within the same pharmaceutical formulation, at least one (1) of which is Licensed Compound and/or any other compound from the Compound Library. 1.5 "Compound Library" shall mean the collection of compounds (including, without limitation, the Licensed Compound) which as of the Execution Date is specifically and/or generically covered by one or more claims in U.S. Patent No. 5,262,439, entitled "Soluble Monoesters of Probucol", or any corresponding foreign patents or patent applications. The Compound Library shall include such compounds in any form, including any salt, hydrate or crystalline structure thereof. 1.6 "Cost of Goods" shall mean Schering's fully allocated manufacturing cost of goods as determined in accordance with Schedule 1.6. 1.7 "Effective Date" shall mean the next business day following the last to occur of (i) expiration or earlier termination of any notice and waiting period under the HSR Act; or (ii) the date of delivery of fully executed counterparts of this Agreement (the "Execution Date"). 1.8 "First Commercial Sale" shall mean, with respect to any Licensed Product, the first sale by Schering to any third party, not an Affiliate or Sublicensee, of such Licensed Product for an indication for which Schering has obtained Regulatory Approval. 1.9 "HRD" shall mean a health registration dossier or its equivalent, submitted to a national government or a supranational governmental authority, consisting of the chemical, pharmaceutical and biological documentation; the toxicological and pharmacological documentation; and the clinical documentation respectively, and covering a Licensed Product which is filed in any country outside the United States and which is analogous to a new drug application, product license application or its equivalent filed with the United States Food and Drug Administration seeking approval to market and sell a Licensed Product in the Territory and including, where applicable, applications for pricing, pricing reimbursement approval, labeling and Regulatory Approval. 1.10 "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 1.11 "Improvement" shall mean any enhancement in the formulation, preparation, presentation, means of delivery, dosage, packaging of, manufacture, or any new or expanded therapeutic indications(s) for, Licensed Product or Licensed Compound, 2 76 in each case which is developed prior to or during the Term of this Agreement by or on behalf of Licensor. 1.12 "International Agreement" shall mean that certain exclusive license agreement by and between Licensor and Schering-Plough Ltd. entered into concurrently herewith. 1.13 "Licensed Compound" shall mean the soluble analog of probucol AGI-1067, having the chemical name butanedioic acid, mono[4-[[1-[3,5-bis (1,1-dimethyethyl)-4-hydroxyphenyl]thio]-1-[methylethylthio]-2,6-bis (1,1-dimethylethyl)-phenyl]ester, and any stereoisomers, salts, hydrates and/or crystalline forms thereof. 1.14 "Licensed Product(s)" shall mean any form or dosage of pharmaceutical composition or preparation in final form for sale by prescription, over-the-counter or any other method, which contains as an active ingredient the Licensed Compound and/or any other compound from the Compound Library, including, without limitation, Combination Products; provided, however, that Licensed Product shall not include topical dermatological products as described in Section 2.11(c). 1.15 "Licensor Know-How" shall mean any of Licensor's information and materials specifically relating to the research, development, registration, manufacture, marketing, use or sale of Licensed Compound and/or Licensed Product and/or the Compound Library, and which prior to or during the Term of this Agreement are developed by or at the request of Licensor, or those of its Affiliates involved in the performance of development of Licensed Product under Article 2, or are in Licensor's or such Affiliates' possession or control through license or otherwise (provided that Licensor is permitted to make disclosure thereof to Schering without violating the terms of any third party agreement), and which are not generally known. Licensor Know-How shall include, without limitation, discoveries, practices, methods, knowledge, Improvements, processes, formulas, data, ideas, skill, experience, inventions, know-how, technology, trade secrets, manufacturing procedures, purification and isolation techniques, instructions, test data and other intellectual property, patentable or otherwise, relating to Licensed Compound, Licensed Product or any Improvements. Licensor Know-How shall also include, without limitation: (i) all biological, chemical, pharmacological, toxicological, pharmaceutical, physical and analytical, clinical, safety, manufacturing and quality control data and information related thereto; (ii) compositions of matter, assays and biological materials specifically relating to development, manufacture, use or sale of any Licensed Compound, Licensed Product or Improvement; and (iii) all applications, registrations, licenses, authorizations, approvals and correspondence submitted to or received from any regulatory authorities 3 77 with jurisdiction in the Territory over an investigational drug containing Licensed Compound and/or Licensed Product (including, without limitation, minutes and meeting notes relating to any communications with any regulatory authority with jurisdiction in the Territory over an investigational drug containing Licensed Compound and/or Licensed Product). 1.16 "NDA" shall mean a New Drug Application or its equivalent filed with the United States Food and Drug Administration seeking approval to market and sell a Licensed Product in the United States. 1.17 "Net Sales" shall mean the amounts actually received on all sales of Licensed Product by Schering, its Affiliates or Sublicensees to an unaffiliated third party, and exclusive of intercompany transfers or inter-company sales, less the following reasonable and customary deductions from such gross amounts (to the extent actually taken): (i) normal and customary trade, cash and quantity discounts, allowances and credits; (ii) credits or allowances actually granted for damaged goods, returns or rejections of Licensed Product and retroactive price reductions; (iii) sales taxes, duties or other taxes with respect to such sales (including duties or other governmental charges levied on, absorbed or otherwise imposed on the sale of Licensed Product including, without limitation, value added taxes or other governmental charges otherwise measured by the billing amount, when included in billing); (iv) insurance, postage, customs duties and transportation costs, when included in billing; (v) charge back payments and rebates granted to managed health care organizations or to federal, state and local governments, their agencies, and purchasers and reimbursers or to trade customers, including but not limited to, wholesalers and chain and pharmacy buying groups; and (vi) rebates (or equivalents thereof) granted to or charged by national, state or local governmental authorities in countries other than the United States. In determining Net Sales of a Licensed Product any of the above discounts shall be accounted for and apportioned based on the list price of each such Licensed Product. In the event that Licensed Product is sold in the form of a Combination Product containing Licensed Compound and one or more other active ingredients then Net Sales 4 78 for such Combination Product will be calculated by multiplying actual Net Sales of such Combination Product by the fraction A/(A+B) where: A is the invoice price of the Licensed Compound contained in the Combination Product if sold separately by Schering, an Affiliate or Sublicensee and B is the invoice price of any other active component or components in the Combination Product if sold separately by Schering, an Affiliate or Sublicensee. In the event that the Licensed Product is sold in the form of a Combination Product containing one or more active ingredients other than Licensed Compound and one or more such active ingredients of the Combination Product are not sold separately, then the above formula shall be modified such that A shall be the total cost to Schering, its Affiliate or Sublicensee(s) of the Licensed Compound and B shall be the total cost to Schering, its Affiliate or Sublicensee of any other active component or components in the combination. 1.18 "Patent Rights" shall mean all patents and patent applications in the Territory which during the Term of this Agreement are owned or controlled (with the right to grant sublicenses) by Licensor and which contain one or more claims covering Licensed Compound(s), Licensed Product(s), one or more compounds contained in Compound Library, or any uses, formulations, processes or methods of preparing any of the foregoing, or any Improvements, including, but not limited to, those set forth in Schedule 1.18, any and all substitutions, divisions, continuations, continuations-in-part, reissues, renewals, registrations, confirmations, re-examinations, extensions, supplementary protection certificates or any like filing thereof, and provisional applications of any such patents and patent applications and any international equivalent of any of the foregoing. 1.19 "Primary Indication" shall mean the treatment and prevention of [ * ]. 1.20 "Proprietary Information" shall mean all other scientific, clinical, regulatory, marketing, financial and commercial information or data, whether communicated in writing, verbally or electronically, which is provided by one Party to the other Party in connection with this Agreement including, without limitation, Licensor Know-How. When Propriety Information is disclosed in a manner other than in writing, it shall be reduced to written form, marked "Confidential" and transmitted to the receiving Party within twenty (20) business days of disclosure to the receiving Party. 1.21 "Regulatory Approval" shall mean any approvals, including any NDA's, HRD's, supplements, amendments, pre- and post-approvals, marketing authorizations based upon such approvals (including any prerequisite manufacturing approvals or authorizations related thereto) and labeling approval(s), technical, medical and scientific licenses, registrations or authorizations of any national, regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity, necessary for the development, manufacture, distribution, marketing, promotion, offer for sale, use, import, export or sale of Licensed Product(s) and/or Licensed Compound(s) in the Territory. 5 79 1.22 "Secondary Indication" shall mean [ * ]. 1.23 "Sublicensee" shall mean any party not an Affiliate of Schering, which party is authorized by Schering or its Affiliates through express or implied license or consent to import, export, use, distribute, market, promote, offer for sale and sell Licensed Product(s) under Section 2.1(b). 1.24 "Territory" shall mean the United States, including its territories, possessions and commonwealths. 1.25 "Term" shall mean the period described in Section 8.1 of the Agreement. 1.26 "Valid Claim" shall mean a composition of matter claim, or method of use claim (or its equivalent) for the Primary Indication and/or the Secondary Indication, of an issued and unexpired patent in a country in the Territory which covers the Licensed Compound and/or any other compound from the Compound Library, which is included within the Patent Rights, and which (i) has not been revoked or held unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal; or (ii) has not been abandoned, disclaimed, or admitted to be invalid or unenforceable through reissue or disclaimer or otherwise. ARTICLE II LICENSE; DISCLOSURE OF INFORMATION; DEVELOPMENT AND COMMERCIALIZATION 2.1 Exclusive License Grant. (a) License. Subject to the terms and conditions of this Agreement, Licensor hereby grants to Schering, as of the Effective Date, an exclusive license (exclusive even as to Licensor) under the Patent Rights and Licensor Know-How in the Territory to develop, make, have made, import, export, use, distribute, market, promote, offer for sale and sell: (i) Licensed Compound(s) and/or Licensed Product(s) containing Licensed Compound; and (ii) compound(s) in the Compound Library other than Licensed Compound, and/or Licensed Product(s) containing such compound(s) for the Primary Indication and the Secondary Indication. (b) Co-Exclusive License to Other Indications Subject to the terms and conditions of this Agreement, Licensor hereby grants to Schering, as of the Effective Date, a co-exclusive license under the Patent Rights and Licensor Know-How in the Territory to develop, make, have made, import, export, use, distribute, market, promote, offer for sale and sell compound(s) in the Compound Library other than Licensed Compound, and/or Licensed Product(s) containing 6 80 such compound(s), for any and all indications other than the Primary Indication and Secondary Indication. The term "co-exclusive license" shall mean that with respect to the rights granted to Schering under this Section 2.1(b), Licensor retains the same rights as are granted to Schering. With respect to a given compound, indication or territory, each of Licensor and Schering may either directly exercise and exploit its co-exclusive rights or grant a co-exclusive license under such rights, either in whole or in part, to one (1) third party or Affiliate. (c) Right to Sublicense. The licenses granted to Schering under Sections 2.1(a) and 2.1(b) shall include the right to grant sublicenses to Affiliates and/or any third party (to the extent provided therein), provided that Schering remains responsible to Licensor under this Agreement for the performance of its Sublicensees. (d) Retained Rights Subject to the restrictions set forth in Section 2.11, Licensor retains all rights under the Patent Rights not expressly granted to Schering by this Section 2.1, and the right to use Licensor Know-How pursuant to Sections 2.6(h) and 5.1(c) below. (e) Third Party Agreements. As of the Execution Date, Licensor is a party to certain agreements (as listed in Schedule 2.1(e), redacted copies of which have been provided to Schering) with third parties pursuant to which Licensor has acquired rights to certain patent applications, patents and technology, which agreements are relevant to the Patent Rights and/or Licensor Know-How. The parties acknowledge that the licenses granted to Schering under this Agreement are subject to the specific rights retained by or granted to the U.S. Government, and/or the rights for research use retained by such third parties, under those agreements. In the event that on or after the Execution Date and during the Term of this Agreement, Licensor acquires any additional Patent Rights or Licensor Know-How from any third parties, by assignment, license or otherwise, Licensor shall promptly notify Schering in writing to that effect, and provide Schering with a copy (which may be redacted) of the agreement(s) with such third party. To the extent that the copies of the agreements listed in Schedule 2.1(e) which were provided to Schering, or any other agreements provided to Schering under this Section 2.1(e), have been redacted, Licensor represents and warrants that the redacted portions of such agreements have no material effect on the scope of the licenses or other rights granted to Schering under this Agreement. Nothing herein shall be construed as granting to Schering any greater rights under the Patent Rights and/or Licensor Know-How than those held by Licensor 2.2 Non-Exclusive License Grant. In the event that the development, making, having made, importing, exporting, use, distribution, marketing, promotion, offering for sale or sale by Schering, its Affiliates and/or Sublicensees of Licensed Product in the Territory would infringe during the Term of this Agreement a claim of an issued letters patent, and/or any patent rights which Licensor owns or has the rights to license and 7 81 which patents are not covered by the grant in Section 2.1, Licensor hereby grants to Schering and its Affiliates, to the extent Licensor is legally able to do so, a non-exclusive, royalty-free license in the Territory under such issued letters patent solely for Schering, its Affiliates and/or Sublicensees to discover, develop, make, have made, use, distribute, market, promote, offer for sale and sell Licensed Compound and/or Licensed Product(s) in the Territory. 2.3 Disclosure of Information. Promptly after the Effective Date, Licensor shall, at its own cost, disclose to Schering in writing, or via mutually acceptable electronic media, copies or reproductions of all existing Licensor Know-How not previously disclosed to Schering in order to enable Schering to exploit its rights granted under Section 2.1 and, if applicable, Section 2.2 of this Agreement. In addition, during the Term of this Agreement, Licensor shall promptly disclose to Schering in writing, or via mutually acceptable electronic media, on an ongoing basis copies or reproductions of all new Licensor Know-How that is reasonably necessary for research, development, registration, manufacture, marketing, use or sale of Licensed Compound and/or Licensed Product. Such Licensor Know-How and other information shall be automatically deemed to be within the scope of the licenses granted herein without payment of any additional compensation. Upon Schering's request but reasonably subject to Licensor's other business requirements, Licensor shall provide reasonable technical assistance to enable Schering to utilize such additional Licensor Know-How, provided, that Schering shall promptly reimburse Licensor for reasonable out-of-pocket costs and expenses incurred by Licensor in providing such technical assistance. Licensor shall invoice Schering for such costs and expenses, and shall provide documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) [ * ] days after receipt by Schering of the invoice provided, however, that such cost and out-of-pocket expenses must be identified prior to being committed to by Licensor and provided to Schering to determine whether Schering agrees to have the technical assistance provided at such cost and the final amount sought to be reimbursed shall not exceed [ * ] of the estimated cost without Schering's prior written consent. Schering shall be under no obligation to reimburse Licensor for out-of-pocket costs and expenses incurred by Licensor without Schering's agreement. Schering shall have the right to use for all purposes in connection with obtaining any Regulatory Approval for the Licensed Product(s) all Licensor Know-How and other information, disclosed pursuant to this Section and under this Agreement. 2.4 HSR Filing and Approvals. (a) HSR Filing. To the extent necessary, each of Licensor and Schering shall file, within ten (10) days after the date of this Agreement, with the Federal Trade Commission (the "FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division") any notification and report form (the "Report") required of it in the reasonable opinion of either or both Parties under the HSR Act with respect to the transactions as contemplated hereby and shall cooperate with the other Party to the extent necessary to assist the other Party in the preparation of its Report and to proceed to obtain necessary approvals 8 82 under the HSR Act, including but not limited to the expiration or earlier termination of any and all applicable waiting periods required by the HSR Act. (b) Licensor's Obligations. Licensor shall use good faith reasonable efforts to assist Schering in eliminating any concern on the part of any court or government authority regarding the legality of the proposed transaction, including, if required by federal or state antitrust authorities, Schering's promptly taking all reasonable steps to secure government antitrust clearance. Licensor shall cooperate in good faith at its own cost with any government investigation and promptly produce documents and information demanded by a second request for documents and of witnesses if requested. (c) Additional Approvals. Each of Licensor and Schering will cooperate and use all reasonable efforts to make all other registrations, filings and applications, to give all notices and to obtain as soon as practicable all governmental or other consents, transfers, approvals, orders, qualifications authorizations, permits and waivers, if any, and to do all other things reasonably necessary or desirable in Schering's opinion for the consummation of the transactions as contemplated hereby (including, without limitation, those acts required to obtain necessary approvals under any foreign equivalent antitrust statute to the HSR Act or regulation from any government or regulatory authority having the requisite jurisdiction; provided, however, that Schering shall promptly reimburse Licensor for reasonable out-of-pocket costs and expenses incurred by Licensor in providing such cooperation. Licensor shall invoice Schering for such costs and expenses, and shall provide supporting documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) [ * ] days after receipt by Schering of the invoice. 2.5 Joint Management Committee. The Parties shall establish a Joint Management Committee (the "JMC") to oversee the development and commercialization program for Licensed Product for the Primary Indication and the Secondary Indication, and to facilitate the exchange of information between the Parties. The JMC will generally serve in an advisory capacity with respect to the development and commercialization activities to be performed by Schering under this Agreement, with Schering retaining final decision making authority with respect to all such matters. (a) Composition of the JMC. The JMC shall be composed of up to three (3) representatives from each of Schering and Licensor, and a quorum shall consist of at least one (1) JMC representative from each Party. In any matter before the JMC, each Party shall have one (1) vote, with decisions being made by unanimous decision. Schering shall seriously consider the recommendations and decisions of the JMC. A Party's representatives to the JMC shall serve at the discretion of such Party and may be substituted for or replaced at any time by such Party. The JMC shall be chaired by a representative of Schering. The Chairperson shall be responsible for calling meetings, preparing agendas and 9 83 preparing and issuing minutes of each meeting within [ * ] days thereafter. (b) JMC Meetings. The JMC shall meet at least once each Calendar Quarter during the Term of this Agreement, until such time as the Parties agree to a more or less frequent meeting schedule. The site of such meetings shall alternate between the offices of Schering and Licensor (or any other site mutually agreed upon by the Parties) and each Party shall bear its own costs of attending such meetings. All meetings of the JMC shall be summarized in writing and sent to both Parties and countersigned by both Parties. (c) JMC Responsibilities. The JMC will be generally responsible for monitoring the status of Schering's development and commercialization activities with respect to Licensed Product and for preparing recommendations for implementation by Schering with regard to: (i) selection of Licensed Compounds for development by Schering as Licensed Products for the Primary Indication; (ii) preclinical and clinical development plans; (iii) development timelines and scheduling; (iv) strategies for obtaining and maintaining Regulatory Approvals; (v) marketing and sales strategies for Licensed Product. (d) Deadlock. In the event that the JMC is unable to reach a decision by unanimous vote with respect to any matter, then Schering shall have final decision making authority with respect thereto. 2.6 Schering's Development Obligations. (a) Schering Diligence. Schering shall, at Schering's expense, and subject to Licensor's compliance with its obligations under Sections 2.3 and 2.4, use good faith reasonable efforts to develop, obtain Regulatory Approval for, and commercialize the Licensed Product(s) in the Territory for the Primary Indication. Schering shall have the option, in its sole discretion, to seek Regulatory Approval for the Licensed Product for any additional indications it determines are desirable, but shall have no diligence obligations to Licensor with respect thereto with the exception of those expressly set forth in Section 2.11(d). The Parties acknowledge and agree that all business decisions including, without limitation, decisions relating to Schering's research, development, registration, manufacture, sale, commercialization, design, price, distribution, marketing and promotion of Licensed Products covered under this Agreement, shall be within the sole discretion of Schering. Licensor acknowledges that Schering is in the business of developing, manufacturing and selling pharmaceutical products and, subject to the provisions of this Section, nothing in this Agreement shall be construed as restricting such business or imposing on Schering the duty to market and/or sell and exploit Licensed Compound or Licensed Product for which royalties are payable hereunder to the exclusion of, or in preference to, any other product, or in any way other than in accordance with its normal commercial practices. 10 84 (b) Opportunity to Cure. If, in Licensor's reasonable opinion, Schering fails to comply with any of its diligence obligations under Sections 2.6(a) and (c), then Licensor shall have the right to give Schering written notice thereof stating in reasonable detail the particular failure(s). Schering shall have a period of [ * ] days from the receipt of such notice to correct the failure or, in the event that the failure cannot be reasonably cured within a [ * ] day period, then Schering shall initiate actions reasonably expected to cure the failure within [ * ] days of receiving notice and shall thereafter diligently pursue such actions to cure the failure (even if requiring longer than the [ * ] days specified in Section 8.4(a)(i)). In the event of a dispute as to whether or not Schering has failed to exercise due diligence under Sections 2.6(a) and 2.6(c), or whether Schering is diligently pursuing actions reasonably expected to cure such failure under this Section 2.6(b), such dispute shall be resolved through binding arbitration in accordance with Section 9.2. (c) Research and Development Activities. As of the Effective Date, Schering shall be responsible, at its cost and expense, and in its sole judgment, for all research and development activities which are necessary to obtain Regulatory Approval for a Licensed Product in the Territory for the Primary Indication and any post-approval studies required as a condition of obtaining any Regulatory Approval for a Licensed Product for the Primary Indication. The parties acknowledge and agree that Schering's obligations under this Section 2.6(c) shall include all of the costs of conducting the CART Study (whether incurred before or after the Effective Date) which are estimated at [ * ]. In addition, Schering shall be responsible for any other studies (or portions of studies) necessary or desirable, in its sole judgment, for maintaining any Regulatory Approval (for the Primary Indication or any other indication for which Schering, in its sole discretion, may decide to seek Regulatory Approval) in the Territory, as well as any pre-marketing studies prior to such Regulatory Approval and post-marketing studies conducted following a Regulatory Approval. (d) Licensed Product Registrations; Pricing Reimbursement Approvals. Subject to its diligence obligations set forth in Section 2.6(a), Schering shall be responsible, at its cost and expense, and in its sole judgment, for determining the appropriate regulatory strategy, for obtaining and maintaining all Regulatory Approvals and for obtaining and maintaining any pricing and reimbursement approvals required for the sale of Licensed Product in the Territory. Each Regulatory Approval and each pricing and reimbursement approval shall be placed in Schering's name or the name of a Schering Affiliate unless applicable law requires, or Licensor and Schering otherwise agree, that an approval be solely or jointly in the name of Licensor or a designated Licensor Affiliate. Licensor agrees that notwithstanding such Regulatory Approval or pricing and reimbursement approval in its name, Schering retains the exclusive rights to make, have made, import, export, use, distribute, promote, offer for sale 11 85 and sell Licensed Compound and/or Licensed Product(s) as granted Schering in Section 2.1. (e) Data. Schering shall own all data arising out of studies performed by or on behalf of Schering under this Article II. (f) Assistance by Licensor. In connection with any NDA, HRD or other application for Regulatory Approval relating to Licensed Product, Licensor shall, at Schering's request, provide to Schering in a prompt manner responses to questions which have been raised by any regulatory authority in connection with such application for Regulatory Approval and further provide to Schering estimates of Licensor's [ * ] costs for rendering such assistance. Licensor shall assist Schering from time to time, at Schering's request, in the design and implementation of clinical studies. Subject to Licensor's rights under Section 3.3(b), Licensor shall assist Schering to enable Schering to self-source bulk material for the manufacture of Licensed Compound and/or Licensed Product; provided, however, that Schering shall have no obligation whatsoever to purchase any bulk material or Licensed Compound from Licensor. (g) Reimbursement of Costs by Schering (i) Schering shall reimburse Licensor for its reasonable [ * ] costs and expenses incurred in rendering assistance under Section 2.6(f) (but no more than [ * ] of those costs which Licensor estimated, as provided above, that the work would cost unless Schering provides written approval). Licensor shall invoice Schering for such costs and expenses, and shall provide documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) [ * ] days after receipt by Schering of the invoice, provided, however, that Schering shall be under no obligation to reimburse Licensor for [ * ] costs and expenses incurred by Licensor without Schering's agreement. (ii) Schering shall reimburse Licensor for its reasonable [ * ] costs and expenses incurred in performing research and development activities under Section 2.6 (h) (but no more than [ * ] of those costs which Licensor estimated, as provided below, that the work would cost unless the JMC provides written approval). Licensor shall invoice Schering for such costs and expenses, and shall provide documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) [ * ] days after receipt by Schering of the invoice, provided, however, that Schering shall be under no obligation to reimburse Licensor for research and development costs and expenses incurred by Licensor without the prior approval of the JMC. 12 86 (h) Licensor's Additional Development Obligations. In addition to Licensor's obligations under Section 2.6(f), the JMC will assign to Licensor the responsibility to conduct, on Schering's behalf and at Schering's expense, certain of the research and development activities, including clinical studies involving Licensed Product, for which Schering is responsible under Section 2.6(c). The nature and extent of the research and development activities to be conducted by Licensor is generally set forth in Schedule 2.6(h). The JMC shall determine the specific aspects of such activities, including the timing and costs of the work to be performed by Licensor. Licensor agrees to use good faith reasonable efforts to complete such activities in the manner determined by the JMC, and shall have the right to utilize contract research organizations and other third party contractors in the performance of such activities, provided that Licensor shall remain responsible for the performance of all such contractors. To the extent that Licensor utilizes third party contractors to perform such activities, Licensor shall enter into suitable agreements with such contractors, which agreements shall incorporate provisions consistent with the terms and conditions of this Agreement, including, without limitation, provisions governing confidentiality, ownership of data, inventions and other intellectual property arising from such activities, financial obligations and termination rights. Licensor shall keep the JMC informed with regard to such third party contracts and shall provide Schering with a copy of all such agreements. Any research and development activities conducted by Licensor or its contractors pursuant to this Section 2.6(h) shall be performed in accordance with good laboratory practices and good clinical practices, and in compliance with all applicable laws, rules and regulations in the U.S. and the EU, and shall meet current regulatory standards. Schering shall promptly notify Licensor in the event that Schering reasonably determines that all or any part of the work performed by Licensor and/or its contractors under this Section 2.6(h) fails to meet such standards. If Licensor reasonably disagrees with such determination, the parties shall refer the matter to an independent expert (selected by mutual agreement of the parties) to determine whether or not the study must be repeated to support Regulatory Approval for Licensed Product. In the event that Licensor and/or the independent expert agrees with Schering's determination and such studies are repeated, then Schering shall have the right to deduct the [ * ] costs of repeating such work from the [ * ] payments due Licensor under this Agreement. (i) Adverse Event Reporting Licensor shall promptly report to Schering any information regarding adverse events related to the use of the Licensed Product in accordance with the Adverse Event Reporting Procedures (as may be amended from time to time upon mutual agreement) set forth in Schedule 2.6(i) and incorporated herein by reference. To the extent that Licensor holds any INDs or otherwise has any adverse event reporting obligations with respect to Licensed Product, Schering shall promptly report to Licensor any information regarding adverse events related to the use of Licensed Product in accordance with such Adverse Event Reporting Procedures. 13 87 2.7 Independent Discoveries by Schering. Licensor acknowledges that Schering and/or its Affiliates have ongoing research programs which may now or in the future independently discover, develop and/or acquire technologies and/or products relating to treatment and prevention of any disease, disorder or condition in humans or animals. Licensor agrees that such technologies and products, to the extent discovered without use of Licensor Know-How, will not be deemed to be Licensor Know-How and are outside the scope of this Agreement. 2.8 Excused Performance. In addition to the provisions of Article VIII and Section 9.9, the obligations of Schering with respect to a Licensed Product under Sections 2.6(a), 2.6(c), 2.6(d) and 2.11(d) are expressly conditioned upon the continuing absence of any adverse condition or event which warrants a delay in commercialization of a Licensed Product including, but not limited to, an adverse condition or event relating to the safety or efficacy of a Licensed Product or unfavorable labeling, pricing or pricing reimbursement approvals, or lack of Regulatory Approval, and the obligation of Schering to develop or market any such Licensed Product shall be delayed or suspended so long as in Schering's reasonable opinion any such condition or event exists. 2.9 Supply of Licensed Compound/Licensed Product. Licensor shall be responsible, at Licensor's expense, for supplying Schering with Licensed Compound (in the form of bulk active), from Licensor's existing inventory of Licensed Compound, to enable Schering to perform [ * ], for such Licensed Compound for the Primary Indication. In addition, Licensor has the limited option to supply all of Schering's requirements of Licensed Products as set forth in Section 3.3(b). All Licensed Compound to be supplied by Licensor hereunder shall be delivered FCA (Kenilworth, New Jersey) (Incoterms 1990) via a carrier to be specified by Schering. Licensor warrants and represents that all supplies of Licensed Compound provided to Schering by Licensor shall conform to the applicable specifications for such Licensed Compound and were prepared in accordance with current Good Manufacturing Practices ("cGMPs") and other applicable federal, national, state and local laws and regulations in effect at the time of manufacture. Schering shall be responsible for the formulation and packaging of the Licensed Compound provided by Licensor hereunder, and for manufacture and supply of all Licensed Compound and/or Licensed Product necessary for the performance of [ * ] and for supplying all commercial quantities of Licensed Compound and Licensed Products. Licensor shall transfer to Schering all Licensor Know-How relating to the manufacture of Licensed Compound, and at Schering's request and expense shall provide reasonable technical support to facilitate the implementation of such manufacturing technology at Schering. 2.10 Reports. Schering shall provide Licensor with quarterly reports of the status of the research and development activities and progress of any application for Regulatory Approval, as applicable, in connection with Licensed Product in the Territory. Further, Schering shall inform Licensor of commencement, completion, and results of the major phases of clinical development of Licensed Product, including but not limited to Phase II and Phase III clinical trials, NDA and HRD submissions, NDA and HRD filings, 14 88 approvable and approval letters, and launch. 2.11 Non-Compete Provision. Subject to the terms of Section 9.1(b), Licensor and its Affiliates shall be subject to the non-compete obligations set forth in this Section 2.11. (a) During the Term of this Agreement, Licensor shall not undertake a development program for, or commercialize, either on its own or in collaboration with any third party: (i) Licensed Compound or any product containing Licensed Compound for any indication; and/or (ii) any compound in the Compound Library for the Primary Indication and/or the Secondary Indication; and/or (iii) any other compound for the Primary Indication. (b) For the period extending from the Effective Date until the earlier of five (5) years after the First Commercial Sale of Licensed Product in the Territory or December 31, 2010, licensor shall not, either on its own or in collaboration with any third party: (i) commercialize any compound in the Compound Library for any indication; and/or (ii) commercialize any other compound for the Secondary Indication. (c) The foregoing notwithstanding, Licensor shall at all times retain the right to develop and commercialize topical products containing any compound other than the Licensed Compound for the treatment or prevention of dermatological conditions, diseases or disorders. In addition, Licensor shall have the right at all times to enter into agreements with third parties relating to the performance by Licensor of pre-clinical research activities with respect to compounds owned or controlled by such third parties, provided that such compounds do not compete through the same mechanism of action with the Licensed Compound (as determined using the same criteria as set forth in Section 6.2(k)) with respect to the Primary Indication and/or the Secondary Indication. (d) Licensor's non-compete obligations under Section 2.11(b)(ii) are expressly conditioned upon Schering's initiating a development program for Licensed Product for the Secondary indication within four (4) years after the Effective Date, and thereafter using good faith reasonable efforts to develop and commercialize one or more Licensed Products for the Secondary Indication. 15 89 ARTICLE III PAYMENTS; ROYALTIES AND REPORTS 3.0 Coordination of Payments under the International Agreement. The license fee, milestone payments and royalties payable by Schering under this Article III are in consideration for the rights and licenses granted to Schering under this Agreement and are in addition to any amounts payable to Licensor under the International Agreement. It is understood and agreed that, with respect to the development milestone payable under Section 3.2(a)(i) and the sales milestones payable under Section 3.2(b) the occurrence of one or more of such milestone events will result in milestone payment obligations under both this Agreement and the corresponding provisions of the International Agreement. It is further understood that Schering's financial obligations with respect to development costs under Article II shall be [ * ] apportioned between Schering and the corresponding obligations of Schering-Plough Ltd. under the International Agreement. 3.1 License Fee. In partial consideration for the licenses and other rights granted to Schering hereunder, Schering shall pay to Licensor a license fee ("License Fee") of [ * ], which payment shall be due within [ * ] business days following the Effective Date. 3.2 Milestone Payments. In partial consideration for the licenses and other rights granted to Schering hereunder, Schering shall promptly notify Licensor in writing upon the occurrence of an event triggering one of the milestone payments set forth in this Section 3.2, and within thirty (30) days after the occurrence of such event pay to Licensor the applicable milestone payment. (a) Development Milestones: (i) [ * ] upon the successful completion (as defined in Schedule 3.2) by Licensor of the Canadian Anti-oxidant Restenosis Trial (the "CART Study") using the Licensed Compound AGI-1067; (ii) [ * ] upon initiation of a Phase III clinical trial (i.e., dosing of the first patient) in North America under the United States IND for the Licensed Compound AGI-1067; and (iii) [ * ] upon Schering's receipt of written documentation of Regulatory Approval for the Licensed Product in the United States. (b) Sales Milestones: (i) [ * ] upon the first achievement of [ * ] in annual worldwide sales of the Licensed Product during a single Calendar Year; (ii) [ * ] upon the first achievement of [ * ] in annual worldwide sales of the Licensed Product during a single Calendar Year; (iii) [ * ] upon the first achievement of [ * ] in annual worldwide sales of the Licensed Product during a single Calendar Year; (iv) [ * ] upon the first achievement of [ * ] in annual worldwide sales of the Licensed Product during a single Calendar Year. 16 90 The foregoing sales milestone payments are in addition to any royalty payments due Licensor under Section 3.3 with respect to sales of Licensed Product. For purposes of clarity, the parties acknowledge that (1) the first achievement of more than one of the above sales milestones in the same Calendar Year shall not affect Schering's obligation to make the relevant sales milestone payments to Licensor, and (2) annual worldwide sales of the Licensed Product shall be determined based upon the aggregate total of sales in the Territory under this Agreement and sales in countries outside the Territory under the International Agreement. (c) Limitations. Except as expressly set forth below, each development milestone payment under Section 3.2(a) and each sales milestone payment under Section 3.2(b) shall be payable one (1) time only on the first occurrence of the indicated event regardless of the number of times the event triggering the payment of such milestone occurs. The development milestone payment set forth in Section 3.2(a)(iii) for U.S. Regulatory Approval of a Licensed Product shall be payable for the first Licensed Product developed by Schering and thereafter shall again be payable for each successive Licensed Product successfully developed by Schering which contains as the active ingredient a different compound from the Compound Library. For purposes of clarity and avoidance of doubt, the parties acknowledge that development milestone 3.2(a)(iii) will not be triggered by repeated occurrences of that milestone event involving different Licensed Products containing the same compound from the Compound Library. If the triggering event for a given milestone payment does not occur prior to the effective date of termination, or the expiration, of this Agreement, Schering shall have no obligation to pay such milestone payment to Licensor. The Parties acknowledge and agree that nothing herein shall be construed as representing an estimate or projection of anticipated sales or the actual value of Licensed Compounds or Licensed Products, and the figures set forth in Section 3.2(b) are merely intended to define Schering's obligations to Licensor in the event such sales performance is achieved. 3.3 Royalties. In further consideration for the licenses granted to Schering hereunder, for so long as the Licensed Product is covered by a Valid Claim in the Territory at the time of sale by Schering, and subject to the provisions of Section 3.3 (a)-(c), Schering shall pay to Licensor royalties on a country-by-country basis of [ * ] of Schering's, its Affiliates' or its Sublicensees' Net Sales of Licensed Product in the Territory. With respect to countries in the Territory where no such Valid Claim exists, the royalty rate shall be [ * ], and such royalties shall be paid for [ * ] years from the first commercial sale of Licensed Product in such country. No royalties shall be due upon the sale or other transfer among Schering, its Affiliates or Sublicensees, but in such cases the royalty shall be due and calculated upon Schering's or its Affiliates' or its Sublicensees' Net Sales to the first independent third party. No royalties shall accrue on the disposition of Licensed Product by Schering, its Affiliates or Sublicensees as samples (promotion or otherwise) or as donations (for example, to non-profit institutions or government agencies for a non-commercial purpose) or for clinical studies. Such 17 91 dispositions by Schering shall not be included in the determination of Net Sales during the period of time in which such third party sales are occurring. (a) Cap on Royalties Plus Cost of Goods. The parties acknowledge and agree that the total of (i) royalties payable by Schering to Licensor under this Agreement, and (ii) the Cost of Goods of Licensed Product manufactured by Schering and/or paid by Schering to third parties for the manufacture of Licensed Product, shall not exceed [ * ] of Net Sales of Licensed Product. Schering shall use good faith reasonable efforts to keep the Cost of Goods of Licensed Product from exceeding [ * ] of Net Sales. Schering shall determine the Cost of Goods for the Licensed Product in a timely manner, and in no event later than [ * ]. In the event that notwithstanding such efforts by Schering the Cost of Goods for Licensed Product does exceed [ * ] of Net Sales, then Schering shall notify Licensor in writing to that effect. Following receipt of such notice, Licensor shall have the right to have an independent auditor review Schering's relevant records and make an independent determination of the Cost of Goods for the Licensed Product. Any such audit shall be conducted under terms and conditions essentially the same as those set forth in Section 3.7. (b) Licensor's Option to Manufacture. In the event that Schering's Cost of Goods for the Licensed Product is correctly determined to exceed [ * ] of Net Sales, Licensor shall have the right to manufacture and supply, or to seek a third party supplier able to manufacture and supply, Schering's requirements of Licensed Product at a Cost of Goods equal to or less than [ * ] of Net Sales for Licensed Product. If Licensor is able, or locates a third supplier able, to manufacture and supply Licensed Product at a Cost of Goods equal to or less than [ * ] of Net Sales, Schering shall in good faith negotiate and enter into a suitable supply agreement with Licensor or such third party, as appropriate, for the manufacture and supply of Licensed Product. Any such agreement shall include terms obligating Schering to purchase, and Licensor or the third party to manufacture and supply, all of Schering's requirements of Licensed Product at a Cost of Goods to be agreed upon, not to exceed [ * ] of Net Sales of Licensed Product. All supplies of Licensed Product to be provided to Schering by Licensor or such third party manufacturer pursuant to this Section 3.3(b) shall be manufactured at a qualified manufacturing site, shall conform to the applicable specifications for Licensed Product and shall be prepared in accordance with cGMPs and all applicable federal, national, state and local laws and regulations in effect at the time of manufacture. (c) Royalty Reduction. In the event that Schering's Cost of Goods for Licensed Product are correctly determined to exceed [ * ] of Net Sales of Licensed Product and Licensor is unable to identify a third party capable of supplying Schering's requirements of Licensed Product at a price equal to or less than [ * ] of Net Sales of Licensed Product, then Schering shall remain responsible for the manufacture and supply of Licensed Product and the royalty 18 92 rate to be paid by Schering under this Section 3.3 shall be reduced so that the total of (i) royalties payable by Schering to Licensor under this Agreement, and (ii) the Cost of Goods of Licensed Product manufactured by Schering and/or paid by Schering to third parties for the manufacture of Licensed Product, is equal to [ * ] of Net Sales of Licensed Product. Notwithstanding the foregoing, the royalty payable to Licensor under this Agreement shall not be reduced pursuant to this Section 3.3(c) to less then [ * ] where a Valid Claim exists, or [ * ] where no Valid Claim exists. 3.4 Third Party Licenses. In the event that Schering's outside patent counsel determines that patent licenses from third parties are required by Schering, its Affiliates or its Sublicensees in order to discover, develop, make, have made, import, export, use, distribute, promote, market, offer for sale or sell Licensed Compound and/or Licensed Product (hereinafter "Third Party Licenses"), Schering shall provide Licensor with written notice to that effect and shall be solely responsible for acquiring such licenses at Schering's sole discretion. Schering may reduce any royalty otherwise due Licensor hereunder to reimburse it for royalties and or license fees actually paid to such third parties under any Third Party Licenses of patent claims which would be infringed by the manufacture, use, import, export or sale of Licensed Compound and/or Licensed Product in the Territory. Schering shall have no right to reduce any royalty due Licensor hereunder for any amounts paid to a third party under any Third Party License to the extent it is a license to technology (other than Licensor Know-How) or materials (other than Licensed Compound) selected by Schering for use in connection with the Licensed Product. The amount of reduction of royalties due Licensor and the amount of reimbursement to Schering shall be equal to [ * ] of the royalties or license fees paid to such third parties in consideration for the Third Party License but in no event shall the royalty due Licensor for any Licensed Product in any country be thereby reduced to less than [ * ] of the royalty rate otherwise due Licensor hereunder for such Licensed Product in such country. 3.5 Compulsory Licenses. If a compulsory license is granted under the Patent Rights to a third party with respect to Licensed Compound and/or Licensed Product in any country in the Territory with a royalty rate lower than the royalty rate provided for under Section 3.3, then the royalty rate to be paid by Schering on Net Sales in that country under Section 3.3 shall be reduced to the rate paid by the compulsory licensee for so long as such compulsory license is in effect. 3.6 Reports; Payment of Royalty; Payment Exchange Rate and Currency Conversions. (a) Royalties Paid Quarterly. Within [ * ] calendar days following the close of each Calendar Quarter, following the First Commercial Sale of a Licensed Product, Schering shall furnish to Licensor a written report for the Calendar Quarter showing the Net Sales of Licensed Product(s) sold by Schering, its Affiliates and its Sublicensees in the Territory during such Calendar 19 93 Quarter and the royalties payable under this Agreement for such Calendar Quarter. Simultaneously with the submission of the written report, Schering shall pay to Licensor, for the account of Schering or the applicable Affiliate or Sublicensee, as the case may be, a sum equal to the aggregate royalty due for such Calendar Quarter calculated in accordance with this Agreement (reconciled for any previous overpayments or underpayments). (b) Method of Payment. Payments to be made by Schering to Licensor under this Agreement shall be paid by bank wire transfer in immediately available funds to such bank account as is designated in writing by Licensor from time to time. Royalties shall be deemed payable by the entity making the Net Sales from the country in which earned in local currency and subject to foreign exchange regulations then prevailing. Royalty payments shall be made in United States dollars to the extent that free conversions to United States dollars is permitted. The rate of exchange to be used in any such conversion from the currency in the country where such Net Sales are made shall be the rate of exchange used by Schering Corporation for reporting such sales for United States financial statement purposes. If, due to restrictions or prohibitions imposed by national or international authority, payments cannot be made as aforesaid, the Parties shall consult with a view to finding a prompt and acceptable solution, and Schering will deal with such monies as Licensor may lawfully direct at no additional out-of-pocket expense to Schering. Notwithstanding the foregoing, if royalties in any country cannot be remitted to Licensor for any reason within [ * ] months after the end of the Calendar Quarter during which they are earned, then Schering shall be obligated to deposit the royalties in a bank account in such country in the name of Licensor. 3.7 Maintenance of Records; Audits. (a) Record Keeping by Schering. Schering and its Affiliates shall keep complete and accurate records in sufficient detail to enable the royalties payable hereunder to be determined. Upon [ * ] days prior written notice from Licensor, Schering shall permit an independent certified public accounting firm of nationally recognized standing selected by Licensor, at Licensor's expense, to have access during normal business hours to examine pertinent books and records of Schering and/or its Affiliates as may be reasonably necessary to verify the accuracy of the royalty reports hereunder. The examination shall be limited to pertinent books and records for any year ending not more than [ * ] months prior to the date of such request. An examination under this Section 3.7(a) shall not occur more than once in any Calendar Year. Schering may designate competitively sensitive information, which such auditor may not disclose to Licensor; provided, however, that such designation shall not encompass the auditor's conclusions. The accounting firm shall disclose to Licensor only whether the royalty reports are correct or incorrect and the specific details concerning any discrepancies. No other information shall be provided to 20 94 Licensor. All such accounting firms shall sign a confidentiality agreement (in form and substance reasonably acceptable to Schering) as to any of Schering's or its Affiliate's confidential information which they are provided, or to which they have access, while conducting any audit pursuant to this Section 3.7(a). (b) Underpayments/Overpayments. If such accounting firm correctly concludes that additional royalties were owed during such period, Schering shall pay the additional royalties within [ * ] days of the date Licensor delivers to Schering such accounting firm's written report so correctly concluding. If such underpayment exceeds [ * ] of the royalty correctly due Licensor then the fees charged by such accounting firm for the work associated with the underpayment audit shall be paid by Schering. Any overpayments by Schering will be credited against future royalty obligations. In the event that Schering disagrees with the audit report and the chief financial officers of Schering and Licensor (or their designees) fail to resolve such disagreement, the dispute will be resolved through the dispute resolution mechanism set forth in Section 9.2. (c) Record Keeping by Sublicensee. Schering shall include in each sublicense granted by it pursuant to this Agreement a provision requiring the Sublicensee to make reports to Schering, to keep and maintain records of sales made pursuant to such sublicense and to grant access to such records by Licensor's independent accountant to the same extent required of Schering under this Agreement. (d) Confidentiality. Licensor shall treat all financial information subject to review under this Section 3.7, or under any sublicense agreement, in accordance with the confidentiality provisions of this Agreement, and shall cause its accounting firm to enter into an acceptable confidentiality agreement with Schering obligating it to retain all such financial information in confidence pursuant to such confidentiality agreement. (e) Binding Records. Upon the expiration of [ * ] months following the end of any Calendar Year, the calculation of royalties payable under this Agreement with respect to such year shall be binding and conclusive upon the Parties, and Schering, its Affiliates and its Sublicensees shall be released from any liability or accountability with respect to royalties for such Calendar Year. 3.8 Income Tax Withholding. If at any time, any jurisdiction within the Territory requires the withholding of income taxes or other taxes imposed upon payments set forth in this Article III, Schering shall make such withholding payments as required and subtract such withholding payments from the payments set forth in this Article III, or if applicable, Licensor will promptly reimburse Schering or its designee(s) of the amount of such payments, it being understood that such withholding taxes are the obligation of Licensor. Schering shall provide Licensor with documentation of such withholding and payment in a manner that is satisfactory for purposes of the U.S. Internal Revenue 21 95 Service. Any withholdings paid when due hereunder shall be for the account of Licensor and shall not be included in the calculation of Net Sales. Payments of withholding taxes made by Schering pursuant to this Section 3.8 will be made based upon financial information to be provided to Schering by Licensor and, to the extent that such information is incorrect or incomplete, Licensor shall be liable for any fine, assessment or penalty, or any deficiency, imposed by any taxing authority in the Territory for any deficiency in the amount of any such withholding or the failure to make such withholding payment. If Schering is required to pay any such deficiency, or any such fine, assessment or penalty for any such deficiency, Licensor shall promptly reimburse Schering for such payments, which shall not be included in the calculation of Net Sales. 3.9 Direct Affiliate Licenses. Whenever Schering shall reasonably demonstrate to Licensor that, in order to facilitate direct royalty payments by an Affiliate, it is desirable that a separate license agreement be entered into between Licensor and such Affiliate, Licensor will grant such licenses directly to such Affiliate by means of an agreement which shall be consistent with all of the provisions hereof, provided that Schering guarantees the Affiliate's obligations thereunder. ARTICLE IV PATENTS 4.1 Filing, Prosecution and Maintenance of Patents. Licensor agrees to diligently file, prosecute and maintain in the Territory, at Licensor's expense, all Patent Rights owned in whole or in part by Licensor and licensed to Schering under this Agreement, including without limitation, any Patent Rights covering any Improvement(s). Schering shall determine the country(ies) in the Territory with respect to which Schering desires Licensor to perform such activities and will promptly notify Licensor to that effect. All such determinations shall be made by Schering in accordance with its standard practices with respect to the filing, prosecution and maintenance of patents, and Licensor's obligation to file, prosecute and maintain each patent application or patent within the Patent Rights under this Section 4.1 shall be limited to those countries selected by Schering for such patent application or patent. Licensor shall supply Schering with a copy of the applications as filed, together with notice of its filing date and serial number. Licensor shall keep Schering regularly advised of the status of pending patent applications (including, without limitation, the grant of any Patent Rights), and upon the written request of Schering shall provide copies of any substantive papers provided to or received from government patent authorities related to the filing, prosecution and maintenance of such patent filings. Schering shall treat all information, papers, and other materials provided by Licensor pursuant to this Section 4.1 in accordance with the confidentiality provisions of this Agreement. 4.2 Option of Schering to Prosecute and Maintain Patents. Licensor shall give [ * ] days prior written notice to Schering of any desire to cease prosecution and/or maintenance of a particular Patent Right and, in such case, shall permit Schering, at its sole discretion, to continue prosecution or maintenance at its own expense. If Schering 22 96 elects to continue prosecution or maintenance, Licensor shall execute such documents and perform such acts, at Schering's expense, as may be reasonably necessary to effect an assignment of such Patent Rights to Schering. Any such assignment shall be completed in a timely manner to allow Schering to continue such prosecution or maintenance. Any patents or patent applications so assigned shall not be considered Patent Rights. 4.3 Enforcement. (a) Notice and Discontinuance of Infringement. In the event that either Schering or Licensor becomes aware of any third party infringement within the Territory of any Valid Claim, it will notify the other Party in writing to that effect. Any such notice shall include evidence to support an allegation of infringement by such third party. Licensor shall have a period of six (6) months from the date of said notice to obtain a discontinuance of such infringement or bring suit against the third party infringer. Licensor shall bear all the expenses of any suit brought by it. Schering shall have the right, prior to commencement of the trial, suit or action brought by Licensor, to join any such suit or action, and in such event shall pay one-half of all costs of such suit or action. In the event that Schering has joined in the action and shared in the costs thereof as set forth above, no settlement, consent judgment or other voluntary final disposition of the suit may be entered into without the consent of Schering. In the event that Schering has not joined the suit or action, Schering will reasonably cooperate with Licensor in any such suit or action and shall have the right to consult with Licensor and be represented by its own counsel, provided that Licensor shall periodically reimburse Schering for its out-of-pocket costs (excluding the costs of retaining its own outside counsel) incurred in cooperating with Licensor. Any recovery or damages derived from any suit under this Section 4.3(a) where Schering has joined and shared costs shall be used first to reimburse each of Licensor and Schering for its documented out-of-pocket legal expenses relating to the suit, shall be used second to reimburse Licensor for royalties lost as a result of reduced sales of Licensed Product, shall be used third to reimburse Schering for amounts attributed to Schering's lost profits, with any remaining amounts, including but not limited to punitive, exemplary, or other enhanced damages, to be shared equally by the Parties. Any recovery or damages derived from a suit which Schering has not joined shall be retained by Licensor. (b) Continuance of Infringement. If Licensor has neither obtained a discontinuance of such infringement nor brought suit against such infringer after the expiration of the six month period specified in Subsection 4.3(a), Schering shall have the right, but not the obligation, to bring suit against such infringer under the Patent Rights and join Licensor as a party plaintiff, provided that Schering shall bear all the expenses of such suit. Licensor shall cooperate with Schering in any such suit for infringement of a Patent Right brought by Schering against a third party, and shall have the right to consult with Schering and to participate in and be represented by independent counsel in such litigation at its own expense. 23 97 Schering shall periodically reimburse Licensor for its out of pocket costs (excluding Licensor's costs of retaining independent counsel) incurred in cooperating with Schering. Schering shall incur no liability to Licensor as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any of the Patent Rights invalid or unenforceable, except that Schering shall indemnify and hold Licensor harmless for any monetary judgment or award against or penalty levied upon either Licensor or Schering arising out of Schering's acts in the enforcement of such Patent Rights. In the event that Schering recovers any sums through litigation under this Section 4.3(b) by way of damages or in settlement thereof, Schering shall retain all such sums. 4.4 Third Party Infringement Suit. (a) Defense. In the event that a third party sues Schering alleging that Schering's, its Affiliates' or its Sublicensees' making, having made, importing, exporting, using, distributing, marketing, promoting, offering for sale or selling Licensed Compound and/or Licensed Product in one or more countries in the Territory infringes or will infringe said third party's patent, then Schering may elect to defend such suit at its sole expense and discretion. To the extent that the alleged infringement is based upon the use of Licensed Compound, another compound from the Compound Library or the Licensor Know-How, Schering shall have no obligation to pay royalties to Licensor under Section 3.3 with respect to sales of Licensed Product in such country(ies) during the pendency of any such suit. Upon Schering's request and in connection with Schering's defense of any such third party infringement suit, Licensor shall cooperate with Schering for such defense provided, that Schering shall promptly reimburse Licensor for reasonable out-of-pocket costs and expenses incurred by Licensor in providing such cooperation (excluding Licensor's costs of retaining independent counsel). Licensor shall invoice Schering for such costs and expenses, and shall provide documentation for the invoice. The invoice shall be payable to Licensor or its designee(s) thirty (30) days after receipt by Schering of the invoice. (b) Licensing. Schering shall have the right to negotiate with said third party for a suitable license or assignment of rights under the relevant patents. In the event that such negotiation results in a consummated agreement, then any lump sum payment and/or royalty payments to be made thereunder shall be paid by Schering and shall be offset against any royalties due Licensor in accordance with the terms of Article 3.4. 4.5 Certification Under Drug Price Competition and Patent Restoration Act. Licensor and Schering each shall immediately give written notice to the other of any certification of which they become aware filed pursuant to 21 U.S.C. ss.355(b)(2)(A)(iv) and 355(j)(2)(A)(vii), or any amendment or successor statute thereto, claiming that Patent Rights covering Licensed Compound and/or Licensed Product(s) are invalid or that infringement will not arise from the manufacture, use or sale of a product containing 24 98 Licensed Compound or otherwise equivalent to Licensed Product by a third party. Notwithstanding any provision to the contrary, in the event that the Patent Rights at issue are owned and/or controlled by Licensor and Licensor has failed to bring an infringement action against such third party at least fourteen (14) business days prior to expiration of the forty five (45) day period set forth in 21 U.S.C. ss.355(c)(3)(C) (or any amendment or successor statute thereto), Schering shall have the right to bring such an infringement action, in its sole discretion and at its own expense, in its own name and/or in the name of Licensor. At Schering's request, Licensor shall, at its own expense, provide Schering reasonable assistance to conduct such infringement action, including, without limitation, causing the execution of such legal documents as Schering may deem necessary for the prosecution of such action. Schering shall periodically reimburse Licensor for its out-of-pocket costs (excluding any of Licensor's costs of retaining independent counsel) incurred in assisting Schering. Schering shall incur no liability to Licensor as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any of the Patent Rights invalid or unenforceable, except that Schering shall indemnify and hold Licensor harmless for any monetary judgment or award against or penalty levied upon either Licensor or Schering arising out of Schering's acts in the enforcement of such Patent Rights. In the event that Schering recovers any sums in such litigation by way of damages or in settlement thereof, Schering shall have the right to retain all such sums to offset its costs, losses and expenses. 4.6 Abandonment. Subject to Schering's rights pursuant to Section 4.2, Licensor shall at the earliest known date give notice to Schering of the grant, lapse, revocation, surrender, invalidation or abandonment of any Patent Rights licensed to Schering for which Licensor is responsible for the filing, prosecution and maintenance under this Agreement. 4.7 Patent Term Restoration. The Parties hereto shall cooperate with each other in obtaining patent term restoration or its equivalent in the Territory where applicable to Patent Rights. In the event that elections with respect to obtaining such patent term restoration are to be made, Schering shall have the right to make the election and Licensor agrees to abide by such election. 4.8 Notices Regarding Patents. All notices, inquiries and communications in connection with this Article IV shall be sent in the manner set forth in Section 9.7 to the Parties at the addresses and facsimile numbers indicated below. If to Licensor: AtheroGenics, Inc. 8995 Westside Parkway Alpharetta, Georgia 30004 Attn.: Vice President, Business Development (with a copy to: President) Fax No.: (678) 336-2501 25 99 If to Schering: Schering Corporation 2000 Galloping Hill Road Kenilworth, New Jersey 07033 Attn.: Staff Vice President - Patents and Trademarks Fax No.: (908) 298-5388 ARTICLE V CONFIDENTIALITY AND PUBLICATION 5.1 Confidentiality. (a) Nondisclosure Obligation. Each of Licensor and Schering shall use only in accordance with this Agreement, and shall not disclose to any third party, any of the other Party's Proprietary Information received by it pursuant to this Agreement without the prior written consent of the other Party. The foregoing obligations shall survive the expiration or termination of this Agreement for a period of five (5) years. These obligations shall not apply when and to the extent Proprietary Information: (i) is known by the receiving Party at the time of its receipt, and not through a prior disclosure by the disclosing Party, as documented by business records; (ii) is at the time of disclosure or thereafter becomes published or otherwise part of the public domain without breach of this Agreement by the receiving Party; (iii) is subsequently disclosed to the receiving Party by a third party that has the right to make such disclosure; (iv) is developed by the receiving Party independently of Proprietary Information or other information received from the disclosing Party and such independent development can be documented by the receiving Party; (v) is disclosed to any institutional review board of any entity conducting clinical trials, or any governmental or other regulatory agencies in order to obtain patents, to gain approval to conduct clinical trials or to market Licensed Compound and/or Licensed Product, but such disclosure may be made only to the extent reasonably necessary to obtain such patents or authorizations; or (vi) is required by law, regulation, rule, act or order of any governmental authority or agency to be disclosed by a Party, provided that 26 100 notice is promptly delivered to the other Party in order to provide an opportunity to seek a protective order or other similar order with respect to such Proprietary Information and thereafter the disclosing Party discloses to the requesting entity only the minimum Proprietary Information required to be disclosed in order to comply with the request, whether or not a protective order or other similar order is obtained by the other Party. (b) Disclosure to Agents. Notwithstanding the provisions of Section 5.1(a), Schering shall have the right to disclose Licensor's Proprietary Information to its Sublicensees, agents, consultants, Affiliates or other third parties (collectively "Agents") in accordance with this Section 5.1(b). Such disclosure shall be limited only to those Agents directly involved in the research, development, manufacture, marketing or promotion of Licensed Compound or Licensed Product (or for such Agents to determine their interest in performing such activities) in accordance with this Agreement. Any such Agents must agree in writing to be bound by confidentiality and non-use obligations essentially the same as those contained in this Agreement. The term of confidentiality and non-use obligations for such Agents shall be no less than ten (10) years. Schering shall be jointly and severally liable for any disclosure of Licensor Proprietary Information by Agents. (c) Disclosure to a Third Party. Licensor shall have the right to use and disclose any Licensor Know-How at its sole option and discretion for the limited purpose of filing, prosecuting, and supporting Patent Rights. Subject to the terms of Section 5.2, either Party may publish Licensor Know-How under the terms of Section 5.3 below. Licensor shall not otherwise disclose, provide or transfer any Licensor Know-How to any third party without the prior written approval of Schering. 5.2 Publicity. Except as provided in Section 5.1 and this Section 5.2, a Party may not use the name of the other Party in any publicity, advertising or in any other public way and, may not issue press releases or otherwise publicize or disclose any information related to the existence of this Agreement, the terms or conditions of this Agreement, or any information relating to the subject matter hereof, without the prior written consent of the other Party. The Parties shall agree upon an initial press release to announce the execution of this Agreement, together with a corresponding Q&A outline for use in responding to inquiries about the Agreement. Following such initial press release, Licensor may use the specific information contained therein, or in any subsequent public announcements or publications made by Schering or by mutual agreement of the Parties, in Licensor's investor relations and public relations activities. Licensor shall make no public announcement, either written, oral or in any medium relating to the safety of Licensed Compound and/or Licensed Product, except for statements in official correspondence with government patent authorities in support of Patent Rights as provided for in Section 5.1(c). Nothing in the foregoing, however, shall prohibit a Party from making disclosures to the extent required under applicable federal or state securities laws or any rule or regulation of any nationally recognized securities exchange, provided same is accurate and complete. In such event, however, the disclosing Party shall use good faith efforts to consult with the other Party prior to such disclosure and, where applicable, shall request confidential treatment to the extent available. 27 101 5.4 Publication. Schering and Licensor each acknowledge the potential benefit in publishing results of certain studies to obtain recognition within the scientific community and to advance the state of scientific knowledge. Each Party also recognizes the mutual interest in obtaining valid patent protection and in protecting business interests and trade secret information. No publication of Licensor Know-How or Patent Rights may be made without the prior written consent of Licensor. The Parties agree that Schering, its Affiliates, employees or consultants shall be free to make any publication which does not disclose Licensor Know-How or Patent Rights. In the event that any proposed publication (as defined below) discloses Licensor Know-How or Patent Rights, the following procedure shall apply: Either Party, its Affiliates, employees or consultants wishing to make a publication shall deliver to the other Party a copy of the proposed written publication or an outline of an oral disclosure at least [ * ] days prior to submission for publication or presentation. For purposes of this Agreement, the term "publication" shall include, without limitation, abstracts and manuscripts for publication, slides and texts of oral or other public presentations, and texts of any transmission through any electronic media, e.g. any computer access system such as the Internet, including the World Wide Web. The reviewing Party shall have the right (i) to propose modifications to the publication for patent reasons, trade secret reasons or business reasons or (ii) to request delay of the publication or presentation in order to protect patentable information. If the reviewing Party requests a delay, the publishing Party shall delay submission or presentation for a period of up to eighteen (18) months from the filing date of the first patent application in the Territory covering the information contained in the proposed publication or presentation. If the reviewing Party requests modifications to the publication, the publishing Party may edit such publication to prevent disclosure of trade secret or proprietary business information prior to submission of the publication or presentation. ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1 Representations and Warranties of Each Party. Each of Licensor and Schering hereby represents, warrants and covenants to the other Party hereto that as of the Execution date it has complied, and during the period extending from the Execution Date until the expiration or termination of this Agreement it shall comply, with all applicable material laws and regulations relating to its activities under this Agreement. Each of Licensor and Schering further represents, warrants and covenants to the other Party hereto that as of the Execution Date: (a) it is a corporation or entity duly organized and validly existing under the laws of the state or other jurisdiction of its incorporation or formation; (b) the execution, delivery and performance of this Agreement by such Party has been duly authorized by all requisite corporate action, subject only to receipt of requisite approval of its board of directors; 28 102 (c) it has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder; (d) the execution, delivery and performance by such Party of this Agreement and its compliance with the terms and provisions hereof does not and will not conflict with or result in a breach of any of the terms and provisions of or constitute a default under (i) a loan agreement, guaranty, financing agreement, agreement affecting a product or other agreement or instrument binding or affecting it or its property; (ii) the provisions of its charter or operative documents or bylaws; or (iii) any order, writ, injunction or decree of any court or governmental authority entered against it or by which any of its property is bound; (e) except for the governmental and Regulatory Approvals required to market Licensed Product in the Territory and any filings or approvals referred to in Section 2.4, the execution, delivery and performance of this Agreement by such Party does not require the consent, approval or authorization of, or notice, declaration, filing or registration with, any governmental or regulatory authority and the execution, delivery or performance of this Agreement will not violate any law, rule or regulation applicable to such Party; (f) this Agreement has been duly authorized, executed and delivered and constitutes such Party's legal, valid and binding obligation enforceable against it in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to the availability of particular remedies under general equity principles; (g) to the best of its knowledge there are no third party pending patent applications (excluding the Patent Rights), which, if issued, may cover the development, manufacture, use or sale of any Licensed Compound or Licensed Product. 6.2 Licensor's Representations. Licensor hereby represents, warrants and covenants to Schering that as of the Execution Date: (a) to the best of its knowledge, the Patent Rights and Licensor Know-How are subsisting and are not invalid or unenforceable, in whole or in part; (b) it has the full right, power and authority to grant all of the right, title and interest in the licenses granted to Schering under Article II hereof; (c) to the best of its knowledge, it has not previously assigned, transferred, conveyed or otherwise encumbered its right, title and interest in the Licensed Compound, Licensed Product, the Patent Rights, or Licensor Know- 29 103 How; (d) except as specifically set forth in Schedule 6.2(d), it is the sole and exclusive owner and/or licensee of the Patent Rights and Licensor Know-How, all of which are free and clear of any liens, charges and encumbrances, and to the best of its knowledge no other person, corporation or other private entity, or governmental entity or subdivision thereof, has or shall have any claim of ownership with respect to the Patent Rights or Licensor Know-How, whatsoever; (e) to the best of its knowledge, the Patent Rights and Licensor Know-How, and the development, manufacture, use, distribution, marketing, promotion and sale of Licensed Products do not interfere or infringe (as applicable) on any intellectual property rights owned or possessed by any third party; (f) there are no claims, judgments or settlements against or amounts with respect thereto owed by Licensor, and to the best of its knowledge no pending or threatened claims or litigation against Licensor relating to Licensed Compound, the Patent Rights and Licensor Know-How; (g) to the best of its knowledge, there are no circumstances that would adversely affect the commercial utility or the use of the Licensed Product; (h) it has provided to Schering a summary of all material adverse events known to it relating to the Licensed Compound; (i) there are no collaborative, licensing, material transfer, supply, distributorship or marketing agreements or arrangements or other similar agreements to which it or any of its Affiliates are a party relating to Licensed Compound, Licensed Product or Patent Rights which would materially limit the rights granted to Schering under this Agreement with respect to the Licensed Compound, Licensed Product or Patent Rights; (j) there are no trademark(s) chosen, owned or controlled by Licensor or its Affiliates specifically in connection with the Licensed Compound and/or the Licensed Product in the Territory; and (k) except as set forth in Schedule 6.2(k), it has not identified any compounds outside of the Compound Library which exhibit both (1) similar or better VCAM-1 inhibition than the Licensed Compound as determined using Licensor's currently available in vitro screens for VCAM-1 inhibitory activity (i.e., the human aortic endothelial cell based screen) and (2) histologically or morphologically demonstrated anti-atherosclerotic properties similar or better than Licensed Compound in the Licensor's animal models (i.e., the hypercholesterolemic rabbit). 30 104 Licensor further represents, warrants and covenants to Schering that: (l) during the period extending from the Execution Date until the expiration or termination of this Agreement it will use reasonable efforts not to diminish the rights under the Patent Rights and Licensor Know-How granted to Schering hereunder, including without limitation, by not committing or permitting any actions or omissions which would cause the breach of any license or other agreements between itself and third parties which provide for licenses, assignments or other rights to any Patent Rights or Licensor Know-How, that it will provide Schering promptly with notice of any such alleged breach, and that as of the Execution Date, it is in compliance in all material respects with any such licenses or other agreements with third parties; (m) as of the Execution Date, and to the best of its knowledge, all data summaries provided in writing to Schering by Licensor prior to the Execution Date relating to pre-clinical and clinical studies of the Licensed Compound accurately represent the raw data underlying such summaries; and (n) Licensor shall not seek or file for any trademark for use in connection with the Licensed Compound and/or the Licensed Product in the Territory during the period extending from the Execution Date until the expiration or termination of this Agreement. 6.3 Continuing Representations. The representations and warranties of each Party contained in Sections 6.1 and 6.2 shall survive the execution of this Agreement. 6.4 No Inconsistent Agreements. Neither Party has in effect and after the Effective Date neither Party shall enter into any oral or written agreement or arrangement that would be inconsistent with its obligations under this Agreement. 6.5 Representation by Legal Counsel. Each Party hereto represents that it has been represented by legal counsel in connection with this Agreement and acknowledges that it has participated in the drafting hereof. In interpreting and applying the terms and provisions of this Agreement, the Parties agree that no presumption shall exist or be implied against the Party which drafted such terms and provisions. 6.6 Additional Obligations of Licensor The Parties acknowledge and agree that all data and information provided by Licensor to Schering arising out of or relating to any preclinical and/or clinical studies involving the Licensed Compound and/or Licensed Product conducted by or on behalf of Licensor (the "Studies"), or relating to any patent applications or patents having claims covering the Licensed Compound and/or Licensed Product, are of material importance to the development and commercialization of the Licensed Compound and/or Licensed Product and to Schering's decision to enter into this Agreement. 31 105 (a) Licensor represents and warrants that, to the best of its knowledge and based upon Licensor's diligence in the performance of the relevant activities, as of the Execution Date it (and its subcontractors and/or collaborators, if any): (i) has fully complied with all applicable laws, rules and regulations, in the preparation, filing and prosecution of patent applications or patents; (ii) has fully complied with all applicable laws, rules and regulations, in the conduct and evaluation of the Studies and with regard to all applications or submissions for Regulatory Approval in the Territory, if any; (iii) knows of no irregularities or information suggesting any irregularities in connection with the preparation, filing or prosecution of patent applications or patents which may have a material adverse effect with respect thereto; and (iv) knows of no irregularities or information suggesting any irregularities in connection with the conduct and evaluation of the Studies which may have a material adverse effect with respect thereto. (b) To the extent of Licensor's obligations under this Agreement, Licensor shall undertake to perform the following in accordance with all applicable laws, rules and regulations: (i) to prepare, file, prosecute and maintain, or ensure that its subcontractors, collaborators and/or agents prepare, file, prosecute and maintain, any patent applications or patents relating to the Licensed Compound and/or Licensed Product; and (ii) to conduct, or ensure that its subcontractors and/or collaborators, if any, shall conduct, any Studies. (c) In the event Licensor becomes aware of any known or suspected impropriety or misconduct relating to the preparation, filing, prosecution or maintenance of patent applications or patents, and/or the performance, analysis or reporting of any Studies, or any application or submission for Regulatory Approval, Licensor shall, within twenty-four (24) hours notify Schering of such event in writing. ARTICLE VII INDEMNIFICATION AND LIMITATION ON LIABILITY 7.1 Indemnification by Schering. Schering shall indemnify, defend and hold harmless Licensor and its Affiliates, and each of its and their respective employees, 32 106 officers, directors and agents (each, a "Licensor Indemnified Party") from and against any and all third party claims, demands, lawsuits, proceedings, settlement amounts, liability, loss, damage, cost, and expense (including reasonable attorneys' fees), (collectively, a "Liability") which may be asserted against the Licensor Indemnified Party or which the Licensor Indemnified Party may incur, suffer or be required to pay resulting from or arising out of (i) the discovery, development, manufacture, promotion, distribution, use, testing, marketing, sale or other disposition of Licensed Compound and/or Licensed Product(s) by Schering, its Affiliates or Sublicensees (including without limitation any personal injury, death, or other injuries suffered by users of Licensed Compound or Licensed Product), or (ii) the breach by Schering of any covenant, representation or warranty contained in this Agreement; or (iii) the successful enforcement by a Licensor Indemnified Party of its rights under this Section 7.1. Notwithstanding the foregoing, Schering shall have no obligation under this Agreement to indemnify, defend or hold harmless any Licensor Indemnified Party with respect to any Liability which results from the willful misconduct or negligent acts or omissions of Licensor, its Affiliates, or any of their respective employees, officers, directors or agents. 7.2 Indemnification by Licensor. Licensor shall indemnify, defend and hold harmless Schering and its Affiliates, and each of its and their respective employees, officers, directors and agents (each, a "Schering Indemnified Party") from and against any Liability which the Schering Indemnified Party may incur, suffer or be required to pay resulting from or arising out of (i) the breach by Licensor of any covenant, representation or warranty contained in this Agreement; or (ii) the successful enforcement by a Schering Indemnified Party of its rights under this Section 7.2. Notwithstanding the foregoing, Licensor shall have no obligation under this Agreement to indemnify, defend or hold harmless any Schering Indemnified Party with respect to any Liability which results from willful misconduct or negligent acts or omissions of Schering, its Affiliates, or any of their respective employees, officers, directors or agents. 7.3 Conditions to Indemnification. Each Party agrees to promptly give the other Party notice of any claim for which indemnification may be sought. Failure of an indemnified Party to provide notice of a claim to the indemnifying Party shall affect the indemnified Party's right to indemnification only to the extent that such failure has a material adverse effect on the indemnifying Party's ability to defend or the nature or the amount of the Liability. Subject to the provisions of Article IV, the indemnifying Party shall have the right to assume the defense of any suit or claim related to the Liability if it has assumed responsibility for the suit or claim in writing; provided, however, that if in the reasonable judgment of the indemnified Party, such suit or claim involves an issue or matter which could have a materially adverse effect on the business operations or assets of the indemnified Party, the indemnified Party may waive its rights to indemnity under this Agreement and control the defense or settlement thereof, but in no event shall any such waiver be construed as a waiver of any indemnification rights such Party may have at law or in equity. If the indemnifying Party defends the suit or claim, the indemnified Party may participate in (but not control) the defense thereof at its sole cost and expense. 33 107 7.4 Settlements. Subject to the provisions of Article IV, neither Party may settle a claim or action related to a Liability without the consent of the other Party if such settlement would impose any monetary obligation on the other Party or require the other Party to submit to an injunction or otherwise limit the other Party's rights under this Agreement, provided that such consent shall not be unreasonably withheld or delayed. Any payment made by a Party to settle any such claim or action shall be at its own cost and expense. 7.5 Limitation of Liability. With respect to any claim by one Party against the other arising out of the performance or failure of performance of the other Party under this Agreement, the Parties expressly agree that the liability of such Party to the other Party for such breach shall be limited under this Agreement or otherwise at law or equity to direct damages only and in no event shall a Party be liable for, punitive, exemplary or consequential damages suffered or incurred by the other Party. 7.6 Insurance. Each Party acknowledges and agrees that during the Term of this Agreement it shall maintain adequate insurance and/or a self-insurance program for contractual liability insurance to cover such Party's obligations under this Agreement. Each Party shall provide the other Party with evidence of such insurance and/or self-insurance program, upon request. ARTICLE VIII TERM AND TERMINATION 8.1 Term and Expiration. This Agreement shall be effective as of the Effective Date and unless terminated earlier by mutual written agreement of the Parties or pursuant to Sections 8.2, 8.3 or 8.4 below, the Term of this Agreement shall continue in effect on a product-by-product and country-by-country basis until the expiration of the last to expire Patent Right incorporating a Valid Claim covering the Licensed Product, or in countries where no such Patent Rights exist until the tenth anniversary of the First Commercial Sales of Licensed Product in such country. Upon expiration of this Agreement, Schering's licenses pursuant to Section 2.1 and 2.2 shall become fully paid-up, perpetual licenses. 8.2 Termination by Schering Without Cause. Schering shall have the unilateral right to terminate this Agreement on a product-by-product basis (without cause) at any time by giving sixty (60) days advance written notice to Licensor. In the event of the exercise of such termination rights, the rights and licenses granted to Schering under Sections 2.1 and 2.2 shall terminate and all rights to Licensor Know-How, Licensed Compounds and Licensed Products with respect to the applicable product which are granted pursuant to this Agreement shall revert to Licensor. 34 108 8.3 Termination Upon Cessation of Development. (a) Termination by Either Party Either Party shall have the unilateral right to terminate this Agreement on a product-by-product basis at any time by giving sixty (60) days advance written notice to the other Party if Schering ceases development or commercialization of Licensed Compound or Licensed Product pursuant to Sections 2.6(a) and (c), subject to Section 2.6(b). In the event of the exercise of such termination rights, the rights and licenses granted to Schering under Sections 2.1 and 2.2 shall terminate and all rights to Licensor Know-How, Licensed Compounds and Licensed Products with respect to the applicable product which are granted pursuant to this Agreement shall revert to Licensor. (b) Termination by Licensor Licensor shall have the unilateral right to terminate this Agreement by giving [ * ] days written notice to Schering in the event that: (i) [ * ]; or (ii) [ * ]. In the event of the exercise of such termination rights, the rights and licenses granted to Schering under Sections 2.1 and 2.2 shall terminate and all rights to Licensor Know-How, Licensed Compounds and Licensed Products with respect to the applicable product which are granted pursuant to this Agreement shall revert to Licensor. 8.4 Termination. (a) Termination for Cause. This Agreement may be terminated by written notice at any time during the Term of this Agreement: (i) by either Party, subject to Section 9.2, if the other Party is in breach of its material obligations with respect to such product hereunder and has not cured such breach within sixty (60) days (thirty (30) days with respect to payment obligations under Article III) after written notice requesting cure of the breach with reasonable detail of the particulars of the alleged breach, or within sixty (60) days of receiving notice initiated actions reasonably expected to cure the cited failure and thereafter diligently pursued such actions to cure the failure (even if requiring longer than the sixty (60) days set forth in this subsection); or (ii) by either Party upon the filing or institution of bankruptcy, reorganization (in connection with any insolvency), liquidation or receivership proceedings, or upon an assignment of a substantial portion of the assets for the benefit of creditors by the other Party, or in the event a 35 109 receiver or custodian is appointed for such other Party's business, or if a substantial portion of such other Party's business is subject to attachment or similar process; provided, however, that in the case of any involuntary bankruptcy proceeding such right to terminate shall only become effective if the proceeding is not dismissed within sixty (60) days after the filing thereof. (b) Effect of Termination for Cause on License. (i) Termination by Schering. In the event Schering terminates this Agreement under Section 8.4(a)(i), due to a breach by Licensor of its material obligations under Section 2.1(a), 2.1(b) or 2.11(a) of this Agreement, then Schering's licenses pursuant to Sections 2.1 and 2.2 shall become fully paid-up, perpetual licenses. (ii) Termination by Licensor. In the event that Licensor terminates this Agreement under Section 8.4(a)(i), then the rights and licenses granted to Schering under Sections 2.1 and 2.2 shall terminate and all rights to Licensor Know-How, Licensed Compounds and Licensed Products granted pursuant to this Agreement shall revert to Licensor. (iii) Effect of Bankruptcy. In the event Schering terminates this Agreement under Section 8.4(a)(ii) or this Agreement is otherwise terminated under Section 8.4(a)(ii), the Parties agree that Schering, as a licensee of rights to intellectual property under this Agreement, shall retain and may fully exercise all of its rights and elections under the Insolvency Statute including as set forth in Section 9.8 hereof. 8.5 Effect of Termination. Expiration or termination of the Agreement shall not relieve the Parties of any obligation accruing prior to such expiration or termination, and the provisions of Articles V and VII shall survive the expiration of the Agreement. With regard to reimbursement for development costs incurred by Licensor, including, without limitation, the costs of clinical studies, Schering's obligations under Section 2.6 shall upon termination be limited to the costs for actual work performed in accordance with the relevant research plans or protocols up to the effective date of such termination, or any irrevocable financial commitments made by Licensor prior to the date of notice of termination. Any expiration or early termination of this Agreement shall be without prejudice to the rights of either Party against the other accrued or accruing under this Agreement prior to termination, including the obligation to pay royalties for Licensed Product(s) or Licensed Compound sold prior to such termination. In the event of termination of this Agreement, Schering shall have the right to continue to sell its existing inventory of Licensed Product during the six (6) month period immediately following such termination, provided that Schering shall continue to make royalty payments with respect to such sales. 36 110 8.6 Remedies for Breach. In addition to any and all other remedies that Schering may have under this Agreement, or otherwise under law and/or equity, in the event that Licensor materially breaches its obligations under Sections 6.6(a) or (b) of this Agreement and/or materially breaches its representation, warranties and covenants under Section 6.2(m), then Schering shall have the right, at Schering's sole discretion, upon written notice to Licensor to either: (i) deduct [ * ] of the remaining unpaid milestone(s) in Section 3.2; (ii) permanently reduce by [ * ] the royalty rates provided for in Section 3.3; or (iii) immediately terminate the Agreement. 8.7 Licensor's Rights on Termination. In the event that Licensor terminates this Agreement under Section 8.3 or 8.4(a)(i), or Schering terminates this Agreement under Section 8.2 or 8.3, Schering shall provide to Licensor the following: (i) all existing Regulatory Approvals and/or applications for Regulatory Approval for the applicable Licensed Product(s) in the Territory; (ii) access, including the right to make copies, of all preclinical, clinical, pharmacokinetic, toxicology or other data owned or controlled by Schering which is necessary to support any of the Regulatory Approvals provided to Licensor under Section 8.7(i); (iii) subject to the terms of Section 8.7 (iv), all preclinical and clinical supplies of the applicable Licensed Product(s), and/or Licensed Compound or other Compound Library compounds, in Schering's possession or control; (iv) access to all manufacturing information relating to the Licensed Product, including assigning, sublicensing or otherwise making available, as appropriate, any third party manufacturing agreements relied upon by Schering for the manufacture of Licensed Product, in each case to the extent reasonably necessary for Licensor to manufacture the Licensed Product following such termination; (v) to the extent that termination occurs after the First Commercial Sale of the applicable Licensed Product(s) and subject to the terms of Section 8.5, Licensor shall have the right to purchase Schering's remaining inventory of the applicable Licensed Product(s) and/or Licensed Compound or other Compound Library compounds for sale in the Territory at [ * ] of Schering's fully absorbed manufacturing costs. In addition, in the event of such termination, Schering shall grant to Licensor a paid-up, non-exclusive, non-transferable license in the Territory under any issued patents, or pending patent applications, owned or controlled by Schering which would otherwise be infringed by the manufacture, use or sale of the applicable Licensed Product(s) in the Territory, which license shall be restricted to the sole purpose of making, having made, importing, exporting, using, distributing, marketing, promoting, offering for sale 37 111 and selling such Licensed Product(s). 8.8 Concurrent Termination with the International Agreement. In the event of any termination of the International Agreement by either Licensor or Schering-Plough Ltd. under the provisions of Sections 8.2, 8.3 or 8.4 of the International Agreement, this Agreement shall automatically terminate concurrently under the corresponding Section 8.2, 8.3 or 8.4 of this Agreement. ARTICLE IX MISCELLANEOUS 9.1 Assignment/Change of Control. (a) Assignment. Neither this Agreement nor any or all of the rights and obligations of a Party hereunder shall be assigned, delegated, sold, transferred, sublicensed (except as expressly permitted hereunder) or otherwise disposed of, by operation of law or otherwise, to any third party (other than an Affiliate of an assigning Party under the condition that the assignor remain responsible to the other Party under this Agreement), without the prior written consent of the other Party. Any attempted assignment, delegation, sale, transfer, sublicense or other disposition, by operation of law or otherwise, of this Agreement or of any rights or obligations hereunder contrary to this Section 9.1 shall be a material breach of this Agreement by the attempting Party, and shall be void and without force or effect; provided, however, either Party may, without such consent, assign the Agreement and its rights and obligations hereunder to an Affiliate or in connection with the transfer or sale of all or substantially all of its assets related to the division or the subject business, or in the event of its merger or consolidation or change in control or similar transaction. This Agreement shall be binding upon, and inure to the benefit of, each Party, its Affiliates, and its permitted successors and assigns. Each Party shall be responsible for the compliance by its Affiliates with the terms and conditions of this Agreement. (b) Change of Control. In the event the ownership or control of Licensor is acquired by another pharmaceutical company that has an ongoing development program or commercializes (directly or through any Affiliate) any compound or product for the Primary Indication and/or the Secondary Indication, Licensor shall promptly notify Schering in writing to that effect. Licensor's obligations under Section 2.11 shall not extend to any such compound or product. Effective upon such notice, the JMC shall be disbanded and Schering will assume and thereafter be responsible for all of the rights and obligations of the JMC. Licensor, and following the change of control the acquiring party, shall use best efforts to ensure that such acquiring party does not have any access to any of Schering's Proprietary Information or other proprietary information relating to the development and commercialization of Licensed Product. Such best efforts shall 38 112 include, without limitation: (i) ensuring that the acquiring party does not have access to any such information prior to the change of control of Licensor; and (ii) promptly destroying or returning to Schering all such information in Licensor's possession or control upon completion of the change of control. The acquiring party shall have no rights to use any Licensor Know-How relating to the Primary Indication or the Secondary Indication in connection with the development and commercialization of its own compound or product for the Primary and/or Secondary Indication. All of Schering's obligations under Article II to provide Licensor and/or the JMC with reports or to otherwise keep Licensor informed with respect to the development and commercialization of Licensed Compound, any other compound within the Compound Library and/or Licensed Product shall immediately terminate; provided, however, that Schering shall provide such acquiring party with an annual summary of its activities in developing and commercializing Licensed Product. 9.2 Governing Law. This Agreement shall be governed, interpreted and construed in accordance with the laws of the State of New Jersey, without giving effect to conflict of law principles. All disputes under this Agreement shall be governed by binding arbitration pursuant to the mechanism set forth in Schedule 9.2 attached hereto and incorporated hereby. 9.3 Waiver. Any delay or failure in enforcing a Party's rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such Party's rights to the future enforcement of such rights under this Agreement, nor operate to bar the exercise or enforcement thereof at any time or times thereafter, excepting only as to an express written and signed waiver as to a particular matter for a particular period of time. 9.4 Independent Relationship. Nothing in this Agreement shall be deemed to create an employment, agency, joint venture or partnership relationship between the Parties hereto or any of their respective Affiliates, agents or employees, or any other legal arrangement that would impose liability upon one Party for the act or failure to act of the other Party. Neither Party shall have any power to enter into any contracts or commitments or to incur any liabilities in the name of, or on behalf of, the other Party, or to bind the other Party in any respect whatsoever. 9.5 Export Control. This Agreement is made subject to any restrictions concerning the export of products or technical information from the United States of America which may be imposed upon or related to Licensor or Schering from time to time by the government of the United States of America. Furthermore, Schering agrees that it will not export, directly or indirectly, any technical information acquired from Licensor under this Agreement or any products using such technical information to any country for which the United States government or any agency thereof at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the Department of Commerce or other agency of the 39 113 United States government when required by an applicable statute or regulation. 9.6 Entire Agreement; Amendment. This Agreement, including the Exhibits and Schedules hereto and all the covenants, promises, agreements, warranties, representations, conditions and understandings contained herein sets forth the complete, final and exclusive agreement between the Parties with respect to the subject matter hereof and supersedes and terminates all prior and contemporaneous agreements and understandings between the Parties, whether oral or in writing. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as are set forth herein. No subsequent alteration, amendment, change, waiver or addition to this Agreement shall be binding upon the Parties unless reduced to writing and signed by an authorized officer of each Party. Each Party in deciding to execute this Agreement has not relied on any understanding, agreement, representation or promise by the other Party which is not explicitly set forth herein. 9.7 Notices. Except as provided under Section 4.8 hereof, any notice required or permitted to be given or sent under this Agreement shall be hand delivered or sent by express delivery service or certified or registered mail, postage prepaid, or by facsimile transmission (with written confirmation copy by registered first-class mail) to the Parties at the addresses and facsimile numbers indicated below. If to Licensor, to: AtheroGenics, Inc. 8995 Westside Parkway Alpharetta, Georgia 30004 Attn.: Vice President, Business Development Fax No.: (678) 336-2501 If to Schering to: Schering Corporation 2000 Galloping Hill Road Kenilworth, New Jersey 07033 Attn.: Vice President, Business Development Fax No.: (908) 298-5379 with copies to: Schering Corporation 2000 Galloping Hill Road Kenilworth, New Jersey 07033 Attn.: Law Department - Staff Vice President, Licensing Fax No.: (908) 298-2739 Any such notice shall be deemed to have been received on the date actually received. Either Party may change its address or its facsimile number by giving the other Party written notice, delivered in accordance with this Section. 40 114 9.8 Provisions for Insolvency. (a) Effect on Licenses. All rights and licenses granted under or pursuant to this Agreement by Licensor to Schering are, for all purposes of Section 365(n) of Title 11 of the United States Code (together with its foreign equivalent, the "Insolvency Statute"), licenses of rights to "intellectual property" as defined in the Insolvency Statute. Licensor agrees that Schering, as licensee of such rights under this Agreement shall retain and may fully exercise all of its rights and elections under the Insolvency Statute provided that Schering makes all royalty payments under this Agreement. Licensor agrees during the Term of this Agreement to create and maintain current copies or, if not amenable to copying, detailed descriptions or other appropriate embodiments, to the extent feasible, of all such intellectual property. If a case is commenced by or against Licensor under the Insolvency Statute, Licensor (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, an Insolvency Statute trustee) shall, (i) as Schering may elect in a written request, immediately upon such request: (A) perform all of the obligations provided in this Agreement to be performed by Licensor including, where applicable and without limitation, providing to Schering portions of such intellectual property (including embodiments thereof) held by Licensor and such successors and assigns or otherwise available to them; or (B) provide to Schering all such intellectual property (including all embodiments thereof) held by Licensor and such successors and assigns or otherwise available to them; and (ii) not interfere with the rights of Schering under this Agreement, or any agreement supplemental hereto, to such intellectual property (including such embodiments), including any right to obtain such intellectual property (or such embodiments) from another entity. (b) Rights to Intellectual Property. If an Insolvency Statute case is commenced by or against Licensor, and this Agreement is rejected as provided in the Insolvency Statute, and Schering elects to retain its rights hereunder as provided in the Insolvency Statute, then Licensor (in any capacity, including debtor-in-possession) and its successors and assigns (including, without limitation, an Insolvency Statute trustee) shall provide to Schering all such intellectual property (including all embodiments thereof) held by Licensor and such successors and assigns, or otherwise available to them, immediately upon 41 115 Schering's written request. Whenever Licensor or any of its successors or assigns provides to Schering any of the intellectual property licensed hereunder (or any embodiment thereof) pursuant to this Section 9.8, Schering shall have the right to perform the obligations of Licensor hereunder with respect to such intellectual property, but neither such provision nor such performance by Schering shall release Licensor from any such obligation or liability for failing to perform it. (c) Schering's Rights. All rights, powers and remedies of Schering provided herein are in addition to and not in substitution for any and all other rights, powers and remedies now or hereafter existing at law or in equity (including, without limitation, the Insolvency Statute) in the event of the commencement of an Insolvency Statute case by or against Licensor. Schering, in addition to the rights, power and remedies expressly provided herein, shall be entitled to exercise all other such rights and powers and resort to all other such remedies as may now or hereafter exist at law or in equity (including, without limitation, the Insolvency Statute) in such event. The Parties agree that they intend the foregoing Schering rights to extend to the maximum extent permitted by law, including, without limitation, for purposes of the Insolvency Statute: (i) the right of access to any intellectual property (including all embodiments thereof) of Licensor, or any third party with whom Licensor contracts to perform an obligation of Licensor under this Agreement, and, in the case of the third party, which is necessary for the development, registration, manufacture and marketing of Licensed Compound and/or Licensed Product(s); and (ii) the right to contract directly with any third party described in (i) to complete the contracted work. (d) Deemed Grant of Rights. In the event of any insolvency of Licensor and if any statute and/or regulation in any country in the Territory requires that there be a specific grant or specific clause(s) in order for Schering to obtain the rights and benefits as licensee under this Agreement which are analogous to those rights under Section 365(n) of Title 11 of the United States Code, then this Agreement shall be deemed to include any and all such required grant(s), clause(s) and/or requirements. (e) Security Interests. In addition to any other rights granted to Schering hereunder, with respect to any country in the Territory in which Schering reasonably determines that its rights set forth in this Section 9.8 are nonexistent or inadequate to protect Schering's interests in the licenses granted hereunder, Licensor shall, upon Schering's request, execute a security agreement, or any foreign equivalent, for each country in the Territory, granting Schering a secured interest in all intellectual property licensed to Schering under this Agreement. 42 116 9.9 Force Majeure. Failure of any Party to perform its obligations under this Agreement (except the obligation to make payments when properly due) shall not subject such Party to any liability or place them in breach of any term or condition of this Agreement to the other Party if such failure is due to any cause beyond the reasonable control of such non-performing Party ("force majeure"), unless conclusive evidence to the contrary is provided. Causes of non-performance constituting force majeure shall include, without limitation, acts of God, fire, explosion, flood, drought, war, riot, sabotage, embargo, strikes or other labor trouble, failure in whole or in part of suppliers to deliver on schedule materials, equipment or machinery, interruption of or delay in transportation, a national health emergency or compliance with any order or regulation of any government entity acting with color of right. The Party affected shall promptly notify the other Party of the condition constituting force majeure as defined herein and shall exert reasonable efforts to eliminate, cure and overcome any such causes and to resume performance of its obligations with all possible speed; provided, however, that nothing contained herein shall require any Party to settle on terms unsatisfactory to such Party any strike, lock-out or other labor difficulty, any investigation or proceeding by any public authority, or any litigation by any third party. If a condition constituting force majeure as defined herein exists for more than ninety (90) consecutive days, the Parties shall meet to negotiate a mutually satisfactory resolution to the problem, if practicable. 9.10 Severability. If any provision of this Agreement is declared illegal, invalid or unenforceable by a court having competent jurisdiction, it is mutually agreed that this Agreement shall endure except for the part declared invalid or unenforceable by order of such court; provided, however, that in the event that the terms and conditions of this Agreement are materially altered, the Parties will, in good faith, renegotiate the terms and conditions of this Agreement to reasonably substitute such invalid or unenforceable provisions in light of the intent of this Agreement. 9.11 Counterparts. This Agreement shall become binding when any one or more counterparts hereof, individually or taken together, shall bear the signatures of each of the Parties hereto. This Agreement may be executed in any number of counterparts, each of which shall be an original as against either Party whose signature appears thereon, but all of which taken together shall constitute but one and the same instrument. 9.12 Captions. The captions of this Agreement are solely for the convenience of reference and shall not affect its interpretation. 9.13 Recording. Each Party shall have the right, at any time, to record, register, or otherwise notify this Agreement in appropriate governmental or regulatory offices anywhere in the world, and each Party shall provide reasonable assistance to the other in effecting such recording, registering or notifying. Notwithstanding the foregoing, prior to recording, registering, or otherwise notifying this Agreement, the Party desiring to so record, register, or notify shall provide a copy of all materials to be filed for review, comment, and approval by the other Party, such approval not unreasonably to be withheld or delayed. 43 117 9.14 Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement including, without limitation, any filings with any antitrust agency which may be required. 44 118 IN WITNESS WHEREOF, this Agreement has been executed by the duly authorized representatives of the Parties as of the date set forth below. ATHEROGENICS, INC. SCHERING CORPORATION By: Russell Medford By: David Poorvin ------------------------------ ------------------------------ Title: President & CEO Title: Vice President ------------------------------ ------------------------------ Date: 22 October 1999 Date: 21 October 1999 ------------------------------ ------------------------------ 45 119 SCHEDULE 1.6 Elements of Fully Absorbed Manufacturing Cost of Goods The following expenses are included in manufacturing costs: 1. Direct Materials Materials used in the manufacturing process that are traced directly to the completed product, such as: - Inert raw materials or excipients - Active substances/ingredients - Packaging components such as bottles, caps, labels, etc. 2. Direct Labor The cost of employees engaged in production activities that are directly identifiable with product costs. Excludes supervision, which is included in indirect labor, and production support activities such as inspection, plant and equipment maintenance labor, and material handling personnel. Direct Labor cost includes: - Base pay, overtime, vacation and holidays, illness, personal time with pay and shift differential. - Cost of employee fringe benefits such as health and life insurance, payroll taxes, welfare, pension and profit sharing. 3. Indirect Manufacturing Costs Costs which are ultimately allocated to product based on standard direct labor hours of the operating departments. These costs include: - Indirect Production Labor - salaries of employees engaged in production activities who are not classified as direct labor, including supervision, clerical, etc. - Costs of Direct Labor - employees not utilized for the manufacturing of product such as training, downtime and general duties. - Indirect Materials - supplies and chemicals which are used in the manufacturing process and are not assigned to specific products but are included in manufacturing overhead costs. Includes supplies for which direct assignment to products is not practical. - Utilities - expenses incurred for fuel, electricity and water in providing i 120 power for production and other plant equipment. - Maintenance and Repairs - amount of expense incurred in-house or purchased to provide services for plant maintenance and repairs of facilities and equipment. - Other Services - purchased outside services and rentals such as the cost of security, ground maintenance, etc. - Depreciation - of plant and equipment utilizing the straight-line method of calculation. - Insurance - cost of comprehensive and other insurance necessary for the safeguard of manufacturing plant and equipment. - Taxes - expense incurred for taxes on real and personal property (manufacturing site, buildings and the fixed assets of equipment, furniture and fixtures, etc.). If manufacturing site includes other operations (marketing, R&D, etc.), taxes are allocated to manufacturing on the basis of total real and personal property. - Cost of manufacturing, service departments - such as: (where applicable) - Packaging Engineering - Manufacturing Maintenance - Industrial Engineering - Receiving and Warehousing - Purchasing and Accounting - Production Scheduling - Inventory Management - Plant Materials Management - Central Weigh - Manufacturing Administration - Allocated costs of services provided to manufacturing including: (where applicable) - Cafeteria - Personnel Operations - Health and Safety Services - Division Engineering and Operations Services - Plant Services (housekeeping) - Manufacturing Information Systems - Plant Power - Office of V.P. Manufacturing Various bases are used for allocating these costs to manufacturing operating departments including headcount, square feet, metered utilities use, estimated services rendered, EDP computer hours, etc. ii 121 4. Quality Assurance Costs Direct labor and indirect costs for Quality Assurance departments testing and approving materials used in manufacturing and completed manufacturing batches and finished products. This includes all manufacturing in-process testing and testing of finished materials. Excluded from product costs are QA costs related to research and development, stability testing, and other costs customarily excluded from such Quality Assurance costs. The following expenses are not included in manufacturing costs: a) Inventory Carrying Costs b) Regulatory Affairs Costs c) Pilot plant costs, research batches and other similar costs prior to turnover to manufacturing. These are handled as development costs and expensed to R&D. This excludes commercial goods produced by a research facility. d) Costs incurred by Manufacturing for special projects (e.g. requests by Schering-Plough Research Institute) to establish and certify new production processes, batch sizes and product line improvements, and new vendor certification of equipment and primary materials components. These costs are expensed to R&D. e) Manufacturing start-up costs and initial one-time extraordinary manufacturing costs incurred prior to plant operation and achievement of a normal production activity level. Includes costs of training, testing, qualification/validation of new equipment and facilities and initial, trial batches. These costs are deferred and then amortized to Other Production Costs over five years. f) Significant idle capacity is eliminated from factory overhead and product cost. Idle or excess capacity costs are culled out of the Manufacturing Budget and expensed as a period cost to Other Production Costs. g) Finished goods warehousing, shipping and other distribution costs. These are included in distribution costs. h) Product liability and/or business interruption insurance expenses. i) Intercompany profit. 5. Other Production Costs Three major types of expense are included in the Other Production Costs classification. a) Variances from standard cost the difference between the actual and standard cost of inventory purchased and produced during the period less any portion applicable to on-hand inventory which has been capitalized. (i) Materials purchase price variance (ii) Materials usage/yield variances (iii) Direct labor efficiency/inefficiency - reflects the cost difference between the standard and actual number of direct labor iii 122 hours used for actual production. (iv) Overhead - reflects all other labor and overhead cost variances including activity and spending production related and support. With the exception of overhead, all of the other variances can be identified by product and can be added (if unfavorable) or subtracted (if favorable) to determine actual manufacturing costs of a product. (b) Non-standard costs: Cost of miscellaneous production related operations for which standards are not established due to the nature of the function, such as manufacturing start-up operations, stock conversions and reclaiming (processing and returning to finished goods inventory) of products returned by customers. Also includes miscellaneous expenses incurred in connection with the production of inventory which for various reasons (e.g., cyclical, non-recurring) are not included in standard costs. Examples include excess/idle capacity not included in standards, abnormal waste or rework, experiments, unallocated production costs, tooling and package design costs. Some of the above costs may be incurred for specific products, e.g., rework, experiments, tooling, but the majority are general to all products produced. (c) Inventory adjustments: Consists of charges or credits due to adjustments to inventory concerning revaluation to new standards, stock conversions, capitalized/amortized production variances, shortages or overages, and damage or obsolescence of regular on-hand inventory or products returned by customers. Each of these charges or credits can be identified to a specific product. iv 123 Schedule 1.18 PATENT RIGHTS ATHEROGENICS, INC. U.S. PATENT PORTFOLIO AGI 1067 Updated July 1999
DOCKET MATTER NO. TITLE SERIAL FILING PATENT ISSUE RELATED LAST NAME NO. NO. DATE NO. DATE CASES ACTION - ---------- ---------- ------------------------ ---------- -------- --------- -------- ---------- -------- ATH100 105001 Treatment for 07/969,934 10/30/92 5,380,747 01/10/95 Patented (EMU110) Atherosclerosis and other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH100 105023 Treatment for 08/722,438 10/17/96 5,877,203 3/2/99 FWC of Patented DIV Atherosclerosis and 08/257,821 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH101 105012 Treatment for 08/486,239 06/07/95 5,792,787 8/11/98 CON of Patented DIV CON Atherosclerosis and 08/257,821 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH101 105009 Treatment for 08/477,881 06/07/95 5,783,56 7/21/98 DIV of Patented DIV2 Atherosclerosis and 08/240,858 (ATH101 other Cardiovascular and DIV2) Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105004 Treatment for 08/317,399 10/04/94 5,807,884 9/15/98 CIP of Patented EMU110CIP2 Atherosclerosis and 08/240,858 other Cardiovascular and and CIP of Inflammatory Diseases 07/969,934 - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105008 Treatment for 08/483,335 06/07/95 5,811,449 9/22/98 DIV OF Patented DIV1 Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105028 Treatment for 08/474,530 06/07/95 5,750,351 5/12/98 CON OF Patented CON(1) Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105006 Treatment for 08/484,059 06/07/95 5,773,209 6/30/98 CON of Patented CON(3) Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105011 Treatment for 08/473,272 06/07/95 5,773,231 6/30/98 CON of Patented CON(4) Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH102 105010 Treatment for 08/471,537 06/07/95 5,846,959 12/8/98 CON of Patented CON(5) Atherosclerosis and 08/317,339 other Cardiovascular and Inflammatory Diseases - --------------------------------------------------------------------------------------------------------------------------------- ATH103 105016 Soluble Analogs of Probucol 07/876,557 04/30/92 5,262,439 11/16/93 Patented - --------------------------------------------------------------------------------------------------------------------------------- [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------------------------------------------- [*] [*] [*] [*] [*] [*] - --------------------------------------------------------------------------------------------------------------------------------- [*] [*] [*] [*] [*] [*] - ---------------------------------------------------------------------------------------------------------------------------------
ATHEROGENICS, INC. FOREIGN PATENT PORTFOLIO Updated July 1999
DOCKET TITLE COUNTRY SERIAL NO. FILING PUBLICATION LAST NAME & DATE NO. ACTION - ------ ------------------- ------- ---------- -------- ----------- --------- [*] - ------------------------------------------------------------------------------------------------------ EMU110 Treatment of Hungary P9603041 05/10/95 Published CIP(2) Atherosclerosis and 11/28/97 other Cardiovascular 105005 and Inflammatory Pending Diseases - ------------------------------------------------------------------------------------------------------ [*] - ------------------------------------------------------------------------------------------------------ 105015 - ------------------------------------------------------------------------------------------------------
124 Schedule 2.1(e) Third Party Agreements License Agreement between Emory University and Atherogenics, Inc., dated January 11, 1995. License to the United States Government dated March 27, 1995. Patent Purchase Agreement between Sampath Parthasarathy, Ph.D. and Atherogenics, Inc., dated April 26, 1995. 125 Schedule 2.6(h) Development Work to be Performed by Licensor Pre-clinical: [ * ] 126 SCHEDULE 2.6(i) ADVERSE EVENT REPORTING PROCEDURES FOR PRODUCTS The Parties understand and agree that these procedures are intended to comply with 21 CFR 314.80(b) and 21 CFR 310.305(a) concerning standard written procedures for adverse event reporting in the United States. These procedures may be amended by the Parties at any time, at the request of either Party, to ensure that they fully and accurately reflect the procedures in place for surveillance, receipt, evaluation and reporting of adverse drug experiences by the pharmacovigilance departments of the Parties and comply with applicable laws and regulations in the countries in which the product(s) is marketed and/or is under investigation. In that regard, upon the written request of either Party, the Parties shall meet to renegotiate in good faith, all or some of these procedures. Each Party may request such a meeting no more often than once in any twelve (12) month period. 1. Definitions: (a) An Adverse Event ("AE") is defined as: i) any experience which is adverse, including what are commonly described as adverse or undesirable experiences, adverse events, adverse reactions, side effects, or death due to any cause associated with, or observed in conjunction with the use of a drug, biological product, or device in humans, whether or not considered related to the use of that product: - occurring in the course of the use of a drug, biological product or device, - associated with, or observed in conjunction with product overdose, whether accidental or intentional, - associated with, or observed in conjunction with product abuse, - associated with, or observed in conjunction with product withdrawal ii) Any significant failure of expected pharmacological or biologic therapeutical action (with the exception of in clinical trials). (b) Associated with or related to the use of the drug is defined as: A 127 reasonable possibility exists that the AE was caused by the drug. (c) Expected or unexpected are defined as: i) Expected ("labeled") AE - An AE which is included in the Investigators' Brochure for clinical trials, included in local labeling (e.g., summary of product characteristics) for Marketed Drugs, or in countries with no local labeling, in the Company Core Data Sheet (CCDS). ii) Unexpected ("unlabeled") AE - An AE that does not meet the criteria for an expected AE or an AE which is listed but differs from that event in terms of severity or specificity. (d) IND Holder is defined as: A "Sponsor" as defined in 21 CFR Part 312.2(b) of an investigational new drug in any regulatory jurisdiction, including a holder of a foreign equivalent thereto. (e) Life-threatening is defined as: any adverse drug experience that places the patient, in the view of the initial reporter, at immediate risk of death from the adverse drug experience as it occurred, i.e., it does not include an AE that, had it occurred in more severe form, might have caused death. (f) NDA Holder is defined as: An "Applicant" as defined in 21 CFR Part 314.3(b), for regulatory approval of a Licensed Product in any regulatory jurisdiction, including a holder of a foreign equivalent thereto. (g) Serious or Non-Serious are defined as: i) Any adverse drug experience occurring at any dose that results in any of the following outcomes: Death, a life-threatening adverse drug experience, inpatient hospitalization or prolongation of existing hospitalization, a persistent or significant disability/incapacity, or a congenital anomaly/birth defect. Important medical events that may not result in death, be life-threatening, or require hospitalization may be considered serious when, based upon appropriate medical judgment, they may jeopardize the patient or subject and may require medical or surgical intervention to prevent one of the outcomes listed in this definition. Examples of such medical events include allergic bronchospasm requiring intensive treatment in an emergency room or at home, blood dyscrasias or convulsions that do not result in inpatient hospitalization, or the development of drug dependency or drug abuse. 128 ii) A Non-serious AE is any AE which does not meet the criteria for a serious AE. (h) Not associated or unrelated to the use of the drug means it does not meet the definition of "associated." 2. Capitalized terms not defined in this Appendix shall have the meaning assigned thereto in the Agreement. 3. With respect to all Licensed Products: All initial reports (oral or written) for any and all serious AEs as defined above which become known to either Party (other than from disclosure by or on behalf of the other Party) must be communicated by telephone, telefax or electronically directly to the other Party, NDA Holder, and/or IND Holder (individually and collectively referred to as "Holders") within five (5) calendar days of receipt of the information. Written confirmation of the Serious AE received by the Party should be sent to the other Party and the Holders as soon as it becomes available, but in any event within two (2) business days of initial report of the Serious AE by such Party. All Parties and Holders should exchange Medwatch and/or CIOMS forms and other health authority reports within two (2) business days of submission to any regulatory agency. All initial reports and follow-up information received for all non-serious AEs for marketed Licensed Products which become known to a Party (other than from disclosure by or on behalf of the other Party) must be communicated in writing, by telefax or electronically to the other Party and all Holders on a monthly basis, on Medwatch or CIOMs forms (where possible). All follow-up on any AE reports forwarded to either Party by FDA must be submitted to FDA. Each Party shall coordinate and cooperate with the other whenever practicable to prepare a single written report regarding all Serious AEs, provided, however, that neither Party shall be obligated to delay reporting or any AE in violation of applicable law or regulations regarding the reporting of adverse events. 4. The Parties further agree that: (a) a written report for AEs for animal studies which suggest a potential significant risk for humans shall be forwarded to the other Party within two (2) business days of receipt by the Party making the report, 129 (b) each Party will give the other Party a print-out or computer disk of all AEs reported to it relating to Products within the preceding 365 days/calendar year, within thirty (30) days of receipt of a request from the other Party; (c) upon request of a Party, the other Party shall make available its AE records relating to Licensed Products (including computer disks) for viewing and copying by the other Party, (d) disclosure of information hereunder by a Party to the other Party shall continue as long as either Party continues to clinically test or market product(s) containing Licensed Products or holds an open IND, NDA or foreign equivalent thereto. (e) all written regulatory reports, including periodic NDA, annual IND, safety updates, or foreign equivalents thereto, etc. should be sent by a Party to the other Party within 2 business days of submission to the appropriate regulatory agency. The Parties shall agree on a procedure for preparing these reports (e.g. electronic mail, facsimile transmission, overnight service, etc.). 5. Each Party shall diligently undertake the following further obligations where both Parties are or will be commercializing products hereunder and/or performing clinical trials with respect to Licensed Product: (a) to immediately consult with the other Party, with respect to the investigation and handling of any serious AE disclosed to it by the other Party or by a third Party, including government agencies, and to allow the other Party to review the serious AE and to participate in the follow-up investigation; (b) to immediately advise the other Party of any Product safety communication received from a health authority and consult with the other Party with respect to any proposed change to product warnings, labeling or an Investigator's Brochure involving safety issues, including, but not limited to, safety issues agreed to by the Parties; (c) to diligently handle in a timely manner the investigation and resolution of each AE reported to it; and (d) to provide the other Party reasonable annual audit rights of its AE reporting system and documentation, upon prior notice, during normal business hours, at the expense of the auditing Party and under customary confidentiality obligations. (e) to meet in a timely fashion from time to time as may be reasonably required to implement the adverse event reporting and consultation procedures described in this Appendix, including identification of those individuals in each Party's pharmacovigilance group who will be responsible for reporting to and receiving AE information from the other Party, and the development of a written standard operating 130 procedure with respect to adverse event reporting responsibilities, including reporting responsibilities to investigators; (f) where possible, to transmit all data electronically; (g) to report to each other any addenda, revisions or changes to this Agreement (e.g., change in territories, local regulations, addition of new licensors/licensees to the agreement, etc.) which might alter the adverse event reporting responsibilities hereunder; (h) to utilize English as the language of communication and data exchange between the Parties; (i) to develop a system of exchange of documents and information in the event that the Agreement involves more than two Holders. 131 Schedule 3.2 DEFINITION OF SUCCESSFUL COMPLETION CART STUDY: Schering recognizes that Licensor's Phase II Study 027, commonly referred to as the CART Study, is pivotal to the determination of proof-of-activity in man. Determination by the JMC of "successful completion" of this study will be based upon the study achieving all of the following three points, as reflected in the final study report: [ * ] 132 Schedule 6.2(d) GOVERNMENT RIGHTS Pursuant to that certain Assignment agreement between Licensor and Sampath Parthasarathy dated May 2, 1995, U.S. Patent No. 5,262,439 is subject to a license of rights to the United States Government, as specifically set forth in the License to the United States Government attached hereto as Exhibit A. 133 Schedule 6.2(k) Other VCAM-1 Inhibitors [ * ] 134 Schedule 9.2 ARBITRATION PROVISIONS (a) Scope. Subject to and in accordance with the terms of this Agreement and this Schedule 9.2, all differences, disputes, claims or controversies arising out of or in any way connected or related to this Agreement, whether arising before or after the expiration of the Term of this Agreement, and including, without limitation, its negotiation, execution, delivery, enforceability, performance, breach, discharge, interpretation and construction, existence, validity and any damages resulting therefrom or the rights, privileges, duties and obligations of the Parties under or in relation to this Agreement (including any dispute as to whether an issue is arbitrable) shall be referred to binding arbitration in accordance with the rules of the American Arbitration Association, as in effect at the time of the arbitration. (b) Parties to Arbitration. For the purposes of each arbitration under this Agreement, Schering shall constitute one party to the arbitration and Licensor shall constitute the other party to the arbitration. (c) Notice of Arbitration. A Party requesting arbitration hereunder shall give a notice of arbitration to the other Party containing a concise description of the matter submitted for arbitration, including references to the relevant provisions of the Agreement and a proposed solution (a "Notice of Arbitration"). Notice of Arbitration shall be delivered to the other Party in accordance with Section 9.7 of the Agreement. (d) Response. The non-requesting Party must respond in writing within forty-five (45) days of receiving a Notice of Arbitration with an explanation, including references to the relevant provisions of the Agreement and a response to the proposed solution and suggested time frame for action. The non-requesting Party may add additional issues to be resolved. (e) Meeting. Within fifteen (15) days of receipt of the response from the non-requesting Party pursuant to Paragraph (d), the Parties shall meet and discuss in good faith options for resolving the dispute. The requesting Party must initiate the scheduling of this resolution meeting. Each Party shall make available appropriate personnel to meet and confer with the other Party during such fifteen-(15) day period. (f) Selection of Arbitrator. Any and all disputes that cannot be resolved pursuant to Paragraphs (c), (d) and (e) shall be submitted to an arbitrator (the "Arbitrator") to be selected by mutual agreement of the Parties. The Arbitrator shall be a retired judge of a state or federal court, to be chosen from a list of such retired judges to be prepared jointly by the Parties, with each Party entitled to submit the names of three such retired judges for inclusion in the list. No Arbitrator appointed or selected hereunder shall be an employee, director or shareholder of, or otherwise have any current or previous relationship with, any Party or its respective Affiliates. If the Parties fail to 135 agree on the selection of the Arbitrator, the Arbitrator shall be designated by a judge of the Federal District Court in New York upon application by either Party. (g) Powers of Arbitrator. The Arbitrator may determine all questions of law and jurisdiction (including questions as to whether a dispute is arbitrable) and all matters of procedure relating to the arbitration. The Arbitrator shall have the right to grant legal and equitable relief (including injunctive relief) and to award costs (including reasonable legal fees and costs of arbitration) and interest. Nothing contained herein shall be construed to permit the Arbitrator to award punitive, exemplary or any similar damages. (h) Arbitration Procedure. In the event that Schering is the Party requesting arbitration, the arbitration shall take place in the State of Georgia, unless otherwise agreed by the Parties, at such place and time as the Arbitrator may fix for the purpose of hearing the evidence and representations that the Parties may present. In the event that Licensor is the Party requesting arbitration, the arbitration shall take place in the State of New Jersey, unless otherwise agreed by the Parties, at such place and time as the Arbitrator may fix for the purpose of hearing the evidence and representations that the Parties may present. The arbitration proceedings shall be conducted in the English language. The law applicable to the arbitration shall be the law of the State of New Jersey. No later than twenty (20) business days after hearing the representations and evidence of the Parties, the Arbitrator shall make its determination in writing and deliver one copy to each of the Parties. (i) Discovery and Hearing. During the meeting referred to in Paragraph (e), the Parties shall negotiate in good faith the scope and schedule of discovery, relating to depositions, document production and other discovery devices, taking into account the nature of the dispute submitted for resolution. If the Parties are unable to reach agreement as to the scope and schedule of discovery, the Arbitrator may order such discovery as it deems necessary. To the extent practicable taking into account the nature of the dispute submitted for resolution, such discovery shall be completed within sixty (60) days from the date of the selection of the Arbitrator. At the hearing, which shall commence within twenty (20) days after completion of discovery unless the Arbitrator otherwise orders, the Parties may present testimony (either live witness or deposition), subject to cross-examination, and documentary evidence. To the extent practicable taking into account the nature of the dispute submitted for resolution and the availability of the Arbitrator, the hearing shall be conducted over a period not to exceed thirty (30) consecutive business days, with each Party entitled to approximately half of the allotted time unless otherwise ordered by the Arbitrator. Each Party shall have sole discretion with regard to the admissibility of any evidence and all other matters relating to the conduct of the hearing. (j) Witness Lists. At least twenty (20) business days prior to the date set for the hearing, each Party shall submit to the other Party and the Arbitrator a list of all documents on which such Party intends to rely in any oral or written presentation to the Arbitrator and a list of all witnesses, if any, such Party intends to call at such hearing and 136 a brief summary of each witness' testimony. At least five (5) business days prior to the hearing, each Party must submit to the Arbitrator and serve on each other Party a proposed findings of fact and conclusions of law on each issue to be resolved. Following the close of hearings, the Parties shall each submit such post-hearing briefs to the Arbitrator addressing the evidence and issues to be resolved as may be required or permitted by the Arbitrator. (k) Confidentiality. The arbitration proceedings shall be confidential and, except as required by law, no Party shall make, or instruct the Arbitrator to make, any public announcement with respect to the proceedings or decision of the Arbitrator without the prior written consent of the other Party. The existence of any dispute submitted to arbitration and the award of the Arbitrator shall be kept in confidence by the Parties and the Arbitrator, except as required in connection with the enforcement of such award or as otherwise required by law. (l) Awards and Appeal. Subject to the provisions of this Schedule 9.2, the decision of the Arbitrator shall be final and binding upon the Parties in respect of all matters relating to the arbitration, the conduct of the Parties during the proceedings, and the final determination of the issues in the arbitration. There shall be no appeal from the final determination of the Arbitrator to any court, except in the case of fraud or bad faith on the part of the Arbitrator or any Party to the arbitration proceeding in connection with the conduct of such proceedings. Judgment upon any award rendered by the Arbitrator may be entered in any court having jurisdiction thereof. (m) Costs of Arbitration. The costs of any arbitration hereunder shall be borne by the Parties in the manner specified by the Arbitrator in its determination. (n) Performance of the Agreement. During the pendency of the arbitration proceedings, the matter which is the subject of such arbitration proceedings shall be performed by the Parties (A) in the manner determined by Schering in its sole discretion if it is a matter relating to Schering's development of Licensed Product, and (B) in the manner determined by Licensor in its sole discretion if it is a matter involving payment of License Fees under Section 3.1 and royalty payments under Sections 3.2 or 3.3. Notwithstanding the foregoing, in the event that Schering makes payments pursuant to Sections 3.1, 3.2 or 3.3 and it is subsequently determined by the Arbitrator that Schering was not required to make such payment(s) then Licensor shall promptly repay to Schering all such payments. Further notwithstanding the foregoing, the time periods set forth in Section 2.6(b) of the Agreement shall be suspended during the pendency of the arbitration proceedings. For purposes of this Paragraph (n) the term "pendency of the arbitration proceeding" shall mean the period starting on the date on which arbitration proceedings are commenced by a Party in accordance with Paragraph (c) of this Schedule 9.2 and ending on the date on which the Arbitrator delivers its final determination in writing to the Parties. EX-10.02 5 ex10-02.txt EXCLUSIVE LICENSE AGREEMENTS 1 Exhibit 10.02 EXCLUSIVE LICENSE AGREEMENT between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA and ATHEROGENICS INC. for [*] [*] Certain confidential information contained in this document, marked by an asterisk within brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. 2 TABLE OF CONTENTS ARTICLE NO. PAGE - ----------- ---- 1. DEFINITIONS 2. PERIOD OF PATENT EXCLUSIVE GRANT 3. SUBLICENSES 4. PAYMENT TERMS 5. LICENSE-ISSUE FEE 6. MILESTONE PAYMENTS 7. EARNED ROYALTIES AND MINIMUM ANNUAL ROYALTIES 8. DUE DILIGENCE 9. PROGRESS AND ROYALTY REPORTS 10. BOOKS AND RECORDS 11. LIFE OF THE AGREEMENT 12. TERMINATION BY THE REGENTS 13. TERMINATION BY LICENSEE 14. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION 15. USE OF NAMES AND TRADEMARKS 16. LIMITED WARRANTY 17. PATENT PROSECUTION AND MAINTENANCE 18. PATENT MARKING 19. PATENT INFRINGEMENT i 3 20. INDEMNIFICATION 21. NOTICES 22. ASSIGNABILITY 23. NO WAIVER 24. FAILURE TO PERFORM 25. GOVERNING LAWS 26. PREFERENCE FOR UNITED STATES INDUSTRY 27. GOVERNMENTAL APPROVAL OR REGISTRATION 28. EXPERT CONTROL LAWS 29. SECRECY 30. MISCELLANEOUS ii 4 EXCLUSIVE LICENSE AGREEMENT This License Agreement (the "Agreement") is made effective this 17th day of July, 1998 (the "Effective Date") between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a California corporation having its statewide administrative offices at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550, ("The Regents") represented by the University of California, San Diego campus having its offices at 9500 Gilman Drive, La Jolla, CA 92093-0910, and AtheroGenics Inc. ("Licensee"), a Georgia corporation having offices at 3065 Northwoods Circle, Norcross, GA 30071. WHEREAS 1. Certain inventions, generally characterized as [*] and officially recorded in[*] (collectively the "Invention"), were made in the course of research at the University of California, San Diego by Dr. Joseph Witztum and others and are covered by Regents' Patent Rights as defined herein; 2. The development of the Invention was sponsored in part by the National Institutes of Health and as a consequence this license is subject to overriding obligations to the Federal Government under 35 U.S.C. 200-212 and applicable regulations; 3. Dr. Witztum and the other inventors are employees of The Regents. The Regents have asked Dr. Witztum and his co-inventors to assign their rights to The Regents; 4. Licensee has evaluated the Invention under a Secrecy Agreement with The Regents [*], and has communicated its evaluation to The Regents; 5. Licensee and The Regents have executed a Letter of Intent dated June 27, 1997, that was amended on December 24, 1997 to extend the "Negotiation Period," as defined therein, to March 1, 1998; 6. Licensee wishes to obtain rights from The Regents for the commercial development, use, and sale of products from the Invention, and The Regents is willing to grant those rights so that the Invention may be developed to its fullest and the benefits enjoyed by the general public; and 7. Licensee is currently a "small business firm" as defined in 15 U.S.C. 632; 8. The parties recognize and agree that royalties due under this Agreement will be paid on both pending patent applications and issued patents; 1 5 In view of the foregoing, the parties agree: 1. DEFINITIONS 1.1 "Regents' Patent Rights" means any subject matter claimed in or covered by any of the following: Issued or Pending U.S. Patent Applications, Provisional Applications and applications in preparation related to inventions and as disclosed to Licensee as entitled [*] and assigned to The Regents; and continuing applications thereof including divisions and substitutions but excluding continuation-in-part applications (except continuations-in-part applications supported by the original application); and patents issuing on said applications including reissues, reexaminations and extensions; and any corresponding foreign applications or patents. 1.2 "Licensed Product" means any material that is either covered by Regents' Patent Rights, that is produced by the Licensed Method, or that the use of which would constitute, but for the license granted to Licensee under this Agreement, an infringement of any pending or issued claim within Regents' Patent Rights, including disease indications other than those set forth in the Invention. 1.3 "Licensed Method" means any method that is covered by Regents' Patent Rights, the use of which would constitute, but for the license granted to Licensee under this Agreement, an infringement of any pending or issued claim within Regents' Patent Rights. 1.4 "Net Sales" means the total of the gross invoice prices of Licensed Products sold by Licensee, an affiliate, or a sublicensee, less the sum of the following actual and customary deductions where applicable: cash, trade, or quantity discounts; sales, use, tariff, import/export duties or other excise taxes imposed on particular sales; transportation charges and allowances; or credits to customers because of rejections or returns. For purposes of calculating Net Sales, transfers to an affiliate or sublicensee for end use by the affiliate or sublicensee will be treated as sales at list price. 1.5 "Affiliate" means any corporation or other business entity in which Licensee owns or controls, directly or indirectly, at least fifty percent (50%) of the outstanding stock or other voting rights entitled to elect directors, or in which Licensee is owned or controlled directly or indirectly by at least 50% of the outstanding stock or other voting rights entitled to elect directors, but in any country where the local law does not permit foreign equity participation of at least 50%, then an "Affiliate" includes any company in which Licensee owns or controls or is owned or controlled by, directly or indirectly, the maximum percentage of outstanding stock or voting rights permitted by local law. 1.6 "Field of Use" means all diagnostic and therapeutic use of the Invention for human or veterinary application, including, but not limited to, use in atherosclerosis and other cardiovascular and antiinflammatory diseases. 2 6 1.7 "Know How" means all technical information and know-how, whether or not patented, which is invented, developed, acquired and owned or licensed by The Regents (other than from Licensee or its Affiliates or sublicensees) prior to and during the term of this Agreement and which relate to the Invention; excluding, however, any such item, information and data licensed by The Regents with respect to which The Regents do not have a right to sublicense to third parties. 2. PERIOD OF PATENT EXCLUSIVE GRANT 2.1 Subject to the limitations set forth in this Agreement, The Regents grant to Licensee a world-wide license under Regents' Patent Rights and Know How to make, have made, use, import and sell Licensed Products and to practice Licensed Methods for the life of the longest-lived patent covering the Invention described herein. 2.2 Except as otherwise provided in this Agreement, the license granted in Paragraph 2.1 is exclusive for the life of the Agreement. 2.3 The license granted in Paragraphs 2.1 and 2.2 is subject to all the applicable provisions of any license to the United States Government executed by The Regents and is subject to the overriding obligations to the U.S. Government under 35 U.S.C. 200-212 and applicable governmental implementing regulations. 2.4 The licenses granted in Paragraphs 2.1 and 2.2 are limited to methods and products within the Field of Use. Licensee has no license under this Agreement for other methods and products not described in Regents Patent Rights, and know-how pertaining to the Invention. 2.5 The Regents reserves the right to use the Invention, know-how and associated technology for educational and research purposes. 3. SUBLICENSES 3.1 The Regents also grant to Licensee the right to issue sublicenses to third parties to make, have made, use, import and sell Licensed Products and to practice Licensed Method, as long as Licensee has current exclusive rights thereto under this Agreement. To the extent applicable, sublicenses must include all of the rights of and obligations due to The Regents (and, if applicable, the United States Government) and contained in this Agreement. 3.2 Licensee shall promptly provide The Regents with a copy of each sublicense issued; use diligent efforts to collect and guarantee payment of all payments due The Regents from sublicensees; and summarize and deliver all reports due The Regents from sublicensees. 3 7 3.3 Upon termination of this Agreement for any reason, The Regents, at its sole discretion, shall determine whether Licensee shall cancel or assign to The Regents any and all sublicenses. 3.4 Licensee shall pay The Regents [*] of each non-royalty payment received by Licensee from each sublicensee of the Licensed Products, unless the Licensed Product contains (i) any know-how added by Licensee, in which case the foregoing percentage for non-royalty payments shall be [*] or (ii) any antibody or a material component in addition to know-how added by Licensee, in which case the foregoing percentage for non-royalty payment shall be [*] or (iii) more than one antibody or material component in addition to know-how added by Licensee, in which case the foregoing percentage for non-royalty payments shall be [*] (collectively, Licensed Products meeting the conditions of (i) (ii) or (iii) are referred to hereafter as a "Value Added Licensed Product"). 3.5 Licensee shall pay The Regents [*] of each earned royalty payment received by Licensee, unless the Licensed Product is determined to be a "Value Added Licensed Product" as defined in this Section 3.4, in which case, Licensee's royalty payment to The Regents shall be [*] of each royalty payment received from each sublicensee. Licensee may at its sole discretion select the alternative royalty payment schedule described in Section 7.5. 3.6 In the event that circumstances relating to the sublicensing of the Licensed Products arise that make the sublicensing of the Licensed Product unfeasible or otherwise require consultations between the parties, the parties agree to discuss these circumstances and negotiate in good faith any amendments to this Agreement that may be mutually agreeable to the parties hereto. 4. PAYMENT TERMS 4.1 Paragraphs 1.1, 1.2, and 1.3 define Regents' Patent Rights, Licensed Products and Licensed Methods so that royalties are payable on products and methods covered by both pending patent applications and issued patents. Royalties will accrue in each country for the duration of Regents' Rights in that country and are payable to The Regents when Licensee receives payment from a third party. 4.2 Licensee shall pay earned royalties quarterly within ninety (90) days after the end of the applicable quarter of each calendar year in which such royalties are earned. 4.3 All monies due The Regents are payable in United States dollars. When Licensed Products are sold for monies other than United States dollars, Licensee shall first determine the earned royalty in the currency of the country in which Licensed Products were sold and then convert the amount into equivalent United States funds, using the exchange rate quoted in the Wall Street Journal on the date payment was received by the licensee. 4 8 4.4 Royalties earned on sales occurring in any country outside the United States may not be reduced by any taxes, fees, or other charges imposed by the government of such country on the payment of royalty income. Licensee is also responsible for all bank transfer charges. Notwithstanding this, all payments made by Licensee in fulfillment of The Regents' tax liability in any particular country will be credited against earned royalties or fees due The Regents for that county. 4.5 If at any time legal restrictions prevent the remittance of royalties within 180 days by Licensee from any country where a Licensed Product is, sold, Licensee shall convert the amount owed to The Regents into United States funds and shall pay The Regents directly from its U.S. source of funds for as long as the legal restrictions apply. 4.6 If any patent or patent claim conferring exclusive marketing or manufacturing rights to License under this Agreement within The Regents' Patent Rights is held invalid in a decision by any court of competent jurisdiction, all royalty payments will be held in an interest-bearing escrow account established by the parties until a final decision is made by a court of competent jurisdiction and last resort and from which no appeal has or can be taken, all obligation to pay royalties based on that patent or claim or any claim patently indistinct therefrom will cease as of the date of final decision. Licensee will not, however, be relieved from paying any royalties that accrued and where received before the final decision or that are based on another patent or claim not involved in the final decision, or that are based on The Regents' property rights. 4.7 No royalties may be collected or paid on Licensed Products sold to the account of the U.S. Government, any agency thereof, state or domestic municipal government as provided for in the License to the Government. 4.8 In the event payments, rebilling or fees are not received by The Regents when due, Licensee shall pay to The Regents interest charges at a rate of [*] per annum. Interest is calculated from the date payment was due until actually received by The Regents. 5. LICENSE-ISSUE FEE 5.1 Licensee shall pay to The Regents a license-issue fee equal to the higher of [*] of the patent costs reimbursable to The Regents under the Letter of Intent, said license-issue fee to be paid on the first anniversary of the execution of this License Agreement. Patent costs reimbursed to The Regents within 30 days after the signing of this License Agreement shall not be used in the license-issue fee calculation. This fee is [*]. 5 9 6. MILESTONE PAYMENTS Licensee shall pay to The Regents a one-time royalty in the form of milestone payments in the following amounts within thirty (30) days following the achievement of the specified events for therapeutic applications only: Filing of the 1st IND (one time, any indication): [*] Completing 1st Phase II, including Final Report submission (one time, any indication): [*] Filing of a PLA document (all indications each time): [*] Licensee shall pay to The Regents a one-time royalty in the form of a milestone payment in the following amount within thirty (30) days following the achievement of the specified event for diagnostic applications only: Filing of a 510(k) (or similar): [*] (each time) All Milestone Payments made to The Regents prior to First Market Introduction shall be charged against royalties on sales paid to The Regents. Thereafter, milestone payments shall not be reimbursed to Licensee by The Regents. 7. EARNED ROYALTIES AND MINIMUM ANNUAL ROYALTIES 7.1 Unless provided to the contrary in Section 7.2 and 7.3, Licensee shall pay to The Regents a royalty on worldwide Net Sales according to the following schedule for therapeutic applications only: [*] on sales of less than [*] [*] on sales greater than [*], but less than [*] [*] on sales greater than [*], but less than [*] [*] on sales greater than [*], but less than [*] [*] on sales greater than [*], but less than [*] [*] on sales greater than [*], but less than [*] [*] on sales greater than [*]. Unless provided to the contrary in Sections 7.2, Licensee shall pay to The Regents a royalty of on worldwide Net Sales according to the following schedule for diagnostic applications only: - - [*] on sales of Licensed Product in which the Licensed Method is supplemented by monoclonal antibodies which are not included in The Regents Patent Rights; - - [*] on sales of Licensed Product in which the monoclonal antibodies of Licensed Method are utilized without modification or supplementation by Licensee; 6 10 - - [*] on all other sales of Licensed Product. 7.2 If Licensee determines after consultation with The Regents that it is required to pay royalties or other fees to any third party because the manufacture, use, offer for sale, importation, or sale of a Licensed Method or a Licensed Product would otherwise be likely to infringe any patent or other intellectual property rights of such third party in a given country ("Third Party Royalties"), Licensee may deduct from royalties thereafter due to The Regents pursuant to this Agreement with respect to the Net Sales of such Licensed Method or Licensed Product in such country up to [*] of the Third Party Royalties. If the sum of the royalties paid hereunder and Third Party Royalties for a given Licensed Product or a Licensed Method in a given country exceeds, at any time, more than [*] on a therapeutic product or [*] on a diagnostic product of the Net Sales, then upon Licensee's request, The Regents and Licensee agree to negotiate in good faith in an effort to agree on a reduction in the royalties payable hereunder to The Regents for such Licensed Product or Licensed Method in such country. In the event the parties are unable to agree to such reduction after a reasonable period of time, not to exceed thirty (30) days, either party may request that the issue be arbitrated and the issue will be submitted to final and binding arbitration in accordance with the rules of the American Arbitration Association. 7.3 Licensee may credit solely against all payments to The Regents, including, without limitation, the royalties, accruing under this Agreement all reasonable costs incurred by Licensee after the date hereof in connection with any litigation, interference, opposition, or other action pertaining to the validity, enforceability, allowability or subsistence of the Regents' Patent Rights or whether Licensee's practice of the Regents' Patent Rights infringes a third party patent. 7.4 Licensee shall pay to The Regents a minimum annual royalty of [*] for the life of Regents' Patent Rights, beginning with the year of the first commercial sale of Licensed Product, but no later than the fifth-year anniversary of the Effective Date. For the first year of commercial sales, Licensee's obligation to pay the minimum annual royalty will be pro-rated for the number of months remaining in that calendar year when commercial sales commence and will be due the following March 31, to allow for crediting of the pro-rated year's earned royalties. For subsequent years, the minimum annual royalty will be paid to The Regents by March 31 of each year and will be credited against the earned royalty due for the calendar year in which the minimum payment was made. 7.5 Licensee shall have the right to diligently sublicense the Invention, the Licensed Products and the Licensed Method, including alternate indications thereof, without restriction. In the case of a sublicense, Licensee shall pay The Regents either of the following sublicense schedule as determined by Licensee at its sole discretion: 7 11 i) [*] of each payment received from the sublicensee for Licensed Products that are not Value Added Licensed Products and [*] of each payment received from the sublicensee for Value Added Licensed Products, or ii) Royalties on worldwide net sales in the amount set forth in Sections 7.1. In either schedule, payment shall be made to The Regents within ninety (90) days of sublicense payment being received by Licensee, except as provided for in Sections 3.1, 3.2 and 3.3. 8. DUE DILIGENCE 8.1 Licensee, on execution of this Agreement, shall diligently proceed with the development, manufacture and sale of Licensed Products and shall earnestly and diligently endeavor to market the same within a reasonable time after execution of this Agreement and in quantities sufficient to meet market demands. The Regents expect that the first sale of Licensed Products shall occur within twelve (12) years of the execution date of this Agreement, or within eleven (11) years of the payment of the License Issue Fee, whichever is the sooner, unless the first sale of Licensed Products is delayed by the process of regulatory approval by federal, state or foreign national agencies. 8.2 Licensee shall endeavor to obtain all necessary governmental approvals for the manufacture, use and sale of Licensed Products, or shall certify to The Regents in writing that none are needed. 8.3 Licensee shall: 8.3.1 submit a PMA (or 510(k)) covering Licensed Products to the United States FDA within ten (10) years from the Effective Date of this Agreement. 8.3.2 market Licensed Products in the United States within one year of receiving approval of the PLA for such Licensed Products from the FDA; and 8.3.4 reasonably fill the market demand for Licensed Products following commencement of marketing at any time during the exclusive period of this Agreement. 8.4 If the Licensee is unable to perform any of the above provisions, then The Regents has the right and option to either terminate this Agreement or reduce Licensee's exclusive license to a nonexclusive license. This right, if exercised by The Regents, supersedes the rights granted in Article 2 (GRANT). 8 12 8.5 In addition to the obligations set forth above, Licensee shall spend directly or through partners an aggregate of not less than [*] for the development of Licensed Products during the first [*] years of this Agreement. 9. PROGRESS AND ROYALTY REPORTS 9.1 Beginning December 31, 1998 and semi-annually thereafter, Licensee shall submit to The Regents a progress report covering Licensee's (and any Affiliate or sublicensee's) activities related to the development and testing of all Licensed Products and the obtaining of the governmental approvals necessary for marketing. Progress reports are required for each Licensed Product until the first commercial sale of that Licensed Product occurs in the United States. 9.2 Progress reports submitted under section 9.1 should include, but are not limited to, the following topics related to the Licensed Product and Licensed Method: - summary of work completed - key scientific discoveries - summary of work in progress - current schedule of anticipated events or milestones - market plans for introduction of Licensed Products, and - a Summary of resources (dollar value) spent in the reporting period. 9.3 Licensee has a continuing responsibility to keep The Regents informed of the small business entity status (as defined by the United States Patent and Trademark Office) of itself and its sublicensees and Affiliates. 9.4 Licensee shall report to The Regents in its immediately subsequent progress and royalty report the date of first commercial sale of a Licensed Product in each country. 9.5 After the first commercial sale of a Licensed Product anywhere in the world, Licensee shall make quarterly royalty reports to The Regents on or before the end of each calendar quarter of each calendar year for the preceding calendar quarter. Each royalty report will cover Licensee's preceding calendar quarter and will show (a) the gross sales and Net Annual Sales of Licensed Products sold during the most recently completed calendar quarter; (b) the number of each type of Licensed Product sold; (c) the royalties, in U.S. dollars, payable with respect to sales of Licensed Products; (d) the method used to calculate the royalty; and (e) the exchange rates used. 9.6 If no sales of Licensed Products have been made during any reporting period occurring after the first commercial sale of a Licensed Product anywhere in the world by Licensee, a statement to this effect is required. 9 13 10. BOOKS AND RECORDS 10.1 Licensee shall keep accurate books and records showing all Licensed Products manufactured, used, and/or sold under the terms of this Agreement. Books and records must be preserved for at least five (5) years from the date of the royalty payment to which they pertain. 10.2 Books and records must be open to inspection by representatives or agents of The Regents at reasonable times. The Regents shall bear the fees and expenses of examination but if an error in royalties of more than [*] of the total royalties due for any year is discovered in any examination then Licensee shall bear the fees and expenses of that examination. 11. LIFE OF THE AGREEMENT 11.1 Unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of this Agreement, this Agreement will be in force from the Effective Date until the last-to-expire patent licensed under this Agreement; or for twenty (20) years from the date of this Agreement if no patent issues; or until the last patent application licensed under this Agreement is abandoned and no patent in Regent's Patent Rights ever issues, whichever occurs first. By mutual agreement, the Agreement can be extended until the expiration date of the last-to-expire patent licensed under this Agreement; or until the last patent application licensed under this Agreement is abandoned and no patent in Regents' Patent Rights ever issues. Upon expiration of this Agreement, Licensee shall have a perpetual royalty free license to use Regents' Patent Rights and Know How to make, have made, use, import and sell Licensed Products and to practice Licensed Methods. 11.2 Any termination of this Agreement will not affect the rights and obligations set forth in the following Articles: Article 10 Books and Records Article 14 Disposition of Licensed Products on Hand on Termination Article 15 Use of Names and Trademarks Article 20 Indemnification Article 24 Failure to Perform Article 29 Secrecy 12. TERMINATION BY THE REGENTS If Licensee fails to perform or violates any material term of this Agreement, then The Regents may give written notice of default (Notice of Default) to Licensee. If Licensee fails to repair the default within sixty (60) days of the effective date of Notice of Default, The Regents may terminate this Agreement and its licenses by a second written notice (Notice of Termination). If a Notice of Termination is sent to Licensee, this Agreement will automatically terminate on the effective date of that notice. Termination will not relieve Licensee of its 10 14 obligation to pay any fees owing at the time of termination and will not impair any accrued right of The Regents. These notices are subject to Article 19 (Notices). 13. TERMINATION BY LICENSEE 13.1 Licensee has the right at any time to terminate this Agreement in whole or as to any portion of Regents' Patent Rights by given notice in writing to The Regents. Notice of termination will be subject to Article 19 (Notices) and termination of this Agreement will be effective sixty (60) days from the effective date of notice. 13.2 Any termination under the above paragraph does not relieve Licensee of any obligation or liability accrued under this Agreement prior to termination or rescind any payment made to The Regents or anything done by Licensee prior to the time termination becomes effective. Termination does not affect in any manner any rights of The Regents arising under this Agreement prior to termination. 14. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION 15. USE OF NAMES AND TRADEMARKS Nothing contained in this Agreement confers any right use in advertising, publicity, or other promotional activities any name, trade name, trademark, or other designation of either party hereto (including contraction, abbreviation or simulation of any of the foregoing). Unless required by law, the use by Licensee of the name, "The Regents" or the name of any campus of the University of California is prohibited. 16. LIMITED WARRANTY 16.1 The Regents warrants to Licensee that it has the lawful right to grant this license. 16.2 This license and the associated Invention are provided WITHOUT WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT THE LICENSED PRODUCTS OR LICENSED METHODS WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY RIGHT. 16.3 IN NO EVENT MAY THE REGENTS BE LIABLE FOR ANY INCIDENTAL SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE INVENTION OR LICENSED PRODUCTS. 11 15 16.4 Nothing in this agreement: 16.4.1 is a warranty or representation by The Regents as to the validity or scope of any Regents' Patent Rights; 16.4.2 is a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents of third parties; 16.4.3 is an obligation to bring or prosecute actions or suits against third parties for patent infringement except as provided in Article 19; 16.4.4 confers by implication, estoppel or otherwise any license or rights under any patents of The Regents other than Regents' Patent Rights as defined in this Agreement, regardless of whether those patents are dominant or subordinate to Regent's Patent Rights; or 16.4.5 is an obligation to furnish any know-how not provided in Regents' Patent Rights. 17. PATENT PROSECUTION AND MAINTENANCE 17.1 As long as Licensee has paid patent costs as provided for in Paragraph 17.5, The Regents shall diligently endeavor to prosecute and maintain the United States and foreign patents comprising Regents' Patent Rights using counsel of its choice selected from those approved by Licensee from the list approved by The Regents. The Regents agrees to keep Licensee fully informed of any and all patent prosecution and other actions with respect to Regents' Patent Rights including sending to Licensee copies of all correspondence with patent offices and local associates, submitting to Licensee copies of all draft responses to Office Actions and other substantive filings in sufficient time prior to filing to provide Licensee with adequate time to review and comment on such matters; provided, however, that Licensee shall be responsible for any of its expenses including attorney's fees that Licensee incurs in reviewing and commenting on the information received from The Regents. The Regents shall consult with Licensee regarding any material actions concerning the Patent Rights and shall use all reasonable efforts to take such actions requested by Licensee. If The Regents decide to abandon or allow to lapse any patent or patent application within the Patent Rights in any country, The Regents will inform Licensee in a timely manner and Licensee shall have the right to prosecute or maintain any such patent or patent application at its expense. The Regents shall provide Licensee with copies of all relevant documentation so that Licensee may be informed of the continuing prosecution and Licensee agrees to keep this documentation confidential. The Regents' counsel will take instructions only from The Regents, or from Licensee after these instructions have been approved by The Regents, and all patents and patent applications under this Agreement will be assigned solely to The Regents. 12 16 17.2 The Regents shall use all reasonable efforts to amend any patent application to include claims reasonably requested by Licensee to protect the products contemplated to be sold under this Agreement. 17.3 Licensee shall apply for an extension of the term of any patent related to the species of Fields of Use included within Regents' Patent Rights if appropriate. Licensee shall prepare all documents, and The Regents agree to execute the documents and to take additional action as Licensee reasonably request in connection therewith. 17.4 If either party receives notice pertaining to infringement or potential infringement of any issued Licensed patents or plant-specific patent included within Regents' Patent Rights, that party shall notify the other party within ten (10) days after receipt of notice of infringement, and the terms of Section 19 of this agreement shall apply. 17.5 Licensee shall reimburse The Regents for all the costs of preparing, filing, prosecuting and maintaining all United States and foreign patent applications contemplated by this Agreement and requested by Licensee. Relevant costs billed by The Regents' counsel will be rebilled to Licensee and are due within 30 days of rebilling by The Regents. These costs include patent prosecution costs for the Invention incurred by The Regents prior to the execution of this Agreement and any patent prosecution costs that may be incurred for patentability opinions, re-examination, re-issue, interferences, or inventorship determinations. Prior costs relating to the filing of patents requested by Licensee will be due on execution of this Agreement and billing by The Regents. 17.6 The Regents will notify Licensee of any actions with respect to obtaining patents or other protection on the Invention as it relates to the Field of Use in foreign countries. Licensee may request The Regents to obtain patent or other patent protection on the Invention as it relates to the Field of Use in foreign countries, if available. The Regents shall notify Licensee of any action required to obtain or maintain foreign patents not less than ninety (90) days prior to the deadline for any payment, filing, or action to be taken in connection therewith. This notice concerning foreign filing must be in writing and must identify the countries desired. The absence of a response by Licensee to such a notice from The Regents to Licensee within forty five days of such notice will be considered an election not to obtain or maintain foreign rights. 17.7 Licensee's obligation to underwrite and to pay patent prosecution costs will continue for so long as this Agreement remains in effect, but Licensee may terminate its obligations with respect to any given patent application or patent upon sixty (60) days written notice to The Regents. The Regents will use its best efforts to curtail patent costs when a notice of termination is received from Licensee. The Regents may prosecute and maintain such application(s) or patent(s) at its sole discretion and expense, but Licensee will have no further right or licenses thereunder. Non-payment of patent costs may be deemed by The Regents as an election by Licensee not to maintain application(s) or patent(s). 13 17 17.8 The Regents may, after notification of Licensee, file, prosecute or maintain patent applications at its own expense in any country in which Licensee has not elected to have patent applications filed, prosecuted, or maintained in accordance with this Article, and those applications and resultant patents will not be subject to this Agreement. 18. PATENT MARKING Licensee shall mark all Licensed Products made, used or sold under the terms of this Agreement, or their containers, in accordance with the applicable patent marking laws. 19. PATENT INFRINGEMENT 19.1 If Licensee learns of the substantial infringement of any patent licensed under this Agreement, Licensee shall call The Regents' attention thereto in writing and provide The Regents with reasonable evidence of infringement. Neither party will notify a third party of the infringement of any of Regents' Patent Rights without first obtaining consent of the other party, which consent will not be unreasonably denied. Both parties shall use their best efforts, including but not limited to arbitration, in cooperation with each other to terminate infringement without litigation. 19.2 Licensee may request that The Regents take legal action against the infringement of Regents' Patent Rights. Request must be in writing and must include reasonable evidence of infringement and damages to Licensee. If the infringing activity has not abated within ninety (90) days following the effective date of request, The Regents then has the right to: 19.2.1 commence suit on its own account; or 19.2.2 refuse to participate in the suit, and The Regents shall give notice of its election in writing to Licensee by the end of the one-hundredth (100th) day after receiving notice of written request from Licensee. Licensee may thereafter bring suit for patent infringement, at its own expense, if an only if The Regents elects not to commence suit and if the infringement occurred during the period and in a jurisdiction where Licensee had exclusive rights under this Agreement. If, however, Licensee elects to bring suit in accordance with this paragraph, The Regents may thereafter join that suit at its own expense. 19.3 Legal action as is decided on will be at the expense or the party bringing suit and all recoveries recovered thereby will belong to the party bringing suit, but legal action brought jointly by The Regents and Licensee and fully participated in by both will be at the joint expense of the parties and all recoveries will be shared jointly by them in proportion to the share of expense paid by each party. 14 18 19.4 Each party shall cooperate with the other in litigation proceedings instituted hereunder but at the expense of the party bringing suit. Litigation will be controlled by the party bringing the suit, except that The Regents may be represented by counsel of its choice and at its expense in any suit brought by Licensee. 20. INDEMNIFICATION 20.1 Licensee shall indemnify, hold harmless and defend The Regents, its officers, employees, and agents; the sponsors of the research that led to the Invention; and the inventors of the parents and patent applications in Regent's Patent Rights and their employers against any and all claims, suits losses, damage, costs, fees, and expenses resulting from or arising out of exercise of this license or any sublicense. This indemnification includes, but is not limited to, any product liability. 20.2 Licensee at its sole cost and expense, shall insure its activities in connection with the work under this Agreement and obtain, keep in force and maintain insurance as follows, or an equivalent program of self insurance: Comprehensive or commercial form general liability insurance (contractual liability included) with limits as follows: - Each occurrence [*] - Products/Completed Operations Aggregate [*] - Personal and Advertising injury [*] - General Aggregate (commercial form only) [*] The coverage and limits referred to under the above do not in any way limit the liability of Licensee. Licensee shall furnish The Regents with certificates of insurance showing compliance with all requirements. Certificates must: - Provide for thirty (30) day advance written notice to The Regents of any modification. - Indicate that The Regents has been endorsed as an additional Insured under the coverage referred to under the above. - Include a provision that the coverage will be primary and will not participate with nor will be excess over any valid and collectable insurance or program of self-insurance carried or maintained by The Regents. 20.3 The Regents shall notify Licensee in writing of any claim or suit brought against The Regents in respect of which The Regents intends to invoke the provisions of this Article. Licensee shall keep The Regents informed on a current basis of its defense of any claims under this Article. 15 19 21. NOTICES Any notice or payment required to be given to either party is properly given and effective (a) on the date of delivery if delivered in person or (b) five (5) days after mailing if mailed by first-class certified mail, postage paid, to the respective addresses given below, or to another address as is designated by written notice given to the party. In the case of Licensee: Licensee INC. 3065 Northwoods Circle Norcross, GA 30071 Attention: Dr. Russell Medford, President and CEO With a copy to: Sherry M. Knowles King & Spalding 191 Peachtree Street, N.E. Atlanta, Georgia 30303-1763 In the case of The Regents: THE UNIVERSITY OF CALIFORNIA, SAN DIEGO Technology Transfer Office 9500 Gilman Drive La Jolla, California 92093-0910 Attention: Director Referring to: [*] 22. ASSIGNABILITY This Agreement may be assigned by The Regents, but is personal to Licensee and assignable by Licensee only with the written consent of The Regents, which consent will not be unreasonably withheld. 23. NO WAIVER No Waiver by either party or any default of this Agreement may be deemed a waiver of any subsequent or similar default. 16 20 24. FAILURE TO PERFORM If either party finds it necessary to undertake legal action against the other on account of failure of performance due under this Agreement, then the prevailing party is entitled to reasonable attorney's fees in addition to costs and necessary disbursements. 25. GOVERNING LAWS THIS AGREEMENT WILL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, UNITED STATES OF AMERICA, WITH JURISDICTION IN COURTS OF THE STATE OF CALIFORNIA, but the scope and validity of any patent or patent application will be governed by the applicable laws of the country of the patent or patent application. 26. PREFERENCE FOR UNITED STATES INDUSTRY Because this Agreement grants the exclusive right to use or sell the Invention in the United States, Licensee agrees that any products sold in the U.S. embodying this Invention or produced through the use thereof will be manufactured substantially in the United States. 27. GOVERNMENT APPROVAL OR REGISTRATION If this Agreement or any associated transaction is required by law of any nation to be either approved or registered with any governmental agency, Licensee shall assume all legal obligations to do so. 28. EXPORT CONTROL LAW Licensee shall observe all applicable United States and foreign laws with respect to the transfer of Licensed Products and related technical data to foreign countries, including, without limitation, the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations. This may include a requirement that Licensee manufacture in the United States Licensed Products that are to be sold in the United States. 29. SECRECY 29.1 With regard to confidential information ("Data"), with can be oral or written or both, received from The Regents regarding this Invention, Licensee agrees: 29.1.1 not to use the Data except for the sole purpose of performing under the terms of this Agreement; 17 21 29.1.2 to safeguard Data against disclosure to others with the same degree of care as it exercises with its own data of a similar nature; 29.1.3 not to disclose Data to others (except to its employees, agents or consultants who are bound to Licensee by a like obligation of confidentiality) without the express written permission of The Regents, except that Licensee is not prevented from using or disclosing any of the Data that: 29.1.3.1 Licensee can demonstrate by written records was previously known to it; 29.1.3.2 is now, or becomes in the future, public knowledge other than through acts or omissions of Licensee; or 29.1.3.3 is lawfully obtained by Licensee from sources independent of The Regents; and 29.1.4 that the secrecy obligations of Licensee with respect to Data will continue for a period ending five (5) years from the termination date of this Agreement. 29.2 With regard to biological material received by Licensee from The Regents, if any, including any cell lines, vectors, genetic material, derivatives, products, progeny or material derived therefrom ("Biological Material"), Licensee agrees: 29.2.1 not to use Biological Material except for the sole purpose of performing under the terms of this Agreement; 29.2.2. not to transfer Biological Material to others (except to its employees, agents or consultants who are bound to Licensee by like obligations conditioning and restricting access, use and continued use of Biological Material) without the express written permission of The Regents, except that Licensee is not prevented from transferring Biological Material that: 29.2.2.1 becomes publicly available other than through acts or omissions of Licensee, or 29.2.2.2 is lawfully obtained by Licensee from sources independent of The Regents; 29.2.3 to safeguard Biological Material against disclosure and transmission to others with the same degree of care as it exercises with its own biological materials of a similar nature; 29.2.4 to destroy all copies of Biological Material at the termination of this Agreement. 18 22 30. MISCELLANEOUS 30.1 The headings of the several sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 30.2 This Agreement is not binding on the parties until it has been signed below on behalf of each party. It is then effective as of the Effective Date. 30.3 No amendment or modification of this Agreement is valid or binding on the parties unless made in writing and signed on behalf of each party. 30.4 This Agreement embodies the entire understanding of the parties and supersedes all previous communications, representations or understandings, either oral or written, between the parties relating to the subject matter hereof. The Secrecy Agreement between The Regents and Licensee dated June 27, 1997 is hereby terminated. 30.5 In case of any of the provisions contained in this Agreement is held to be invalid, illegal, or unenforceable in any respect, that invalidity, illegality or unenforceability will not affect any other provisions of this Agreement and this Agreement will be construed as if the invalid, illegal, or unenforceable provisions had never been contained in it. IN WITNESS WHEREOF, both The Regents and Licensee have executed this Agreement, in duplicate originals, by their respective and duly authorized officers on the day and year written. ATHEROGENICS, INC. THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By: Russell M. Meford By: Alan Paau ------------------------------ ------------------------------ (Signature) (Signature) 2/21/98 Name: Russell M. Medford MD PhD Name: Alan Paau, Ph.D --------------------------- ------------------------------ (Please Print) Title: President and CEO Title: Director, Technology Transfer ------------------------------ ------------------------------ 19 EX-10.03 6 ex10-03.txt LICENSE AGREEMENT 1 EXHIBIT 10.03 LICENSE AGREEMENT BETWEEN EMORY UNIVERSITY AND ATHEROGENICS [*] Certain confidential information contained in this document, marked by an asterisk within brackets has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. 2 This LICENSE AGREEMENT ("Agreement") is made and entered into by and between EMORY UNIVERSITY, a nonprofit Georgia corporation with offices located at 1380 South Oxford Road, N.E., Atlanta, Georgia 30322 ("Emory") and ATHEROGENICS, INC. , a for profit Georgia corporation organized and existing under the laws of the State of Georgia with offices located at 3343 Peachtree Road, N.E., Suite 1140, East Tower, Atlanta Financial Center, Atlanta, Georgia 30326 ("AtheroGenics"). WHEREAS, EMORY is the assignee of all right, title, and interest in inventions developed by employees of EMORY and is responsible for the protection and commercial development of such inventions; and WHEREAS, Russell M. Medford, Ph.D., M.D., Margaret K. Offerman, Ph.D., M.D., R. Wayne Alexander, Ph.D., M.D., Sampath Parthasarathy, Ph.D. and Robert Khan, Ph.D., M.D. are employees of EMORY and are named as inventors in certain patent United States patent applications identified in Exhibits A and B attached hereto; and WHEREAS, ATHEROGENICS represents that it has the necessary expertise and will, as appropriate, acquire the necessary resources to fully develop, obtain approval for, and market diagnostic and therapeutic products based upon the inventions claimed in the above referenced patent applications and additional patent applications which the parties anticipate will be filed after the date of this Agreement and which shall be solely assigned to EMORY or jointly assigned to EMORY and ATHEROGENICS as described herein; and WHEREAS, EMORY wants to have such inventions developed, commercialized, and made available for use by the public. 3 NOW, THEREFORE, for and in consideration of the mutual covenants and the premises herein contained, the parties, intending to be legally bound, hereby agree as follows. ARTICLE 1. EFFECTIVE DATE This Agreement shall be effective as of January 11, 1995. ARTICLE 2. DEFINITIONS As used in this Agreement, the following terms shall have the meanings indicated: 2.1 "Affiliate" shall mean any corporation or non-corporate business entity which controls, is controlled by, or is under common control with a party to this Agreement. A corporation or non-corporate business entity shall be regarded as in control of another corporation if it owns, or directly or indirectly controls at least forty percent (40%) of the voting stock of the other corporation, or (i) in the absence of the ownership of at least forty percent (40%) of the voting stock of a corporation or (ii) in the case of a non-corporate business entity, or non-profit corporation, if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation or non-corporate business entity, as applicable. 2.2 "Dollars" shall mean United States dollars. 2.3 "FDA" shall mean the United States Food and Drug Administration or successor entity. 2.4 "Field" shall mean the diagnosis, prevention and treatment of human disease. 2 4 2.5 "IND" shall mean an Investigational New Drug application or its equivalent. 2.6 "Indemnitees" shall mean Emory, its directors, employees and students, and their heirs, executors, administrators, successors and legal representatives. 2.7 "Licensed Patents" shall mean the following subgroups: (i) the patent applications identified in Exhibit "A" hereof and all patents which issue thereon ("Subgroup (i)"), (ii) pending patent applications and issued patents described in Exhibit B, Section I (which may be amended to add patent applications filed after the date of this Agreement) and inventions and technical approaches described in Section II of Exhibit B which may become the subject of claims in patent applications filed after the effective date of this Agreement, ("Subgroup (ii)"), (iii) patent applications to be filed on inventions conceived and reduced to practice under the Sponsored Research Agreement between Emory and AtheroGenics of even date ("Subgroup (iii)"), and (iv) patent applications claiming inventions co-owned by AtheroGenics and Emory which are exclusively licensed by Emory to AtheroGenics (see section 3.2 below). Each subgroup of Licensed Patents shall include all United States and foreign patents which issue thereon and any and all continuations, divisionals, extensions, reissues and reexamination patents, all continuations-in-part, and foreign counterparts thereof which issue anywhere in the world. 2.8 "Licensed Product" shall mean any process, service or product comprising any composition of matter, design, discovery, improvement, invention, process, method, structure or technique ("Invention") claimed in any Valid Claim. 3 5 2.9 "Licensed Technology" shall mean all technical information and data, whether or not patented, presently known or learned, invented or developed by Russell M. Medford, Ph.D., M.D., Margaret K. Offerman, Ph.D., M.D., R. Wayne Alexander, Ph.D., M.D., Sampath Parthasarathy, Ph.D., and Robert Khan, Ph.D., M.D. while an employee of Emory and obligated to assign rights in said technical information and data to Emory, to the extent that (i) such technical information and data is useful for the manufacture, use or sale of any Licensed Product and (ii) Emory possesses the right to license the use of such information to AtheroGenics for commercial purposes. Licensed Technology shall not include any technical information or data invented or developed by any of the above named persons when said person is acting as a consultant under Emory School of Medicine Consulting Policies and is not obligated to assign technical information or data invented or developed thereunder to Emory. 2.10 "Licensed Subject Matter" shall mean all Licensed Patents and Licensed Technology. 2.11 "Licensed Territory" shall mean the world. 2.12 "NDA" shall mean a New Drug Application or its equivalent. 2.13 "Net Distributions" shall mean gross distributions for products utilizing Licensed Patents and Licensed Technology from joint ventures with AtheroGenics or an Affiliate of AtheroGenics, net of discounts, allowances, sales or other similar taxes, rebates and returns, import and/or export duties, and outbound transportation prepaid or allowed. Net Distributions shall be calculated per product line incorporating Licensed Products and shall include any funds or other valuable consideration received by AtheroGenics or an Affiliate of AtheroGenics. 4 6 2.14 "Net Revenue" shall mean Net Distributions plus Sublicensee Royalties on Licensed Products utilizing technology developed and/or manufactured by AtheroGenics alone or through a joint venture with AtheroGenics or an Affiliate of AtheroGenics. 2.15 "Net Selling Price" shall mean the gross selling price paid by a purchaser of a Licensed Product to AtheroGenics, an Affiliate or sublicensee of AtheroGenics, or any other party (other than a joint venture in which AtheroGenics or an Affiliate of AtheroGenics is a participant) authorized by AtheroGenics to sell Licensed Products (net of discounts, allowances, sales or other similar taxes, rebates and returns, import and/or export duties, and outbound transportation prepaid or allowed) and, if applicable, the value of all properties, rights and services received in consideration of a Sale of a Licensed Product. Where a Sale is deemed consummated by a gift, use or other disposition of Licensed Products for other than a selling price stated in cash, the term "Net Selling Price" shall mean the average Net Selling Price billed by AtheroGenics (its Affiliates, sublicensees, joint venture partners or other third parties authorized to Sell Licensed Products) in consideration of the Sale of comparable Licensed Products during the three (3) months immediately proceeding such Sale. 2.16 "Passthrough Royalties" shall mean Sublicensee Royalties received by AtheroGenics from sublicensees wherein AtheroGenics does not develop or manufacture the technology being sublicensed. 2.17 "Registration" shall mean in relation to any Licensed Product, such approvals by United States authorities such as the FDA, as may be legally required before such Licensed Product may be commercialized or Sold in the United States. 5 7 2.18 "Sale" or "Sold" shall mean the transfer or disposition by AtheroGenics, its Affiliates, sublicensees, joint venture partners or any third party authorized by AtheroGenics to make such transfer or disposition, of a Licensed Product, for a selling price or other consideration to a party other than AtheroGenics, its Affiliates, sublicensees or joint venture partners. A Sale shall occur upon transfer of funds for a Licensed Product. A Sale shall not include transfer of product for research, development, clinical or promotional purposes. 2.19 "Sublicensee Royalties" shall mean the Net Selling Price paid by a purchaser of a Licensed Product to AtheroGenics, an Affiliate or sublicensee of AtheroGenics, or any other party (other than a joint venture in which AtheroGenics or an Affiliate of AtheroGenics is a participant) authorized by AtheroGenics to sell Licensed Products. 2.20 "Valid Claim" shall mean an issued claim of any unexpired patent which is a Licensed Patent or claim of any pending patent application which is a Licensed Patent, which claim has not been held unenforceable, unpatentable or invalid by a court or governmental body of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, or which has not been rendered unenforceable through disclaimer or otherwise and which has not been lost through an interference proceeding. ARTICLE 3. GRANT OF LICENSE 3.1 License. Emory hereby grants AtheroGenics and its Affiliates an exclusive right and license to make, use, sell and have sold Licensed Products utilizing inventions claimed in Licensed Patents in Subgroup (i) , (ii) or (iii) and to practice Licensed Technology in the Licensed Territory during the term of this Agreement. 6 8 3.2 Future Option. Emory hereby grants AtheroGenics and its Affiliates an option for an exclusive license to all of Emory's rights to Licensed Patents of Subgroup (iv) . AtheroGenics shall pay for and prosecute patent applications for inventions in Subgroup (iv) in a manner consistent with its obligations under Section 9.2 of this Agreement. AtheroGenics shall have ninety (90) days after issuance of any Valid Claim for such a Licensed Patent within which to exercise its option for that patent. Any license of a Subgroup (iv) Licensed Patent shall contain terms substantially similar to those contained in this Agreement, and shall bear a running royalty rate of [*] and a sublicense royalty rate comparable to the applicable rate for Licensed Patents in Subgroup (iii). 3.3 Government Rights. The license granted in Section 3.1 above is conditional upon and subject to a nonexclusive, nontransferable, royalty free license to the United States and other rights retained by the United States in inventions developed by nonprofit institutions with the support of federal funds. These rights are set forth in 35 U.S.C. ss. 201 et seq. and 37 C.F.R. ss. 401 et seq. which may be amended from time to time by the Congress of the United States or through administrative procedures. 3.4 Retained Licenses. The license granted in Section 3.1 and any license to be granted under Section 3.2 above are further conditional upon and subject to a right and license retained by Emory on behalf of itself and Emory research collaborators to make, use and transfer (not for value) Licensed Products and practice Licensed Technology for research and educational purposes only. Emory shall not undertake to make, use or transfer Licensed Products or practice Licensed Technology under the sponsorship of any for profit entity, other than AtheroGenics, without the express written approval of AtheroGenics. 7 9 Emory shall have the right to publish the general scientific findings from research related to Licensed Patents and Licensed Technology subject to thirty (30) days prior review by AtheroGenics. Emory shall, upon AtheroGenics' request, delete any AtheroGenics' confidential information disclosed in such proposed publication. Emory shall also, upon the request of AtheroGenics made within that thirty (30) day period, refrain from making such publication for a period of time not to exceed ninety (90) days from the date of the request, in order to afford Emory, or AtheroGenics, as applicable, an opportunity to file a United States patent application to protect patentable subject matter disclosed in such proposed publication. 3.5 Sublicenses. AtheroGenics may grant sublicenses under this license. AtheroGenics shall provide Emory with copies of all sublicense agreements within thirty (30) days of their execution date. AtheroGenics shall remain responsible to Emory for the payment of all fees and royalties due under this Agreement, whether or not such payments are made to AtheroGenics by its sublicensees. AtheroGenics shall include in any sublicense granted pursuant to this Agreement, a provision requiring the sublicensee to indemnify Emory and maintain liability coverage to the same extent that AtheroGenics is so required pursuant to Section 11.3 of this Agreement. ARTICLE 4. OBLIGATIONS OF EMORY EMPLOYEES AtheroGenics acknowledges that the founders of AtheroGenics, Drs. R. Wayne Alexander and Russell Medford are full time employees of Emory and their primary professional responsibilities are to Emory. Any contractual or other relationship between AtheroGenics and Dr. Alexander and/or Dr. Medford, for as long as they remain employees of Emory, or between, 8 10 AtheroGenics and any other employee of Emory, whether said relationship is created prior to or during the term of this Agreement, shall be subject to all relevant policies of Emory, including, but not limited to, the Emory and Emory School of Medicine Consulting Policies and the Emory Procedures for Faculty Members involved in Sponsored Scientific Research and Technology Transfer, and the Emory Patent and Copyright Policies as now exist, or as may be amended or established from time to time. ARTICLE 5. ROYALTIES AND OTHER PAYMENTS AtheroGenics shall receive income under this license as well as Passthrough Royalties. Running royalties on Net Revenue and on Passthrough Royalties shall be calculated in the following manner: 5.1 Net Revenue. AtheroGenics shall pay Emory the following running royalties on Net Revenue: (a) [*] of the Net Revenue for Licensed Products utilizing Inventions claimed in any Valid Claim of Licensed Patents in Subgroup (i) Sold in the Licensed Territory; or (b) [*] of the Net Revenue for Licensed Products utilizing Inventions claimed in any Valid Claim of Licensed Patents in Subgroup (ii) or Subgroup (iii) Sold in the Licensed Territory. (c) In the event that a Licensed Product utilizes Inventions claimed by Valid Claims contained in more than one Licensed Patent subgroup, AtheroGenics shall pay the higher 9 11 of the applicable running royalty rate, but in no case shall pay Emory or its assigns more than [*] of the Net Selling Price for any Licensed Product. 5.2 AtheroGenics shall pay Emory the following running royalties on Passthrough Royalties: (a) [*] of the Passthrough Royalties paid to AtheroGenics, up to a maximum of [*] of Net Selling Price, and [*] of lump sum licensing fees paid to AtheroGenics, by a Sublicensee for Licensed Products utilizing Inventions claimed in any Valid Claim of Licensed Patents in Subgroup (i) Sold in the Licensed Territory; or (b) [*] of the Passthrough Royalties paid to AtheroGenics, up to a maximum of [*] of Net Selling Price, and [*] of lump sum licensing fees paid to AtheroGenics, by a Sublicensee for Licensed Products utilizing Inventions claimed in any Valid Claim of Licensed Patents in Subgroup (ii) or Subgroup (iii) Sold in the Licensed Territory. (c) In the event that a Licensed Product subject to Passthrough Royalties utilizes Inventions claimed by Valid Claims contained in more than one Licensed Patent subgroup, AtheroGenics shall pay the higher of the applicable running royalty rate, but in no case shall pay Emory or its assigns more than [*] of the Net Selling Price for any Licensed Product. (d) Emory shall have the right to approve any sublicense arrangement, which approval shall not be unreasonably withheld, which AtheroGenics or Emory reasonably anticipates will result in Passthrough Royalties of less than [*] of the Net Selling Price for 5.2(a) or [*] of the Net Selling Price for 5.2 (b). 10 12 5.3 Signing Fee. AtheroGenics shall pay Emory a signing fee in the amount of [*] upon the execution of this Agreement. 5.4 Milestone Payments. AtheroGenics shall pay Emory a Milestone Payment in the amount specified below no later than thirty (30) days after the occurrence of the corresponding event designated below. Event Milestone Payment ----- ----------------- (a) The date of the first IND for a Licensed [*] Product filed by AtheroGenics, its Affiliate, or sublicensee becomes effective. (b) Commencement Date of a Phase III Trial for [*] any Licensed Product. (c) Registration of any Licensed Product. [*] ARTICLE 6. REPORTS AND ACCOUNTING 6.1 Royalty Reports and Records. During the term of this Agreement, AtheroGenics shall furnish, or cause to be furnished to Emory, written reports governing each of AtheroGenics', AtheroGenics' Affiliates and sublicensees fiscal quarters showing: (a) the gross selling price of all Licensed Products Sold by AtheroGenics, its Affiliates and sublicensees, in each country of the Licensed Territory during the reporting period, together with the calculations of Net Selling Price in accordance with Section 2.15; and (b) the royalties payable in Dollars, which shall have accrued hereunder in respect to such Sales; and (c) the exchange rates, if any, used in determining the amount of Dollars; and 11 13 (d) the amount of any consideration received by AtheroGenics from sublicensees and an explanation of the contractual obligation satisfied by such consideration; and (e) the occurrence of any event triggering a Milestone Payment obligation in accordance with Section 5.4. Reports shall be made semiannually after the first Sale of a Licensed Product. These royalty reports shall be due within ninety (90) days of the close of every second and fourth AtheroGenics fiscal quarter. AtheroGenics shall keep accurate records in sufficient detail to enable royalties and other payments payable hereunder to be determined. 6.2 Right to Audit. Emory shall have the right, upon prior notice to AtheroGenics, not more than once in each AtheroGenics fiscal year, for the period not exceeding the previous twenty four (24) months, through an independent public accountant selected by Emory and acceptable to AtheroGenics, which acceptance shall not be unreasonably refused, to have access during normal business hours of AtheroGenics as may be reasonably necessary to verify the accuracy of the royalty reports required to be furnished by AtheroGenics pursuant to Section 6.1 of the Agreement. AtheroGenics shall include in any sublicenses granted pursuant to this Agreement, a provision requiring the sublicensee to keep and maintain records of Sales made pursuant to such sublicense and to grant reasonable access to such records by Emory's independent public accountant for the purpose of verifying the accuracy of royalty reports. If such independent public accountant's report shows any underpayment of royalties by AtheroGenics, its Affiliates or sublicensees, within ninety (90) days after AtheroGenics' receipt of such report, AtheroGenics shall remit or shall cause its sublicensees to remit to Emory: 12 14 (a) the amount of such underpayment; and (b) if such underpayment exceeds [*] of the total royalties owed for the fiscal year then being reviewed, the reasonably necessary fees and expenses of such independent public accountant performing the audit. Otherwise, Emory's accountant's fees and expenses shall be borne by Emory. Any overpayment of royalties shall be fully refunded within ninety (90) days by Emory. 6.3 Confidentiality of Records. All information subject to review under this Article 6 shall be confidential. Except where provided by law, Emory and its accountant shall retain all such information in confidence. ARTICLE 7. PAYMENTS 7.1 Payment Due Dates. Royalties and sublicense fees payable to Emory as a result of activities occurring during the period covered by each royalty report provided for under Article 6 of this Agreement shall be due and payable on the date such royalty report is due. Payments of royalties in whole or in part may be made in advance of such due date. Any payment in excess of [*] shall be made by wire or transferred to an account of Emory designated by Emory from time to time; provided, however, that in the event that Emory fails to designate such account, AtheroGenics or its Affiliates and sublicensees may remit payment to Emory to the address applicable for the receipt of notices hereunder; providing, further, that any notice by Emory of such account or change in such account, shall not be effective until fifteen (15) days after receipt thereof by AtheroGenics. 13 15 7.2 Currency Restrictions. Except as hereinafter provided in this Section 7.2, all royalties shall be paid in Dollars. If, at any time, legal restrictions prevent the prompt remittance of part of or all royalties with respect to any country in the Licensed Territory where Licensed Products are Sold, AtheroGenics or its sublicensee shall have the right and option to make such payments by depositing the amount thereof in local currency to Emory's account in a bank or depository in such country. 7.3 Interest. Royalties and other payments required to be paid by AtheroGenics pursuant to this Agreement shall, if overdue, bear interest at the lesser of the maximum applicable legal rate of interest on overdue commercial accounts, or the LIBOR rate, calculated on an average daily basis over the period of the delinquency. The payment of such interest shall not foreclose Emory from exercising any other rights it may have because any payment is overdue. ARTICLE 8. DEVELOPMENT AND MARKETING PROGRAM 8.1 Diligence Obligations. AtheroGenics shall directly, or in collaboration with Affiliates and sublicensees, use its best efforts: (a) to conduct a research and development program relating to the use of Licensed Products in the Field; and (b) to promptly register Licensed Products with the FDA as required by law. For purposes of this Agreement, "best efforts" shall mean that AtheroGenics shall use reasonable efforts consistent with those used by comparable biotechnology companies in the United States, at the same stage of corporate and scientific development, in research and 14 16 development projects for diagnostic methods or kits and therapeutic methods or compositions deemed to have commercial value comparable to the Licensed Products. 8.2 Fulfillment; Conversion. AtheroGenics' best efforts obligations set forth in this Article 8 shall be deemed to have been fulfilled if AtheroGenics (a) files an IND for Registration of a Licensed Product in the United States within three (3) years after the effective date of this Agreement; and (b) diligently pursues such Registration by complying with all FDA requirements and appealing, to the extent permissible by law, any decisions taken by the FDA which would prohibit Registration; and (c) commences marketing at least one Licensed Product within six (6) months following Registration. If AtheroGenics fails to meet any deadline set forth in this Section 8.2 or use best efforts as defined in Section 8.1 of this Agreement, Emory may, upon at least ninety (90) days' prior written notice, convert this license from an exclusive to non-exclusive license and grant third parties rights in Licensed Patents and/or Licensed Technology equal to or lesser rights than rights granted to AtheroGenics for the same Licensed Patents and/or Licensed Technology, unless within such ninety (90) day period AtheroGenics meets such deadline or demonstrates to the reasonable satisfaction of Emory that it has resumed and will continue to use best efforts. 8.3 Progress Reports. AtheroGenics shall, no less frequently than once every twelve (12) months until a Licensed Product has been Registered, provide Emory with a written report detailing AtheroGenics', its Affiliates' and sublicensees, activities related to developing Licensed Products and pursuing Registration of Licensed Products. 15 17 8.4 Development Outside United States. No later than AtheroGenics' filing of an NDA for a Licensed Product in the United States, AtheroGenics shall directly, or in collaboration with Affiliates and sublicensees, use its best efforts: (a) to obtain Registration for a Licensed Product in such other countries of the Licensed Territory as AtheroGenics or AtheroGenics' Affiliates and sublicensees deem appropriate; and (b) upon Registration of a Licensed Product in a particular country proceed with due diligence to market such Licensed Product in such country. 8.5 Development of Indications. (a) AtheroGenics and Emory acknowledge that the compositions and methods claimed in the Licensed Patents may be useful for a myriad of indications. AtheroGenics shall, in accordance with its diligence obligations, attempt to develop the Licensed Patents and Licensed Technology for all such indications. However, because of the burdens, both financial and practical, which may be accompanied by this requirement, such development is intended to be staggered. Accordingly, AtheroGenics shall begin diligence requirements for its second indication within [*] of the date of this Agreement, and thereafter for one new indication at least once every [*]. Dates wherein diligence requirements commence for a new indication shall be termed "Diligence Commencement Dates." (b) If AtheroGenics fails to begin using diligence to develop a new potential indication an any Diligence Commencement Date in accordance with Section 8.5 (a) of this Agreement, Emory may, commencing ninety (90) days after that Diligence Commencement Date, request in writing that AtheroGenics enter into good faith negotiations with prospective 16 18 sublicensees which Emory believes are interested in developing an indication which AtheroGenics is not developing, for the purpose of sublicensing one new potential indication. Within sixty (60) days of receipt of such written request, AtheroGenics shall (i) commence and diligently pursue good faith negotiations with such prospective sublicensee or (ii) provide Emory with a detailed development plan, including milestones, for such indication in accordance with diligence requirements of this Agreement. ARTICLE 9. PATENT PROSECUTION 9.1 Licensed Patents Assigned Solely to Emory. AtheroGenics shall be primarily responsible for all patent prosecution activities pertaining to Licensed Patents assigned solely to Emory. AtheroGenics, with the agreement of Emory, which agreement shall not be unreasonably withheld, shall select patent counsel to prosecute all such Licensed Patents and shall provide Emory with copies of all communications from patent offices, filings and correspondence pertaining to such patent prosecution activities, in a timely manner, so as to give Emory an opportunity to comment thereon prior to any responsive filing. Emory shall have the right to have claims which are supported by the specification added to an application. AtheroGenics shall pursue prosecution of such Licensed Patents in at least the following countries: United States, EPO countries, Japan and Canada. AtheroGenics shall, upon Emory's request, pursue prosecution of such Licensed Patents in additional countries at Emory's expense. If AtheroGenics chooses not to timely file or pursue patent protection or patent maintenance for any patent application or issued patent assigned solely to Emory, AtheroGenics 17 19 shall notify Emory prior to abandonment in such a manner as would allow Emory a reasonable period of time to take over prosecution or maintenance of said patent application or issued patent. Such patent application or issued patent shall then not be considered a Licensed Patent and Emory shall be free, at its election, to abandon or maintain the prosecution of such patent application or issued patent or grant rights to such patent application or issued patent to third parties. 9.2 Licensed Patents Jointly Assigned to AtheroGenics and Emory. AtheroGenics shall be primarily responsible for all patent prosecution activities pertaining to Licensed Patents assigned jointly to AtheroGenics and Emory. AtheroGenics shall select patent counsel to prosecute all such Licensed Patents and shall provide Emory with copies of all communications from patent offices, filings and correspondence pertaining to such patent prosecution activities, in a timely manner, so as to give Emory an opportunity to comment thereon prior to any responsive filing. Emory shall have the right to have claims which are supported by the specification added to an application. AtheroGenics shall pursue prosecution of such Licensed Patents in at least the following countries: United States, EPO countries, Japan and Canada. AtheroGenics shall, upon Emory's request, pursue prosecution of such Licensed Patents in additional countries at Emory's expense. If AtheroGenics chooses not to timely file or pursue patent protection or patent maintenance for any patent application or issued patent assigned jointly to AtheroGenics and Emory, AtheroGenics shall, upon Emory's request, assign its interests in such patent application or issued patent to Emory. After such assignment, such patent application or issued patent shall then not be considered a Licensed Patent and Emory shall be free, at its election, to abandon or 18 20 maintain the prosecution of such patent application or issued patent or grant rights to such patent application or issued patent to third parties. ARTICLE 10. INFRINGEMENT 10.1 If either AtheroGenics or Emory becomes aware of a product made, used or sold in the Licensed Territory, which it believes infringes a Valid Claim, the party obtaining such knowledge shall promptly advise the other party of all relevant facts and circumstances pertaining to the potential infringement. AtheroGenics shall have the right to enforce any issued Licensed Patent against such infringement, at its own expense. Emory shall cooperate with AtheroGenics in such effort, including being joined as a party to such action, if necessary. During the pendency of such an action, royalty rates owed by AtheroGenics to Emory shall be reduced by fifty (50%) percent from those listed in Article 5 of this Agreement. 10.2 Any damages or costs recovered by AtheroGenics in connection with any action filed by AtheroGenics hereunder shall be applied first to reimbursing AtheroGenics for costs and expenses of such litigation. Any damages or costs recovered by AtheroGenics in excess of costs and expenses credited shall be the sole property of AtheroGenics. Any such excess damages or costs shall be treated as proceeds of Sales of Licensed Products in the fiscal quarter received by AtheroGenics, and royalties shall be payable by AtheroGenics to Emory thereon in accordance with the terms of this Agreement. 10.3 Any multiplication of damages for punitive purposes shall be treated as proceeds of Sales of Licensed Products in the fiscal quarter received by AtheroGenics, and 19 21 royalties shall be payable by AtheroGenics to Emory thereon in accordance with the terms of this Agreement, and AtheroGenics shall retain all attorney fees awarded. 10.4 If AtheroGenics shall fail, within one hundred twenty (120) days after receiving notice from Emory of a potential infringement, or providing Emory with notice of such infringement, to either (a) terminate such infringement, (b) institute sub-licensing negotiations, to be completed within a reasonable period of time, or (c) institute an action to prevent continuation thereof and, thereafter to prosecute such action diligently, or if AtheroGenics notifies Emory that it does not plan to terminate the infringement, negotiate a sub-license or institute such action, then Emory shall have the right to do so at its own expense. AtheroGenics shall cooperate with Emory in such effort, including being joined as a party to such action if necessary. Emory shall be entitled to retain all damages or costs awarded to Emory in such action. ARTICLE 11. REPRESENTATIONS AND WARRANTIES 11.1 Warranty of Ownership and Right to License. Emory represents and warrants to AtheroGenics as follows: (a) Right to Grant. Subject to Section 3.3 hereof, and certain rights held by Isis Pharmaceuticals in patent application number [*], Emory hereby represents that it has not granted to any third party, and no third party holds, any option, license, sublicense or similar right relating to the use of the Licensed Subject Matter within the Field. Emory further represents that it has the right to grant the license granted hereunder to the Licensed Patents and Licensed Technology. 20 22 (b) Adversary Proceedings. There are no claims, disputes, actions, proceedings, suits or appeals pending against Emory with respect to the Licensed Subject Matter (other than those, if any, with respect to which service of process or similar notice has not yet been made on Emory), and to the knowledge of Emory, none has been threatened against Emory. To the knowledge of Emory, no third party has infringed any of Emory's rights to use the Licensed Subject matter in the Field. 11.2 Exclusion of Other Warranties. Emory disclaims any warranties of merchantability or fitness for a particular purpose and any other implied warranties with respect to the capabilities, safety, utility, or commercial application of the Licensed Patents, Licensed Technology or Licensed Products. ARTICLE 12. INDEMNIFICATION AND INSURANCE 12.1 No Liability. Emory shall not be liable to AtheroGenics or AtheroGenics' Affiliates, customers or sublicensees for compensatory, special, incidental, indirect, consequential or exemplary damages resulting from the manufacture, testing, design, labeling, use or sale of Licensed Products. 12.2 Indemnification. AtheroGenics shall defend, indemnify, and hold harmless the Indemnitees, from and against any and all claims, demands, loss, liability, expense, or damage (including investigative costs, court costs and attorneys, fees) Indemnitees may suffer, pay, or incur as a result of claims, demands or actions against any of the Indemnitees arising or alleged to arise by reason of, or in connection with, any and all personal injury (including death) and property damage caused or contributed to, in whole or in part, by 21 23 AtheroGenics or AtheroGenics' Affiliates, contractors, agents, or sublicensees manufacture, testing, design, use, Sale or labeling of any Licensed Product. AtheroGenics' obligations under this Article shall survive the expiration or termination of this Agreement for any reason. However, this section 12.2 shall not obligate AtheroGenics to indemnify Emory for any claims, demands or actions against any of the Indemnitees arising or alleged to arise by reason or, or in connection with, any and all personal injury (including death) and property damage caused or contributed to, in whole or in part, by Emory during any participation by Emory in clinical testing of any Licensed Product. 12.3 Insurance. Without limiting AtheroGenics' indemnity obligations under the preceding paragraph, AtheroGenics shall, prior to any clinical trial or Sale of any Licensed Product, cause to be in force, an "occurrence based type" liability insurance policy which: (a) insures Indemnitees for all claims, damages, and actions mentioned in Section 12.2 of this Agreement; and (b) includes a contractual endorsement providing coverage for all liability which may be incurred by Indemnitees in connection with this Agreement; and (c) requires the insurance carrier to provide Emory with no less than thirty (30) days' written notice of any change in the terms or coverage of the policy or its cancellation; and (d) provides Indemnitees product liability coverage in an amount appropriate and customary in the industry for bodily injury and for property damage, subject to a reasonable aggregate amount. 22 24 12.4 Occurrence Based Coverage Not Available. If AtheroGenics is unable to obtain "occurrence based type" liability insurance for a reasonable fee, AtheroGenics shall procure "claims made type" liability coverage to be effective prior to any clinical trial or Sale of any Licensed Patent, and throughout the term of this Agreement and "tail coverage," extending at least ten (10) years after termination of this Agreement. AtheroGenics shall notify Emory prior to its first clinical trial or commercial Sale of any Licensed Product, or all insurance coverage AtheroGenics possesses to meet AtheroGenics' obligations under Sections 12.2 and 12.3 of this Agreement. 12.5 Notice of claims. AtheroGenics shall promptly notify Emory of all claims made to AtheroGenics involving the Indemnitees and shall advise Emory of the policy amounts that might be needed to defend and pay any such claims. ARTICLE 13. CONFIDENTIALITY 13.1 Treatment of Confidential Information. During the term of this Agreement, AtheroGenics and Emory each may disclose certain information which the disclosing party deems to be of a confidential, proprietary and trade secret nature. For the term of this Agreement and for a period of seven (7) years following termination of this Agreement, AtheroGenics and Emory each agrees that it shall regard, maintain and preserve the secrecy and confidentiality of any and all information and data, whether in oral or written form, including but not limited to, products, processes, methods, concepts, ideas, programs, formulas, apparatuses, chemicals, organisms, molecules, prototypes, techniques, know-how, marketing plans, business plans, financial information, data, strategies, forecasts, customer lists or technical 23 25 requirements of customers, or other trade secrets (collectively referred to herein as the "Proprietary Information") of the other party which may be disclosed to or obtained by it pursuant to this Agreement. Each party hereto shall take the same measures to preserve the secrecy and confidentiality and avoid the unauthorized use or disclosure of the other party's Proprietary Information as such party takes to protect its own Proprietary Information. 13.2 Access. Each party hereto shall limit access to the Proprietary Information to those of its employees and agents, Affiliates, sublicensees, consultants, outside contractors, governmental regulatory authorities and clinical investigators who have a reasonable need for access to such information in connection with the operation of this Agreement. Further, each party or its Affiliates or sublicensees may disclose Proprietary Information to the United States government or other regulatory authorities to the extent that such disclosure is necessary for the prosecution and/or enforcement of patents or for authorizations to conduct clinical trials or commercially market Licensed Products, provided that such party is otherwise entitled to engage in such activities under this Agreement, or may disclose Proprietary Information as is necessary to exercise any rights which survive termination or expiration of this Agreement. All persons or entities to whom Proprietary Information is disclosed under this Section 13.2 shall be subject to the non-disclosure covenants contained herein. Each party shall use its best efforts to disclose Proprietary information to the other in writing and marked as proprietary. If it is necessary to first disclose such information other than in written form, the disclosing party shall, within thirty (30) days of such first disclosure, 24 26 reduce the information to writing and provide the receiving party with a copy of such information marked as proprietary. 13.3 Covenant Not to Use or Disclose. AtheroGenics and Emory each agrees that it will not, at any time without the prior written consent of the other party, use or disclose the Proprietary Information belonging to the other party for any reason or in any manner whatsoever except as may be necessary for the operation of this Agreement, as explicitly authorized under this Agreement, or as required by law. 13.4 Return of Confidential Documents. Upon termination of this Agreement, or forthwith upon the request of the other party, AtheroGenics and Emory shall promptly return to the other party all such documents, drawings, samples, specimens or reproductions thereof which may have come into its possession. 13.5 Proprietary Rights. AtheroGenics and Emory each acknowledges that the disclosure of Proprietary Information under this Agreement confers no rights in the receiving party other than the right to use the Proprietary Information of the disclosing party for the operation of this Agreement. 13.6 Exceptions. The obligations undertaken by AtheroGenics and Emory hereunder shall not apply to any portion of the Proprietary Information disclosed hereunder which: (a) was known to the non-disclosing party prior to disclosure of such Proprietary Information by the disclosing party; (b) is, or shall become, other than by an act or omission of the non-disclosing party, generally available to the public; or 25 27 (c) shall, by lawful means, be made available to the non-disclosing party by a third party with the right to disclose; or (d) is required by law to be disclosed by the non-disclosing party, provided the non-disclosing party uses its best efforts to notify the disclosing party immediately upon learning of such requirement in order to give the disclosing party reasonable opportunity to oppose such requirement; or (e) results from research and development by the receiving party or its Affiliates or sublicensees, independent of disclosures from the other party of this Agreement, provided that the persons developing such information have not had any exposure to the information received from the disclosing party; or (f) AtheroGenics and Emory agree in writing may be disclosed. In claiming the benefit of any of the exceptions set forth in this Section 13.5, the non-disclosing party shall have the burden of establishing that a portion of the Proprietary Information is subject to such exception. ARTICLE 14. TERM AND TERMINATION 14.1 Term. The term of this Agreement shall Commence on the Effective Date and, unless sooner terminated as otherwise provided for in this Agreement, shall continue in full force and effect until the expiration of the last to expire Valid Claim. If no Valid Claim should issue within ten (10) years of the date of this Agreement, this Agreement shall terminate on the tenth (l0th) anniversary of its Effective Date. If such early termination occurs for failure of a 26 28 Valid Claim to issue, AtheroGenics shall be entitled to continue to utilize within the Field all inventions, data or other information described and/or claimed in Licensed Patents and all technical information and data comprising Licensed Technology. 14.2 Termination. Emory shall have the right to terminate this Agreement upon the occurrence of any one or more of the following events and provided that Emory has given AtheroGenics the notice required in Section 14.3 of this Agreement and AtheroGenics has failed to cure the breach described in such notice within the allotted time: (a) failure of AtheroGenics to make any payment required pursuant to this Agreement within five (5) days after receipt of notice that payment is past due; or (b) failure of AtheroGenics to timely issue AtheroGenics stock to Emory in accordance with that certain Stock Purchase Agreement between Emory and AtheroGenics of even date herewith, provided, however, that any regulatory requirements that would prevent or delay such issuance of stock shall not be grounds for termination; or (c) failure of AtheroGenics to render royalty or progress reports to Emory as required by this Agreement within ten (10) days after receipt of notice that the report is past due or (d) the institution of any proceeding by AtheroGenics under any bankruptcy, insolvency, or moratorium law wherein AtheroGenics is the subject of that proceeding; or (e) any assignment by AtheroGenics of substantially all of its assets for the benefit of creditors; or (f) placement of AtheroGenics' assets in the hands of a trustee or a receiver unless the receivership or trust is dissolved within thirty (30) days thereafter and provided that 27 29 in the case of an involuntary bankruptcy proceeding, which is contested by AtheroGenics, such termination shall not become effective until the bankruptcy court of jurisdiction has entered an order upholding the petition; or (g) a decision by AtheroGenics or AtheroGenics' assignee of rights under this Agreement to quit the business of developing or selling Licensed Products; or (h) the breach by AtheroGenics of any other material term of this Agreement. 14.3 Exercise. Before Emory may exercise its right of termination as defined in Section 14.2 of this Agreement, it must first provide AtheroGenics, its trustees, receivers or assigns ("Recipients") with written notice of default and of Emory's intent to terminate. Such notice shall include the basis for such termination. Recipients shall have thirty (30) days after actual receipt of such notice Within which to undertake to cure the default or dispute the grounds for termination. (a) If Recipients do not dispute the grounds for termination and undertake to cure the default within that thirty (30) day period and (a) default is cured within that thirty (30) day period, or (b) in the instance that the breach cannot p reasonably be cured within thirty days, if default is cured within a reasonable period of time, Emory's notice of intent to terminate shall cease to be effective. (b) If Recipients have a good faith dispute as to the grounds for termination put forth by Emory in its notice, Recipients shall, within the thirty (30) day period after actual receipt of notice, notify Emory that they intend to demonstrate lack of grounds for termination. In such case, Recipients shall have ninety (90) days following the date on which notice of breach is actually received to either 28 30 demonstrate such lack of grounds to Emory's satisfaction, and optionally to file a petition for arbitration in accordance with Article 17 of this Agreement. During this ninety (90) day period, cure of the deficiency shall render Emory's notice of intent to terminate ineffective. 14.4 Termination by AtheroGenics. AtheroGenics shall have the right to terminate this Agreement upon the occurrence of either of the following events: (a) the breach of a material term of this Agreement by Emory; or (b) ninety (90) days after actual delivery by AtheroGenics to Emory of written notice of AtheroGenics intent to terminate. 14.5 Exercise. Before AtheroGenics may exercise its right of termination pursuant to Section 14.4(a) of this Agreement it must first provide Emory with written notice of AtheroGenics' election to terminate. Such notice shall include the basis for such termination. Emory shall have thirty (30) days after actual receipt of such notice within which to undertake to cure the default or dispute the grounds for termination. (a) If Emory does not dispute the grounds for termination and undertakes to cure the default within that thirty (30) day period and (a) default is cured within that thirty (30) day period, or (b) in the instance that the breach cannot reasonably be cured within thirty days, if default is cured within a reasonable period of time, AtheroGenics' notice of intent to terminate shall cease to be effective. (b) If Emory has a good faith dispute to the grounds for termination put forth by AtheroGenics in its notice, Emory shall, within the thirty (30) day period after actual receipt of notice, notify AtheroGenics that it intends to demonstrate lack of grounds for termination. In such case, Emory shall have ninety (90) days following the date on which notice of breach is 29 31 actually received to either demonstrate such lack of grounds to AtheroGenics' satisfaction, and optionally to file a petition for arbitration in accordance with Article i7 of this Agreement. During this ninety (90) day period, cure of the deficiency shall render AtheroGenics' notice of intent to terminate ineffective. 14.6 Failure to Enforce. The failure of Emory or AtheroGenics At any time, or for any period of time, to enforce any of the provisions of this Agreement, shall not be construed as a waiver of such provisions or as a waiver of the right of Emory or AtheroGenics thereafter to enforce each and every such provision of this Agreement. 14.7 Effect.If this Agreement is terminated as a result of AtheroGenics' breach pursuant to Section 14.2 or in accordance with Section 14.4 (b) , AtheroGenics shall return, or at Emory's direction, destroy, all data, writings and other documents and tangible materials supplied to AtheroGenics by Emory. ARTICLE 15. ASSIGNMENT AtheroGenics may grant, transfer, convey, or otherwise assign any or all of its rights and obligations under this Agreement in conjunction with the transfer of all, or substantially all, of the business interest of AtheroGenics to which this Agreement relates. Emory's written consent, which shall not be unreasonably withheld, shall be required prior to any other assignment of AtheroGenics' rights or obligations under this Agreement. 30 32 ARTICLE 16. MISCELLANEOUS 16.1 Legal Compliance. AtheroGenics shall comply with all applicable federal, state and local laws and regulations relating to its manufacture, use, Sale, labelling or distribution of Licensed Products. 16.2 Independent Contractor. AtheroGenics' relationship to Emory shall be that of a licensee only. AtheroGenics shall not be the agent of Emory and shall have no authority to act for, or on behalf of, Emory in any matter for which AtheroGenics does not have express written permission. Persons retained by AtheroGenics as employees or agents shall not, by reason thereof, be deemed to be employees or agents of Emory. Emory's relationship to AtheroGenics shall be that of a licensor only. Emory shall not be the agent of AtheroGenics and shall have no authority to act for, or an behalf of, AtheroGenics in any matter for which Emory does not have express written permission. Persons retained by Emory as employees or agents shall not, by reason thereof, be deemed to be employees or agents of AtheroGenics. 16.3 Patent Marking. AtheroGenics shall mark Licensed Products Sold in the United States with United States patent numbers in compliance with 35 U.S.C. S 287. Licensed Products manufactured or Sold in other countries shall be marked in compliance with the intellectual property laws in force in such foreign countries. 16.4 Use of Names. AtheroGenics shall obtain the written approval of Emory prior to making use of the name of any Emory employee not also employed by AtheroGenics, or the name Emory, for any commercial purpose. This section 16.5 shall not be construed to prevent AtheroGenics from identifying AtheroGenics employees also employed by Emory as being affiliated with Emory. 31 33 Emory shall obtain the written approval of AtheroGenics prior to making use of the name AtheroGenics. 16.5 Place of Execution. This Agreement and any subsequent modifications or amendments hereto shall be deemed to have been executed in the State of Georgia, U.S.A. This Agreement shall not become effective or binding upon Emory until signed by its Executive Vice President in the State of Georgia, U.S.A. 16.6 Governing Law. This Agreement and all amendments, modifications, alterations, or supplements hereto, and the rights of the parties hereunder, shall be construed under and governed by the laws of the State of Georgia and the United States of America. 16.7 Entire Agreement. This Agreement constitutes the entire agreement between Emory and AtheroGenics with respect to the subject matter hereof and shall not be modified, amended or terminated except as herein provided or except by another agreement in writing executed by the parties hereto. 16.8 Survival. Any promises, duties and/or obligations herein contained, such as Articles 12 and 13, which expressly or by implication subsist after the termination of this Agreement, shall survive such termination. 16.9 Severability. All rights and restrictions contained herein may be exercised and shall be binding only to the extent that they do not violate any applicable laws and are intended to be limited to the extent necessary so that they will not render this Agreement illegal, invalid or unenforceable. If any provision or portion of any provision of this Agreement shall be held to be illegal, invalid or unenforceable by a court of competent jurisdiction, the same shall 32 34 be reformed to comply with applicable law or stricken if not so conformable, so as not to affect the validity or enforceability of the remainder of this Agreement. 16.10 Force Majeure. Any delays in or failure of performance of any party to this Agreement shall not constitute a default hereunder, or give rise to any claim for damages, if and to the extent caused by occurrences beyond the control of the party affected, including, but not limited to, acts of God, strikes or other concerted acts of workers, civil disturbances, fires, floods, explosions, riots, war, rebellion, sabotage, acts of governmental authority or failure of governmental authority to issue licenses or approvals which may be required. ARTICLE 17. ARBITRATION Any and all disputes arising with respect to the interpretation of this Agreement, or the parties' respective performance under or breach of the Agreement, shall be resolved by binding arbitration at the request of either party in Atlanta, Georgia before a panel of three (3) arbitrators in accordance with the rules and procedures of the American Arbitration Association. The panel shall provide the parties, in writing, findings of fact and conclusions of law in support of any decision reached. Either party shall have the right to appeal the decision on the grounds of gross error of law or absence of evidence to support the facts. The foregoing arbitration provision shall not preclude either AtheroGenics or Emory from seeking equitable relief from a court of competent jurisdiction to protect its intellectual property from unlawful use or disclosure. 33 35 ARTICLE 18. NOTICES All notices, statements and reports required to be given by one party to the other shall be in writing and shall be deemed to have been given upon delivery in person or, upon the expiration of five (5) days after deposit in a lawful mail depositary in the country of residence of the party giving the notice, registered or certified postage prepaid, and addressed as follows: To Emory: Emory University Attn: Vincent La Terza Director of Licensing and Patent Counsel 1440 Clifton Road, N.E. RM 116 WHSCAB Atlanta, GA 30322 To AtheroGenics: AtheroGenics, Inc. Attn: Michael Henos 3343 Peachtree Road, N.E. Suite 1140, East Tower Atlanta Financial Tower Atlanta, GA 30326 with copies to: Lyon & Lyon Attn: Carol A. Schneider, Ph.D. First Interstate World Center 633 West Fifth Street, Suite 4700 Los Angeles, CA 90071-2066 Either party hereto may change the address to which notices to such party are to be sent by giving notice to the other party at the address and in the manner provided above. Any notice may be given, in addition to the manner set forth above, by telex, facsimile or cable, provided that the party giving such notice obtains acknowledgment by telex, facsimile or cable that such notice has been received by the party to be notified. Notice made in this manner shall be deemed to have been given when such acknowledgment has been transmitted. 34 36 IN WITNESS WHEREOF, Emory and AtheroGenics have caused this Agreement to be signed by their duly authorized representatives as of the day and year indicated below. EMORY UNIVERSITY: ATHEROGENICS: By: John L. Temple By: Michael Henos ------------------------------------ ------------------------------ Name: John Temple Name: Michael Henos Title: Executive Vice President Title: Chairman of the Board Date: 1/13/95 Date: 1-23-95 ---------------------------------- ---------------------------- 35 37 EXHIBIT A [*] 36 38 EXHIBIT B SECTION 1 - - PENDING APPLICATIONS 1. [*] SECTION 2 - - INVENTIONS AND CONCEPTS 1. [*] 2. [*] 3. [*] 4. [*] 37 EX-10.04 7 ex10-04.txt PATENT PUCHASE AGREEMENT 1 Exhibit 10.04 PATENT PURCHASE AGREEMENT THIS PATENT PURCHASE AGREEMENT (this "Agreement") is made this 26th day of April, 1995, by and between Sampath Parthasarathy, Ph.D., a resident of Georgia ("Seller") and AtheroGenics, Inc., a Georgia corporation ("Buyer"). WITNESSETH: WHEREAS, Seller is the inventor of that certain United States Patent No. 5,262,439 for "Soluble Analogs of Probucol" issued on November 16, 1993 (the '439 patent) and corresponding foreign applications and patents (the "Patents"). WHEREAS, Seller previously granted all right, title and interest to the Patents to The Regents of the University of California ("U.C.") and U.C. has returned to Seller all of its right, title and interest to the Patents for consideration in part of [*] (the "Return Price"); and WHEREAS, the Patents are subject to a License to the United States Government executed on March 27, 1995 (the Government License) by virtue of funding provided by the Department of Health and Human Services for work incorporated in the Patents; and WHEREAS, Buyer wishes to obtain all right, title and interest, other than rights conferred in the Government License, to the Patents and the inventions covered by the Patents from Seller and Seller desires to transfer the Patents to Buyer; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. BUYER'S ACQUISITION OF THE PATENT. (a) Seller shall sell and assign all of its right, title and interest to the Patents to Buyer pursuant to the Assignment of Patents attached hereto as Exhibit "A". (b) In full consideration of Seller's sale and transfer of the Patents in accordance with Section 1(a), Buyer shall (i) pay Seller an amount equivalent to the Return Price, (ii) make the payment set forth in Section 1(c) below, and (iii) make the royalty payments to Seller set forth in Section 2. (c) Upon consummation of the transactions contemplated herein, not including periodic royalty payments, Buyer shall reimburse Seller (or pay on behalf of Seller) up to [*] of any of the fees charged by Holtzmann, Wise & Shepard for services performed for Seller in connection with the transactions contemplated herein, including the reacquisition of Patents by Seller from U.C. [*] Certain confidential information contained in this document, marked by an asterisk within brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. 2 2. ROYALTY PAYMENTS TO SELLER. (a) In consideration of Seller's sale and assignment of the Patents to Buyer, Buyer shall pay Seller for the period beginning on the Closing Date and extending until the last to expire valid claim in the jurisdiction where the patent is enforceable ("Term") a royalty of [*] of the gross selling price paid to Buyer by a purchaser of any process, service or product in which any one of claimed inventions of the Patents is utilized as a necessary component net of any discounts, allowances, taxes, rebates, returns, import or export duties and transportation prepaid or allowed. (b) Royalty payments shall be made by Buyer to Seller on a semiannual basis on January 1 and July 1 of each year during the Term and Buyer shall provide Seller with an accounting of all sales of products in respect of the Patents upon Seller's request. All records and books of account with respect to the Patents shall be available at all reasonable times at the principal office of Buyer for inspection by Seller not more than twice per year. 3. IMPROVEMENTS ON PATENT. (a) Rights to all improvements made relating to inventions claimed in the Patents ("Improvements"), which Improvements are made by Seller, shall be covered by that certain Patent, Copyright and Noncompetition Agreement of even date. (b) All Improvements made by Buyer shall become the exclusive property of Buyer, and Seller shall not be entitled to any royalty payments with respect to such Improvements. 4. REPRESENTATIONS AND WARRANTIES OF SELLER. The Representations and Warranties of Seller shall survive the Assignment of the Patents. (a) Seller represents that to the best of his knowledge he has full power and authority to execute, deliver and perform this Agreement and that the provisions of this Agreement do not conflict with any other agreement to which Seller is a party or by which Seller is bound. (b) Seller is the sole and exclusive owner of the Patents, subject to the Government License, and has the unrestricted right to sell and assign the Patents to Buyer. (c) No claim has been asserted against Seller by any person which challenges or questions the ownership or validity of the Patents or effectiveness of any of the claimed inventions of the Patents and to the knowledge of Seller the making, using or selling of any of the claimed inventions of the Patents or the know-how in connection therewith does not infringe in any respect on the rights of any person or entity. 2 3 (d) Other than the Government License, Seller has not assigned any interest or right to obtain an interest in the Patents to anyone other than Holder. (e) Seller is the true, sole inventor of the inventions claimed in the Patents. 5. CONDITIONS TO BUYER'S OBLIGATIONS. Buyer's obligations hereunder shall be subject to the satisfaction of the following conditions: (a) The representations and warranties made by Seller herein shall be true and correct as of the date hereof and as of the Closing Date with the same force and effect as though said representations and warranties had been made on and as of the Closing Date and Seller shall have complied with all of the covenants and agreements required to be performed by Seller on or prior to the Closing Date. (b) Seller shall have executed and delivered to Buyer the Consulting Agreement attached hereto as Exhibit "B" along with any other agreement required thereby. (c) All actions taken by Seller in connection with the transactions contemplated by this Agreement and all documents and papers relating to such transactions shall be satisfactory to Buyer, and Seller shall have delivered to Buyer a certificate, dated as of the Closing Date, certifying that the conditions set forth in Section 5(a) and Section 5(b) have been satisfied. 6. MISCELLANEOUS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, personal representatives, successors and permitted assigns of the parties hereto. (b) This Agreement is not assignable by Seller without the prior written consent of the other party. Any amendments to this Agreement shall be in writing and shall be signed by both parties. (c) Any notice or other communication required or permitted to be given under this Agreement shall be in writing and shall be mailed by certified or registered mail, return receipt requested, or sent by facsimile, or by overnight courier or express mail service: If to Seller: Sampath Parthasarathy, Ph.D. Emory University School of Medicine Department of Gyn-Ob P.O. Box 21246 Atlanta, GA 30322 3 4 with a copy to: Holtzmann, Wise & Shepard 3030 Hansen Way, Suite 100 Palo Alto, CA 94304-1006 Attention: Thomas Barton, Esq. If to Buyer: AtheroGenics, Inc. 3343 Peachtree Road, N.E. Suite 1140, East Tower Atlanta, Georgia 30326 Attention: President with a copy to: Lyon & Lyon First Interstate World Center 633 West Fifth Street, Suite 4700 Los Angeles, CA 90071-2066 Attention: Carol A. Schneider, Ph.D All notices given shall be deemed effective upon receipt or if mailed the earlier of receipt or 5 days after mailing. A change of address is effective when given by one party to the other party in writing pursuant to the notice provisions of this Section 6(c). (d) This Agreement is executed by Buyer in, and shall be construed in accordance with and governed by the laws of, the State of Georgia without giving effect to the principles of conflicts of law thereof. (e) This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original, and all of which shall constitute the same instrument. (f) This Agreement (including the Exhibits hereto) constitutes the sole understanding of the parties with respect to the subject matter hereof; provided, however, that this provision is not intended to abrogate any other written instrument or agreement between the parties executed with or after this Agreement. (g) Each party hereto agrees to do all acts and to make, execute and deliver such written instruments as from time to time shall reasonably be required to carry out the terms and provisions of this Agreement. Furthermore, Seller shall, at any time after the date hereof, take all actions necessary to apply for and to obtain Letters Patent or other comparable legal protection if 4 5 before Closing, or assist Buyer in applying for and obtaining Letters Patent or other legal protection if after Closing in any additional jurisdiction upon Buyer's request and at Buyer's expense. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Sampath Parthasarathy - ---------------------------------- Sampath Parthasarathy, Ph.D. ATHEROGENICS, INC. R Wayne Alexander - ---------------------------------- By: R Wayne Alexander, M.D., Ph.D. President 5 6 ASSIGNMENT WHEREAS THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a corporation duly organized under and pursuant to the laws of CALIFORNIA, and having its principal place of business at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550 (hereinafter referred to as the assignor) is the owner of the invention entitled "SOLUBLE ANALOGS OF PROBUCOL" set forth in United States Patent Number 5,262,439 issued on November 16, 1993; and WHEREAS SAMPATH PARTHASARATHY, Emory University Department of GYN OB, P.O. Box 21246, Atlanta, GA 30322, (hereinafter referred to as the assignee), desires to acquire the entire right, title and interest in and to said inventions and said Letters Patent of the United States, and in and to any Letters Patent or Patents, United States or foreign, to be obtained therefor and thereon; NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, said assignor does sell, assign, transfer and set over to assignee, his successors, legal representatives and assigns, its entire right, title and interest in and to the above mentioned inventions, Letters Patent, and any and all Letters Patent or Patents in the United States of America and all foreign countries which may be granted therefor and thereon, and to any and all divisions, continuations, continuations-in-part, reissues and extensions, and all its rights under the International Convention for the Protection of Industrial Property, the same to be held and enjoyed by said assignee to the full end of the term or terms for which Letters Patent or Patents may be granted, as fully and entirely as the same would have been held and enjoyed by the assignor, had this sale and assignment not been made. 7 ASSIGNOR hereby covenants that no assignment, sale, agreement or encumbrance has been or will be made or entered into which would conflict with this Assignment. ASSIGNOR hereby authorizes and requests the Commissioner of Patents and Trademarks to record this Assignment for said Letters Patent or any legal equivalent thereof in the name of ASSIGNEE, his successors and assigns, in accordance with this Assignment. WITNESS MY HAND AT Alameda California, this 25th day of January, 1995. THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By: Linda S Stevenson ------------------------------ STATE OF CALIFORNIA ) ) SS. COUNTY OF ALAMEDA ) On this 25th day of January, 1995, before me, Jerina A. Labat a Notary Public, personally appeared Linda S. Stevenson, proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to this instrument, and acknowledged that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. Witness my hand and official seal. Jerina A. Labat -------------------------------- Notary Public in and for said County and State 2 8 LICENSE TO THE UNITED STATES GOVERNMENT Invention Title: Soluble Analogs of Probucol Inventor(s): Sampath Parthasarathy Patent or Application Serial No: 5,262,439 U.S. Filing/Issue Date: Issued November 16, 1993 Grant/Contract Identification No: HL 14197 Foreign Applications filed/intended in (countries): Canada, EPO, Japan The invention identified above is a Subject Invention under 35 U.S.C. 200, et seq., and the Standard Patent Rights clause at 37 CRF 401.13 or FAR 52.227-11, which are included among the terms of the above-identified grant/contract award from the Public Health Service/National Institutes of Health. This document is confirmatory of: 1. The nonexclusive, nontransferable, irrevocable, paid-up license granted to the Federal Government in the invention described in the patent application and in any of all divisions, continuations, and continuations in part, and in any and all patents and re-issues granted thereon; and 2. All other rights acquired by the Government by reason of the above identified grant/contract award and the laws and regulations which are applicable to the award. The Government is hereby granted an irrevocable power to inspect and make copies of the above-identified patent application. Signed this 27 day of March, 1995. By: /s/ Sampath Parthasarathy --------------------------------- [Inventor(s) Name] Street Address: 2958 North Brook Drive, Atlanta -------------------------------- City, State, & Zip Code: Atlanta, GA 30340 ----------------- 9 April 26, 1995 Sampath Parthasarathy, Ph.D. Emory University School of Medicine Department of Gyn-Ob P.O. Box 21246 Atlanta, GA 30322 Dear Dr. Parthasarathy: AtheroGenics, Inc., a Georgia corporation (the "Company"), desires to obtain your services as a consultant in the field of atherogenesis and the chemistry and biology of oxidation reactions and their inhibitors, to assist and advise the Company in connection with its efforts of researching, developing, marketing and worldwide promotion of prescription pharmaceuticals for the treatment of atherosclerosis and other inflammatory diseases through regulation of intracellular redox pathways (the "Business"). As part of your services as a consultant, the Company desires that you become a member of its Scientific Advisory Board. Subject to the Assignment of Patents by you to the Company pursuant to that certain Patent Purchase Agreement, dated as of April 26, 1995, between you and the Company (the "Patent Purchase Agreement"), you agree to provide such consulting services and to serve on the Company's scientific Advisory Board in accordance with the following terms and conditions: 1. SERVICES: a. CONSULTING SERVICES. You agree to devote up to eight (8) hours per month providing services as a consultant to the Company in connection with the Business. Such services shall be performed during regular business hours at times reasonably agreeable to you and the Company and shall consist of such duties and responsibilities as are assigned to you by the Board of Directors of the Company. b. SCIENTIFIC-ADVISORY BOARD. As part of your services as a consultant, you agree to serve on the Company's Scientific Advisory Board. There is currently no formal schedule established for meetings of the Scientific Advisory Board but it is anticipated that the Scientific Advisory Board will meet a minimum of six (6) days per year. 2. COMPENSATION. a. CASH COMPENSATION AND EXPENSE REIMBURSEMENT. i. As sole and exclusive compensation for your services hereunder, the Company shall pay you Twelve Thousand Dollars ($12,000) per year for your consulting services and for serving on the Scientific Advisory Board. 10 Sampath Parthasarathy, Pd.D. April 26, 1995 Page 2 For our respective conveniences, the compensation shall be paid to you at the rate of $1000 per month. ii. In addition, you shall be reimbursed for any air travel (economy class) necessary and requested by the Company, and all reasonable living expenses, including, but not limited to, car rental, meals, and lodging incurred by you when associated with the rendering of your services at locations away from your home or from Atlanta, Georgia. The Company shall make all payments to you in accordance with this paragraph within thirty (30) days of receipt of an invoice from you itemizing your travel expenses, including receipts for incidental expenses in excess of $25.00. Your invoices shall be mailed to the Company at 3343 Peachtree Road, N.E., Suite 1140, East Tower, Atlanta, Georgia 30326, Attention: President. iii. All payments, including reimbursements for actual expenditures, shall be, included in your gross income as compensation for services rendered and accordingly reported on your IRS Form 1099. You shall be responsible for payment of all taxes including Social Security taxes on income earned under this Agreement as none will be withheld by the Company. You shall indemnify AtheroGenics for any claims made by federal, state or local tax agencies as a result of your failure to pay taxes, fees, withholding, or the like. b. COMMON STOCK OF THE COMPANY. i. As additional compensation for your services performed under this Agreement, and as an incentive to help make the Company successful, you will be issued 40,000 shares of Common Stock of the Company upon your execution and delivery of this Agreement and the simultaneous closing of the sale of United States Patent No. 5,262,439 and corresponding foreign applications and patents pursuant to the Patent Purchase Agreement. Simultaneous with your acceptance of this Agreement, you will enter into a Stock Restriction Agreement between you and the Company (the "Stock Restriction Agreement") in the form attached hereto as Exhibit "I". If this Agreement is terminated by the Company for cause (which shall be the willful breach by you of this Agreement) or by you (other than for death or disability) pursuant to Paragraph 4 prior to the end of the term provided 11 Sampath Parthasarathy, Pd.D. April 26, 1995 Page 3 herein, you shall be entitled only to the Vested Shares as defined in the Stock Restriction Agreement. ii. The Stock is being acquired by you solely for your account, for investment, with no present intention of making a public distribution thereof within the meaning of the Securities Act. None of the Stock will be sold or transferred by you in violation of the Securities Act or any state securities law, and your financial condition is such that this investment can be made on a long-term basis and you can afford the complete loss of the investment. You are aware that none of the Stock has been registered under the Securities Act or any state securities law, that the Stock must be held indefinitely unless they are subsequently registered or an exception from such registration is available and that the Company is under no obligation to register any of the Stock under the Securities Act or any state securities law. You are aware that an exception from registration requirements of the Securities Act pursuant to Rule 144 thereunder is not presently available; that the Company has not covenanted to make available an exception from the registration requirements pursuant to such Rule 144 or any successor rule for resale of any of the Stock; and that even if any exemption under Rule 144 were available, the Rule permits only routine sales of securities in limited amounts in accordance with the terms and conditions of such Rule. You further acknowledge that there is presently no market for the purchase and sale of any of the Stock. iii. You confirm that the Company has made available to you, or to your representatives, the opportunity to ask questions of its officers and directors and to acquire such additional information about the business and financial condition of the Company as you request. You are not acquiring and will not acquire the Stock based upon representations, oral or written, by any person with respect to the future value of, or income from, such Stock but rather upon your independent examination and judgment as to the prospects of the Company, You have all requisite legal power to enter into this Agreement, to acquire the Stock and carry out and perform your other obligations under the terms of this Agreement. 3. INDEPENDENT CONTRACTOR. It is agreed that you are to have complete freedom of action as to the details, methods and means of performing these services. It is further understood that you are retained and 12 Sampath Parthasarathy, Pd.D. April 26, 1995 Page 4 have contracted with the Company only for the purposes and to the extent set forth in this Agreement, and your relation to the Company and any of its affiliates shall, during the period of your retainer and service, be that of an independent contractor. Except as otherwise provided herein, you shall not be considered under the provisions of this agreement or otherwise as having status as an employee of the Company, nor shall you be entitled hereafter to participate in any plans, arrangements, or distributions by the Company relating to any pension, deferred compensation, bonds, stock bonus, stock option, hospitalization, insurance, or other benefits extended to its employees since you are performing services as an independent contractor. 4. CONTRACT PERIOD. This Agreement becomes effective on the date set forth above your signature and will continue in effect for four (4) years. Notwithstanding the foregoing, either you or the Company may terminate this Agreement at any time and for any reason during its term by giving at least one (1) month's written notice. This Agreement shall automatically extend for consecutive twelve (12) month periods subject to the rights of the parties to terminate this Agreement as provided herein. 5. INVENTIONS. You agree that inventions made during the course of this Agreement shall be subject to the terms of that certain Patent, Copyright and Nondisclosure Agreement dated as of April 26, 1995 (the "Patent, Copyright and Nondisclosure Agreement"). 6. NON-DISCLOSURE: CONFLICT OF INTEREST. Simultaneous with your acceptance of this Agreement, you will enter into the Patent, Copyright and Nondisclosure Agreement in the form attached hereto as Exhibit "2". 7. GENERAL CONDITIONS. a. If any provision of this Agreement shall be declared invalid, illegal or unenforceable, such provision shall be severed and all remaining provisions shall continue in full force and effect. b. The term, the Company, as used herein, shall include any subsidiary or affiliate of the Company. 13 Sampath Parthasarathy, Pd.D. April 26, 1995 Page 5 c. This Agreement shall be binding upon you, your heirs, executors, assigns and administrators and shall inure to the benefit of the Company, its successors and assigns. d. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia. 8. PRIOR AGREEMENTS. This Agreement shall replace all prior agreements between you and the Company relative to your services as a consultant, and this Agreement along with the Patent Purchase Agreement, the Stock Restriction Agreement and the Nondisclosure Agreement, contain the entire understanding between you and the Company regarding your relationship with the Company. This Agreement shall be amended only in writing agreed to by both parties and shall not be assignable by you or by operation of law. Please indicate your acceptance of the foregoing by signing in the space provided below and returning one original letter to my attention. Sincerely, R. Wayne Alexander --------------------------- R. Wayne Alexander, A.D., Ph.D. President AtheroGenics, Inc. Accepted and agreed to this 26th day of April, 1995. /s/ Sampath Parthasarathy, PH.D - ------------------------------- Sampath Parthasarathy, Ph.D. Social Security No.[*] 14 ATHEROGENICS, INC. STOCK RESTRICTION AGREEMENT THIS STOCK RESTRICTION AGREEMENT (this "Agreement") is made and entered into as of April 26, 1995 by and between ATHEROGENICS, INC. a Georgia corporation (the "Company"), and Sampath Parthasarathy, Ph.D., a resident of Georgia ("Stockholder"). R E C I T A L S: A. Stockholder is being issued as of the date hereof forty thousand (40,000) shares of the Common Stock of the Company (the "Shares") in connection with that certain Patent Purchase Agreement of even date herewith (the "Patent Purchase Agreement") and that certain Consulting Agreement dated of even date herewith (the "Consulting Agreement"). As used herein, the term "Shares" refers to all such shares presently held by the Stockholder and to all securities purchased or otherwise received in addition thereto or in replacement thereof, pursuant to or in consequence of any stock dividend, stock split, recapitalization, merger, reorganization, exchange of shares or other similar event. B. The Company is party to Series A Convertible Preferred Stock Agreement (the "Purchase Agreement") dated as of May 6, 1994 with Alliance Technology Ventures, L.P. ("Alliance") pursuant to which the Company issued to Alliance the Company's Series A Convertible Preferred Stock. All capitalized terms in this Agreement shall have the meanings ascribed to such terms in the Purchase Agreement unless otherwise defined herein. In order to provide assurance to Alliance and other persons who may purchase or otherwise require shares of the Series A Convertible Preferred Stock (the "Preferred Stock") of the Company in the future (collectively, the "Investors") and thereby to assist in future equity financings of the Company, Stockholder is willing to enter into this Agreement for the benefit of the Company, the Investors and any other person or entity who holds stock of the Company from time to time. THE PARTIES AGREE AS FOLLOWS: 1. THE COMPANY'S RIGHT TO REPURCHASE UPON TERMINATION OF EMPLOYMENT. 1.1. REPURCHASE RIGHT. The unvested Shares, regardless of ownership, shall be subject to a right (but not obligation) of repurchase in favor of the Company (the "Right of Repurchase") at the price set forth below ("Purchase Price"), if the Stockholder's consultancy with the Company is terminated by Stockholder other than for death or disability or by the Company for cause which shall be the willful breach of the Consulting Agreement (the "Consultancy Termination") before the Right of Repurchase expires with respect to such Shares in accordance with Schedule 1.1. The Purchase Price shall be ten cents (10(cent)) per Share for those 15 40,000 Shares transferred in connection with the Patent Purchase Agreement and the Consulting Agreement. The Stockholder may not dispose of or transfer or pledge or grant a security interest in any Shares which are subject to the Right of Repurchase and any such attempted transfer shall be null and void. The Company's rights under this Section 1.1 shall be freely assignable, in whole or in part. 1.2. REPURCHASE PROCEDURE. The Company's Right of Repurchase shall terminate if not exercised by written notice from the Company to the Stockholder within sixty (60) days from the date on which the Company learns of the Consultancy Termination. If the Company exercises its Right of Repurchase, the Stockholder shall promptly endorse and deliver to the Company the stock certificates representing the Shares being repurchased free and clear of any liens, claims or encumbrances, and the Company shall then pay promptly (but in no event later than sixty (60) days after the date of Consultancy Termination, or five (5) days after return of the stock certificate, whichever is later, pursuant to the provisions of Section 1.3 of this Agreement, the total Purchase Price to the Stockholder. 1.3. REPURCHASE PAYMENT. If, at the time of the repurchase, any notes are outstanding which represent any portion of the total Purchase Price for Shares being so repurchased, the Purchase Price shall be paid first by cancellation of any obligation for accrued but unpaid interest under such notes, next by cancellation of principal under such notes, and finally by payment of cash or check. 1.4. BINDING EFFECT. The Company's Right of Repurchase shall inure to the benefit of the successors and assigns of the Company and shall be binding upon any representative, executor, administrator, heir, successor, assignee or legatee of the Stockholder. 1.5. For purposes of this Article I and Article 2 below, if Stockholder is also a member of the Board of Directors of the Company, the Stockholder shall abstain from voting in regard to Company's Right of Repurchase or Right of First Refusal (as that term is defined below). 2. COMPANY'S RIGHT OF FIRST REFUSAL RESPECTING SHARES. 2.1. RIGHT OF FIRST REFUSAL. Without derogation of any provisions of Section 1, and except as provided by Section 2.5 of this Agreement, and if and to the extent Stockholder is allowed to sell under applicable Securities laws which may restrict Stockholder's ability to sell, pledge or otherwise transfer, in the event that the Stockholder proposes to sell, pledge, or otherwise transfer any Shares or any interest in such Shares to any person or entity, the Company shall have a right of first refusal (the "Right of First Refusal") with respect to such Shares. Stockholder shall give a written notice (the "Transfer Notice") to the Company describing fully any proposed transfer of Shares, including the number of Shares proposed to be transferred, the proposed transfer price, and the name and address of the proposed transferee. The Transfer Notice shall be signed both by the Stockholder and by the proposed transferee. The Company shall have the right to purchase all, but not less than all, of the Shares subject to the Transfer 2 16 Notice at the same price and on the same terms as those indicated in the Transfer Notice by delivery of a notice of exercise of the Company's Right of First Refusal within thirty (30) days after the date the Transfer Notice is delivered to the Company (the "Repurchase Period"). The Company's rights under this Section 2.1 shall be freely assignable, in whole or in part. For purposes of this Agreement, a transfer of Shares or any interest in Shares to an inter vivos revocable trust which does not allow for the disposition of these Shares except upon Stockholder's death and then only to Stockholder's immediate family members, or transfer of Shares or any interest in Shares via a testimentary instrument to Stockholder's immediate family members, shall not be considered a transfer. However, subsequent sales, pledges or other transfers of any Shares or interest in Shares shall be subject to this Right of First Refusal. Notwithstanding anything to the contrary, any Shares so transferred shall be subject to all limitations and restrictions of Section 1.1. 2.2. TRANSFER OF SHARES. If the Company fails to exercise the Right of First Refusal within the Repurchase Period, the Stockholder, may, not later than ninety (90) days following delivery to the Company of the Transfer Notice, conclude a transfer of the Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Stockholder, shall again be subject to the Right of First Refusal and shall require compliance by the Stockholder with the procedure described in Section 2.1 of this Agreement. If the Company exercises the Right of First Refusal, the parties shall consummate the sale of shares on the terms set forth in the Transfer Notice; provided, however, in the event the Transfer Notice provides for payment for the Shares other than in cash, the Company shall have the option of paying for the Shares by the discounted cash equivalent of the consideration described in the Transfer Notice. 2.3. BINDING EFFECT OF RIGHT OF FIRST REFUSAL. The Company's Right of First Refusal shall inure to the benefit of the successors and assigns of the Company and shall be binding upon any transferee of Shares other than a transferee acquiring Shares in a bona fide arms-length transaction where the Company failed to exercise the Right of First Refusal (a "Free Transferee"), or a transferee of a Free Transferee. 2.4. TERMINATION OF THE COMPANY'S RIGHT OF FIRST REFUSAL. Notwithstanding anything in this Section 2, the Company shall have no Right of First Refusal, and Stockholder shall have no obligation to comply with the procedures in Sections 2.1 through 2.3 after the earlier to occur of (i) the Company's initial registered public offering of Common Stock to the public, or (ii) the date ten (10) years after the date of this Agreement. 2.5. LIMITATIONS TO RIGHTS. Without regard and not subject to the provisions of Sections 2.1 and 3.1, the Stockholder may sell or otherwise assign for consideration Shares to any or all of his ancestors, descendants, spouse, or members of his immediate family, or to a custodian, trustee (including a trustee of a voting trust), executor, or other fiduciary for the account of his ancestors, descendants, spouse, or members of his immediate family, provided that each such transferee or assignee, prior to the completion of the sale, transfer, or assignment, shall 3 17 have executed documents assuming the obligations of the Stockholder under this Agreement with respect to the transferred securities. 3. RIGHTS OF CO-SALE. 3.1. THE RIGHTS OF INVESTORS. Following the Repurchase Period, if at any time Stockholder proposes to sell any Shares to parties other than the Investors in a transaction (the "Transaction") not registered under the Act in reliance upon a claimed exemption thereunder, then to the extent the Company has not exercised its Right of First Refusal as to any Shares being sold, any Investor which notifies the Company in writing, within thirty (30) days after receipt of the notification from the Stockholder referred to in Section 3.2 (a "Selling Holder") shall have the opportunity to sell a pro rata portion of Shares which the Stockholder proposes to sell to such third party in the Transaction; whereupon the Stockholder shall assign so much of his interest in the agreement of sale as the Selling Holder shall be entitled to and shall request hereunder, and the Selling Holder shall assume such part of the obligations of the Stockholder under such agreement as shall relate to the sale of the Shares by the Selling Holder. For the purposes of this Section 3, the "pro rata portion" which the Selling Holder shall be entitled to sell shall be an amount of shares equal to the total amount of Shares proposed to be sold multiplied by a fraction, the numerator of which is the number of shares of Common Stock issuable upon conversion of the Preferred Stock and shares of Common Stock owned by a Selling Holder, and the denominator of which is the total number of such shares owned by all participating Selling Holders and the Stockholder. Each Selling Holder shall notify the Stockholder whether it elects to sell an amount equal to or less than its pro rata portion of the Shares so offered. Each Selling Holder shall be entitled to apportion Shares to be sold among its partners and affiliates, provided that such Selling Holder notifies the Company of such allocation. 3.2. NOTICE. Following the Repurchase Period, prior to any sale by the Stockholder of any Shares, the Stockholder shall notify each Investor and the Company, in writing, of his intention to sell and issue such securities, setting forth the general terms under which he proposes to make such sale. Such notice shall be signed by the third parties, or a representative of such third parties, or shall be accompanied by a letter of intent signed by the third parties or representatives of such third parties, to whom the sale, assignment or transfer is proposed and shall indicate the third parties' concurrence with the description of the terms. 3.3. FAILURE TO NOTIFY. If, within thirty (30) days after the Stockholder gives his notice to the Investors, the Investors do not notify the Company that they desire to sell all of their pro rata portion of the Shares described in such notice at the price and on the terms and conditions set forth therein, then the Stockholder may, not later than ninety (90) days following delivery of the notice under Section 3.2 as to the Shares to which the Investors do not indicate a desire to sell, conclude a transfer on the terms and conditions described in the notice. In the event the Stockholder has not concluded such sale of shares within such ninety (90) days, the Stockholder shall not thereafter sell any Shares without first notifying the Investors and the Company in the manner provided above. The exercise or non-exercise of the right to participate in one or more sales of Shares made by the Stockholder shall not adversely affect an Eligible 4 18 Holder's right to participate in subsequent sales of Shares by the Stockholder pursuant to Section 3.1 hereof. 3.4. TERMINATION. The obligations of the Stockholder under this Section 3 shall terminate and be of no further force and effect upon the occurrence of either event described in subsection 2.4 of this Agreement. 4. MARKET STANDOFF. The Stockholder hereby agrees that if so requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the Act, the Stockholder shall not sell or otherwise transfer any Shares for a period of one hundred eighty (180) days following the effective date of a Registration Statement filed under the Act; provided, however, that such restriction shall apply to the first two (2) Registration Statements of the Company to become effective under the Act which include securities to be sold on behalf of the Company to the public in an underwritten public offering under the Act. The Company may impose stop-transfer instructions in order to enforce the foregoing restrictions. 5. TAXES. The Stockholder shall execute and deliver to the Company with this executed Agreement a copy of the Acknowledgement and Statement of Decision Regarding Election Pursuant to Section 83(b) of the Internal Revenue Code (the "Acknowledgement") attached hereto as Schedule 5A. The Stockholder shall execute and submit with the Acknowledgement a copy of the Election Pursuant to Section 83(b) of the Code, attached hereto as Schedule 5B, if the Stockholder has indicated in the Acknowledgement his decision to make such an election. The Stockholder should consult his tax advisor to determine if there is a comparable election to file in the state of his residence and whether such filing is desirable under the circumstances. The Company may withhold from the Stockholder's wage, or require the Stockholder to pay to the Company, any applicable withholding or employment taxes resulting from the lapse of any restrictions imposed on the Shares. 6. STOCK RESTRICTIVE LEGENDS. Stock certificates evidencing Shares may bear such restrictive legends as the Company and the Company's counsel deem necessary or advisable under applicable law or pursuant to this Agreement, including, without limitation, the following legends: "The securities represented hereby are subject to a right of first refusal by the Company and a right of co-sale on the part of certain stockholders pursuant to provisions of the Stock Restriction Agreement between the Company and Sampath Parthasarathy dated as of April 26, 1995, and may not be sold or otherwise transferred except in compliance with the terms of such agreement." 5 19 "The securities represented hereby may be subject to a right of repurchase by the Company, pursuant to the provisions of the Stock Restriction Agreement between the Company and Sampath Parthasarathy dated as of April 26, 1995, and such securities may not be sold or otherwise transferred if such securities are subject to such right of repurchase." "The securities represented hereby are subject to restrictions on transfer for a period of 180 days following the effective date of a registration statement under the Securities Act of 1993, as amended, for an offering of the Company's securities as more fully provided in a Stock Restriction Agreement among the Company, Alliance Technology Ventures, L.P., and the original purchaser of such securities." 7. BINDING EFFECT. Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto. 8. DAMAGES. Stockholder shall be liable to the Company and Alliance for all costs and damages, including incidental and consequential damages, resulting from a disposition of Shares which is not in conformity with the provisions of this Agreement. 9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts entered into and wholly to be performed within the State of Georgia residents. The parties agree that the exclusive jurisdiction and venue of any action with respect to this Agreement shall be in the Superior Court of Georgia for the County of Fulton or the United States District Court for the Northern District of Georgia, and each of the parties hereby submits itself to the exclusive jurisdiction and venue of such courts for the purpose of such action. The parties agree that service of process in any such action may be effected by delivery of the summons to the parties in the manner provided for delivery of notices set forth in Section 10. 10. NOTICES. All notices and other communications under this Agreement shall be in writing. Unless and until Stockholder is notified in writing to the contrary, all notices, communications and documents directed to the Company and related to the Agreement, if not delivered by hand, shall be mailed, addressed as follows: ATHEROGENICS, INC. 3343 Peachtree Road, N.E. Suite 1140 East Tower Atlanta, Georgia 30326 Attention: President 6 20 with a copy to: Lyon & Lyon 633 West Fifth Street Suite 4700 Los Angeles, CA 90071-2066 Attention: Carol A. Schneider, Ph.D. Unless and until the Company is notified in writing to the contrary, all notices, communications and documents intended for Stockholder and related to this Agreement, if not delivered by hand, shall be mailed to Stockholder's last known address as shown on the Company's books, with a copy to: Holtzmann, Wise & Shepard 3030 Hansen Way Suite 100 Palo Alto, CA 94304-1006 Attention: Thomas L. Barton Notices and communications shall be mailed by registered or certified mail, return receipt requested, postage prepaid. All notices related to this Agreement shall be deemed received upon delivery or, if mailed, within five (5) days after mailing in accordance with this Section 10. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. ATHEROGENICS, INC. R. Wayne Alexander ---------------------------------- By: R. Wayne Alexander, M.D., Ph.D. Title: President Stockholder hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement. Stockholder Sampath Parthasarathy -------------------------------------- Stockholder's spouse indicates by the execution of this Agreement his or her consent to be bound by the terms herein as to his or her interests, whether a community property or otherwise, if any, in the Shares. Stockholder's Spouse Mrs. Dalyaui Parthasarathy ----------------------------- 7 21 SCHEDULE 1.01 OF THE STOCK RESTRICTION AGREEMENT The Right of Repurchase shall expire as follows: Forty percent (40%) of the Shares issued to Stockholder shall vest upon signing of the Stock Restriction Agreement, twenty percent (20%) shall vest each year after the date of signing (collectively the "Vested Shares"), and the Right of Repurchase shall no longer apply to any Vested Shares. ATHEROGENICS, INC. R. Wayne Alexander ---------------------------------- By: R. Wayne Alexander, M.D., Ph.D. Title: President Stockholder: Sampath Parthasarathy ----------------------- 22 SCHEDULE 5A ACKNOWLEDGEMENT AND STATEMENT OF DECISION REGARDING ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE The undersigned (which term includes the undersigned's spouse), a holder of 40,000 shares of common stock of ATHEROGENICS, INC., a Georgia corporation (the "Company") hereby states as follows: 1. The undersigned acknowledges receipt of a copy of the Company's Stock Restriction Agreement (the "Agreement"). The undersigned has carefully reviewed the Agreement. 2. The undersigned either [check as applicable]: ____ (a) has consulted, and has been fully advised by, the undersigned's own tax advisor, ______________________, whose business address is ______________________________, regarding the federal, state and local tax consequences of entering into the Agreement, and particularly regarding the advisability of making elections pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and pursuant to the corresponding provisions, if any, of applicable state laws; or X (b) has knowingly chosen not to consult such a tax advisor. 3. The undersigned hereby states that the undersigned has decided [check as applicable]: ____ (a) to make an election pursuant to Section 83(b) of the Code, and is submitting to the Company, together with the undersigned's executed Agreement, an executed form which is attached as Schedule 5B to the Agreement; or X (b) not to make an election pursuant to Section 83(b) of the Code. 4. Neither the Company nor any subsidiary or representative of the Company has made any warranty or representation to the undersigned with respect to the tax consequences of the Agreement or of the making or failure to make an election pursuant to Section 83(b) of the Code or the corresponding provisions, if any, of applicable state law. 23 5. The undersigned is also submitting to the Company, together with the Agreement, an executed original of an election, if any is made, of the undersigned pursuant to provisions of state law corresponding to Section 83(b) of the Code, if any, which are applicable to the undersigned's purchase of shares under the Agreement. Date: 5/25/95 /s/ Sampath Parthasarathy ---------------------------------------- Sampath Parthasarathy, Ph.D. Date: ---------------------------------------- 2 24 SCHEDULE 5B ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE --------------------- The undersigned hereby elects pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), to include in the undersigned's gross income the excess (if any) of (x) the fair market value of the property described below, over the amount the undersigned paid for such property plus, if the shares to which this election relates were acquired by exercise of an "incentive stock option" within the meaning of Section 422 of the Code, the amount excluded from the undersigned's income pursuant to Sections 421 and 422 of the Code. This election is made to the same effect, and with the same limitations, with respect to the analogous provisions of Sections 83(b) (and, if applicable, Sections 412 and 422) of the Code under any applicable state statute. Pursuant to applicable Treasury Regulations the following information is provided: 1. The undersigned's name, address and taxpayer identification (social security) number are Name: Sampath Parthasarathy ---------------------------------------------------------------- Address 2958 Worthbrook Drive, Atlanta GA 30340 -------------------------------------------------------------- Social Security #: [ * ] --------------------------------------------------- 2. The property with respect to which the election is made consists of 24,000 shares of Common Stock of ATHEROGENICS, INC., a Georgia corporation (the "Company"). 3. The date on which the above property was transferred to the undersigned was ____________________, 19__, and the taxable year to which this election relates is 19__. 4. The above property is subject to the following restrictions: (a) a right of repurchase by the Company of the initial purchase price, if the undersigned ceases to be an employee of, or a consultant to, the Company or an affiliate of the Company; and (b) a right of first refusal by the Company should the undersigned wish to transfer the shares to a person or entity other than the Company. 5. The fair market value of the above property at the time of transfer (determined without regard to any restrictions other than those which by their terms will never lapse) is $___________ per share. 6. The amount paid for the above property by the undersigned was $_______ per share. 7. A copy of this election has been furnished to the Company, and a copy will be filed with the income tax return of the undersigned to which this election relates. 25 8. If the shares to which this election relates were acquired by exercise of an "incentive stock option" within the meaning of Section 422 of the Code, this election is protective only, is made solely to bar application of Section 83(a) of the Code, and is not an election of the undersigned actually to recognize income which apart from this election is protected from recognition by Sections 421 and 422 of the Code. If the shares to which this election relates were acquired by exercise of an incentive stock option, the amount expressly excluded from income pursuant to Sections 421 and 422 of the Code is $________ per share. Dated: May 25, 1995. /s/ Sampath Parthasarathy ------------------------------------ Sampath Parthasarathy, Ph.D. 2 26 ATHEROGENICS, INC. PATENT, COPYRIGHT AND NONDISCLOSURE AGREEMENT In partial consideration and as a condition of my engagement as a consultant by AtheroGenics, Inc., a Georgia corporation (the "Company"), and effective as of the date that the consultancy by the Company first commenced, the undersigned agrees as follows: 1. NONCOMPETITION (a) The Company acknowledges and agrees that during the term of my consultancy by, or any subsequent consultancy with the Company (the "Consultancy Period"), I may continue to be employed by the Emory University School of Medicine ("Emory") or may be employed by or consult with other academic or non-profit research institutions. In the course of my employment or consultancy with Emory or another medical school, I will perform services traditionally performed by members of the faculty of such school, including, without limitation, (i) teaching, (ii) providing medical services to patients or related or affiliated hospitals or clinics, (iii) conducting research on behalf of Emory with respect to medical devices, procedures and pharmaceuticals or other compounds which may relate to or be used as prescription pharmaceuticals (including pharmaceuticals which are or may be competitive with those marketed, promoted or researched by the Company), (iv) researching and testing pharmaceuticals or compounds manufactured or developed by third parties under circumstances that result in compensation to Emory (and possible indirect compensation to me) or such other school for such services, and (v) receiving honoraria for presentations at medical conferences or seminars, except that I will not investigate or develop for any other commercial entity (a) the relationship of oxidation reactions to transcriptional factors, including NFxB, in cardiovascular disease and other inflammatory diseases, (b) antioxidants and their anti-inflammatory role in the activation of transcriptional factors in cardiovascular disease and other inflammatory diseases, or (c) the commercial development of antioxidants as potential therapeutic mediators in cardiovascular diseases and other inflammatory diseases. Subject to the foregoing duties which I perform or may perform for Emory or other academic or research institutions during the Consultancy Period, I will not, without the prior written approval of an executive officer of the Company (i) engage in any other professional employment or consulting or (ii) directly or indirectly participate in or assist in any business which is a current or potential competitor of the Company. (b) I understand and acknowledge that the Company is in the business of researching, developing, marketing and worldwide promotion of prescription pharmaceuticals, and that to assist in this business endeavor the Company will be recruiting investors on a worldwide basis to furnish financial backing. During the course of my consulting, I will be consulting in the foregoing areas, i.e. researching, developing, investigating, producing, promoting, marketing and sales of prescription pharmaceuticals, as well as recruiting investors. I will acquire in-depth knowledge of certain of the Company's business practices and confidential information. 27 (c) In light of the foregoing, during the Consultancy Period, I agree that I will not directly or indirectly, expressly or tacitly, for myself or on behalf of any entity anywhere in the world, (i) act as an officer, manager, advisor, executive, controlling shareholder, or consultant to any business in which my duties at or for such business include oversight of or actual involvement in the research, development, investigation, production, promotion, marketing or sales or prescription pharmaceuticals which are competitive with those being produced or developed by the Company, or are under investigation by the Company at the expiration of the Consultancy Period, (ii) recruit investors on behalf of an entity which engages in researching, developing, investigating, producing, promoting, marketing and sales of prescription pharmaceuticals which are competitive with those being produced or developed by the Company, or are under investigation by the Company at the expiration of the Consultancy Period, or (iii) become employed by such an entity in any capacity which would require me to carry out, in whole or in part, the duties I have performed for the Company with respect to prescription pharmaceuticals which are competitive with those being produced or developed by the Company, or are under active investigation by the Company at the expiration of the Consultancy Period). I acknowledge that because of the worldwide nature of the Company's business, this restriction will prevent me from acting in any of the foregoing capacities for any competing entity wherever located and that this worldwide scope is reasonable in light of the business of the Company. (d) I further agree that during the Consultancy Period, and for a period of two (2) years following the termination of the Consultancy Period, I will not directly or indirectly, on my own behalf or in the service or on behalf of others, solicit, suggest or direct others to solicit for hire any person employed by the Company at the time of termination of the Consultancy Period. (e) I agree that during the Consultancy Period, and for a period of two (2) years following the termination of the Consultancy Period, I will not, without the prior written approval of an executive officer of the Company, on my own behalf or in the service of or on behalf of others, knowingly solicit, divert, or attempt to appropriate, to any business which competes with the Company in the fields of research, development, investigation, production, promotion, marketing, and sales of prescription pharmaceuticals, any person or entity who is a customer of the Company or an actively sought prospective customer of the Company (who is known as such by me) during my Consultancy Period. (f) I agree that the covenants contained in this Section 1 are reasonable and necessary to protect the confidentiality of the trade secrets, and other confidential information concerning the Company acquired by me. The provisions of this Section 1 shall be interpreted so as to protect those trade secrets and confidential information, and to secure for the Company the exclusive benefits of the work performed on behalf of the Company by me under this Agreement, and not to unreasonably limit my ability to engage in employment and consulting activities in non-competitive areas which do not endanger the Company's legitimate interests expressed in this Agreement. 2 28 (g) In the event that any of the covenants contained herein in subparagraphs (a) through (e) are deemed unenforceable by a court of competent jurisdiction, I agree that each of the covenants herein is severable from each of the others, and that a declaration of invalidity as to any one of the covenants shall not effect the enforceability of the others. Further, in the event one or more of the covenants herein is deemed unenforceable by a court of competent jurisdiction, the parties hereby agree and request that the court enforce the covenant(s) to the extent found reasonable by the court. I acknowledge that I have had the assistance of counsel of my choice in negotiation of this Agreement and of these covenants. 2. INVENTIONS 2.1 DISCLOSURE The Company acknowledges and agrees that pursuant to my employment relationship with Emory or such other academic or non-profit research institution or commercial enterprise as I may be engaged by in the future ("Employer"), Emory has, and an Employer may have, all right, title and interest in and to any patentable or unpatentable, copyrightable or uncopyrightable, idea, invention, work of authorship (including, but not limited to, computer programs, software and documentation), formula, device, improvement, method, process or discovery (any of the foregoing items hereinafter referred to as an "Invention") arising out of, related to or based upon my work for or on behalf of my Employer. Except for Inventions which arise out of my employment and belong to my Employer, I will disclose promptly to the proper officers of the Company in writing any Invention which relates to the Company's business that I conceive, make, develop, or work on, in whole or in part, solely or jointly with others during the term of my consultancy with the Company and for a period of six months thereafter regardless of whether (a) such invention was conceived, made, developed or worked on during my regular hours of employment of my time away from work; (b) the Invention was made at the suggestion of the Company; or (c) the Invention was reduced to drawing, written description, documentation, models or other tangible form. 2.2 ASSIGNMENT OF INVENTIONS TO COMPANY I hereby assign to the Company without royalty or any other further consideration my entire right, title and interest in and to any Invention I am required to disclose under Section 2.1. 2.3 RECORDS I will make and maintain adequate and current written records of all Inventions covered by Section 2.1. These records shall be and remain the property of the Company. 3 29 2.4 PATENTS Subject to Section 2.1, I will assist the Company in obtaining, maintaining, and enforcing patents and other proprietary rights in connection with any Invention covered by Section 2.2 for which the Company has or obtains any right, title or interest. I farther agree that my obligations under this Section 2.4 shall continue beyond the termination of the Consultancy Period, but if I am called upon to render such assistance after the termination of the Consultancy Period, I shall be entitled to a fair and reasonable rate of compensation for such assistance. I shall, in addition, be entitled to reimbursement of any out-of-pocket expenses incurred at the request of the Company relating to such assistance. 2.5 PRIOR CONTRACTS AND INVENTIONS: INFORMATION BELONGING TO THIRD PARTIES I represent that, except as set forth on Schedule 2.5A hereto an initiated by the Company and me, there are no other contracts to assign inventions that are now in existence between any other person or entity and me. I further represent that other than my employment obligations for Emory and the NIH I have no other employments or undertakings which might restrict or impair my performance of this Agreement I will not, in connection with my engagement as a consultant by the Company, use or disclose to the Company any confidential trade secret or other proprietary information or any previous employer or other person to which I am not lawfully entitled. As a matter of record, I attach to Schedule 2.5B of this Agreement a brief description of all Inventions made or conceived by me prior to my engagement as a consultant with the Company which I desire to be excluded from this Agreement. 3. NONDISCLOSURE OF CONFIDENTIAL INFORMATION (a) I agree that all confidential information which is forwarded to me by the Company and which is marked Confidential if forwarded in written form or which is reduced to writing and marked Confidential within thirty days of forwarding if forwarded in oral form shall be received in strict confidence, used only for the purposes of this Agreement, and not disclosed by me (except as required by law or court order) without the prior written consent of the other Company, unless such information (a) was in the public domain at the time of disclosure, (b) later became part of the public domain through no act or omission of the by me, (c) was lawfully disclosed to me by a third party having the right to disclose it, or (d) was already known by me at the time of disclosure, as evidenced by written documents in my possession at the time of the disclosure. (b) In order to fulfill my obligation of confidence hereunder, I shall use at least the same degree of care with the Company's confidential information as I use to protect my own confidential information. This obligation shall exist while this Agreement is in force and for a period of four (4) years thereafter. 4 30 4. PROPERTY OF THE COMPANY All notes, memoranda, reports, drawings, blueprints, manuals, materials, data and other papers and records of every kind which shall come into my possession at any time after the commencement of my consultancy with the Company, relating to any Inventions which I make while performing my duties as a consultant or member of the Scientific Advisory Board for the Company or relating to Confidential Information shall be the sole and exclusive property of the Company. This property shall be surrendered to the Company upon termination of the Consultancy Period, or upon request by the Company, at any other time either during or after the termination of the Consultancy Period. 5. MISCELLANEOUS 5.1 GOVERNING LAW This Agreement shall be construed and governed by the laws of the State of Georgia applicable to contracts entered into and wholly to be performed in Georgia by Georgia residents. 5.2 ENFORCEMENT If any portion of this Agreement shall be determined to be invalid or unenforceable, the remainder shall be valid and enforceable to the maximum extent possible. 5.3 INJUNCTIVE RELIEF, CONSENT TO JURISDICTION I acknowledge that the Company will suffer substantial damages not readily ascertainable or fully compensable in terms of money in the event of the breach of any of my obligations under this Agreement. I therefore agree that the Company shall be entitled (without limitation of any other rights or remedies otherwise available to the Company) to obtain an injunction from any court of competent jurisdiction prohibiting the continuance or recurrence of any breach of this Agreement. I hereby submit myself to the jurisdiction and venue of the courts of the State of Georgia for purposes of any such action. I further agree that service upon me in any such action or proceeding may be made by first class mail, certified or registered, to my address as last appearing on the records of the Company. 5.4 WAIVER The waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision hereof 5 31 5.5 BINDING EFFECT This Agreement shall be binding upon and shall inure to the benefit of the successors, executors, administrators, heirs, representatives and assigns of the parties. 5.6 HEADINGS The Section headings herein are intended for reference and shall not by themselves determine thee construction or interpretation of this Agreement. 5.7 MODIFICATIONS All modifications or amendments to this Agreement must be in writing and signed by the party against whom enforcement of such modification or amendment is sought. IN WITNESS WHEREOF, I have executed this document as of the 26th day of April, 1995. /s/ Sampath Parthasarathy --------------------------------- Sampath Parthasarathy, Ph.D. RECEIPT ACKNOWLEDGED: ATHEROGENICS, INC. /s/ R. Wayne Alexander - ------------------------------------ By: R. Wayne Alexander, M.D., Ph.D. Title: President 6 32 SCHEDULE 2.5A (List here prior contracts to assign inventions that are now in existence between any other person or entity and you.) 33 SCHEDULE 2.5B (List here previous Inventions which you desire to have specifically excluded from the operation of this Agreement.) EX-10.05 8 ex10-05.txt SPONSORED RESEARCH AGREEMENT 1 EXHIBIT 10.05 SPONSORED RESEARCH AGREEMENT This Sponsored Research Agreement (the "Agreement") is made by and between EMORY UNIVERSITY, a nonprofit Georgia corporation with offices located at 1784 North Decatur Road, Suite 510, Atlanta, Georgia 30322 ("University") and ATHEROGENICS, INC., a for profit Georgia corporation organized and existing under the laws of the State of Georgia with offices located at 3065 Northwoods Circle, Norcross, GA 30071 (hereinafter referred to as "Sponsor"). WHEREAS, Sponsor desires that University perform certain research work in collaboration with Sponsor as hereinafter described and is willing to advance funds to sponsor such research; WHEREAS, Sponsor desires to obtain certain rights to patents and technology developed during the course of such research with a view to profitable commercialization of such patents and technology for the Sponsor's benefit; and WHEREAS, University is willing to perform such research and to grant rights to such patents and technology; NOW THEREFORE, in consideration of the mutual covenants and promises herein contained, the University and the Sponsor agree as follows: [ * ] Certain confidential information contained in this document, marked by an asterisk within brackets has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. 2 TABLE OF CONTENTS
PAGE ---- I. EFFECTIVE DATE.......................................................................................... 3 II. RESEARCH PROGRAM........................................................................................ 3 III. COMPENSATION............................................................................................ 3 IV. CONSULTATION AND REPORTS................................................................................ 4 V. PUBLICITY............................................................................................... 5 VI. PUBLICATION AND ACADEMIC RIGHTS......................................................................... 5 VII. CONFIDENTIAL INFORMATION................................................................................ 6 VIII. PATENTS, COPYRIGHTS, AND TECHNOLOGY RIGHTS.............................................................. 8 IX. LIABILITY............................................................................................... 8 X. INDEPENDENT CONTRACTOR.................................................................................. 9 XI. TERM AND TERMINATION.................................................................................... 9 XII. ATTACHMENTS............................................................................................. 9 XIII. GENERAL................................................................................................. 9 ATTACHMENTS RESEARCH PROGRAM................................................................................................. 12 PAYMENT SCHEDULE................................................................................................. 13 PATENTS, COPYRIGHTS, AND TECHNOLOGY RIGHTS....................................................................... 14 CONFIDENTIALITY AGREEMENT........................................................................................ 18 LICENSE AGREEMENT OF JANUARY 1995................................................................................ 19
i 3 I. EFFECTIVE DATE This Agreement shall be effective as of November 1, 1996. II. RESEARCH PROGRAM 2.1 University will use its best efforts to conduct the Research Program in collaboration with Sponsor as described in Attachment A, and will furnish the facilities necessary to carry out its part of the Research Program. The Research Program will be under the direction of Dr. Dennis Liotta, or his successor as mutually agreed to by the parties hereto ("Principal Investigator"), and will be conducted by the Department of Chemistry at the University. 2.2 The Research Program shall be performed during the period from ________, 1996 through and including __________, 1997 ("the Performance Period"). Sponsor shall have the option to extend the Performance Period in one year increments for a total of five (5) years. Funding for each additional year shall be mutually agreed upon by Sponsor and University at the beginning of each extension year. 2.3 The Principal Investigator shall use his best efforts to achieve the goals of the Research Program. The Principal Investigator shall work with Sponsor to determine the means for performing the Research Program so as best to achieve these goals. 2.4 University and Principal Investigator shall keep accurate financial and scientific records relating to the Research Program and shall make such records available to Sponsor or its authorized representative throughout the Term of the Agreement during normal business hours upon reasonable notice. III. COMPENSATION 3.1 As consideration for the performance by University of its obligations under this Agreement, Sponsor shall pay the University an amount equal to its expenditures and reasonable overhead in conducting the Research Program subject to a maximum expenditure limitation of [*] for the initial one year Performance Period as set forth in Attachment B hereto. An initial payment of [*] shall be made within thirty (30) days after the time of execution of this Agreement and subsequent payments shall be made as quarterly advance payments of up to [*] at three (3) month intervals after the Effective Date. Payments for any extensions of the Performance Period shall also be in equal quarterly advance payments based on the specific budget to be agreed upon at the time of renewal. Unexpended funds shall be reimbursed to Sponsor at the end of each year unless agreed to otherwise by Sponsor and University. 3.2 Funds paid by Sponsor shall include indirect payments to the University. Indirect payments shall be included at the rate of [*] of the total payment for the initial one year Performance Period. For each extension year, the indirect rate shall increase [*] of the total payment until it reaches a maximum of [*] of the total payment, as follows: 4 year 1 [*] year 2 [*] year 3 [*] year 4 [*] year 5 [*]
3.3 University shall maintain all Research Program funds in a separate account and shall expend such funds for wages, supplies, equipment, travel, and other operation expenses in connection with the Research Program in reasonable accordance with the Budget set forth in Attachment B hereto. It is understood that funds of the Research Program may be transferred between categories at the Principal Investigator's discretion, and funds which are not used in a particular quarter may be used in subsequent quarters within each Performance Period year. 3.4 University shall retain title to all equipment purchased and/or fabricated by it with funds provided by Sponsor under this Agreement. IV. CONSULTATION AND REPORTS 4.1 Sponsor's Designated Representative for consultation and communications with the Principal Investigator shall be Dr. Patty Somers, or such other persons as Sponsor may from time to time designate in writing to University and the Principal Investigator. 4.2 During the Term of this Agreement, Sponsor's representatives may consult informally with University's representatives regarding the project, both personally and by telephone. Access to work carried on in University Laboratories in the course of these investigations shall be made available to Sponsor's Designated Representative on a reasonable basis. Clinical and other data shall be made available as it is generated and analyzed. 4.3 The Principal Investigator and Sponsor's technical representatives, including Sponsor's Designated Representative, shall meet on a quarterly basis (every three (3) months) during the Performance Period to discuss research results and set objectives for the next three (3) month period. At the conclusion of each year, and within 120 days of termination of the Agreement, the Principal Investigator and University's Office of Grant and Contract Accounting (within thirty (30) days after the conclusion of each year) shall also submit technical and financial reports, respectively, summarizing the Research Program, and specifically containing: a. A summary of income and expenses of the Research Program for the prior year (Office of Grant and Contract Accounting); and 3 5 b. A report of all activities undertaken and accomplishments achieved through the Research Program during the prior year (Principal Investigator). 4.4 To facilitate the collaborative aspects of the Research Program and to assist Sponsor's in-house research and development efforts, Sponsor shall be provided any tangible technical materials which are produced by the University in the course of the Research Program. In this regard, the University agrees to provide Sponsor with research quantities of any tangible technical material produced by the University in the course of the Research Program and available in transferrable quantities upon written request of Sponsor to do so. Any reasonable extra costs incurred by the University over and above the costs set forth in Article III above in supplying such tangible technical materials to Sponsor shall be paid by Sponsor on receipt of an appropriate invoice from University. V. PUBLICITY No press release or any other written statements in connection with work performed under this Agreement intended for use in the public media making any reference to one party hereunder shall be made by the other party, except as provided below. University, however, shall have the right to acknowledge Sponsor's support of the investigations under this Agreement in scientific or academic publications and other scientific or academic communications. In any such statement, the parties shall describe the scope and nature of their participation accurately and -appropriately. Any press release developed by University regarding this Research Program will be submitted to Sponsor thirty (30) days in advance of planned release, and Sponsor shall have the right to review and comment upon such proposed press release to determine if Sponsor-furnished Confidential Information or patentable information is included therein. If so, the provisions regarding deferral of publications set forth in Article VI below shall be applicable to such release. VI. PUBLICATION AND ACADEMIC RIGHTS 6.1 University and the Principal Investigator have the right to publish or otherwise publicly disclose information gained in the course of this Agreement. In order to avoid loss of patent rights as a result of premature public disclosure of patentable information and to provide Sponsor an opportunity to review proposed publication materials to determine whether such material contains Sponsor-furnished Confidential Information (as defined in Article VII), University will submit any prepublication materials to Sponsor for review and comment at least thirty (30) days prior to planned submission for publication. Sponsor shall notify University within this thirty (30) days period whether Sponsor-furnished Confidential Information is contained therein and whether it desires patent applications to be filed on any inventions contained in the materials, in accord with the provisions of Attachment C. If requested by Sponsor, University shall delay publication of any portion of the 4 6 materials for an additional period not to exceed ninety (90) days, unless a further extension is mutually agreed upon, in order to facilitate filing of a patent application in the United States. University shall have final authority to determine the scope and content of any publications; however if any such publication discloses Sponsor's Confidential Information (as defined in Article VII), University agrees to delete such information prior to publication. 6.2 It is understood that the University investigators may discuss the research being performed under this Agreement with other investigators but shall not reveal information which is Sponsor's Confidential Information under Article VII hereof, nor shall a public disclosure of patentable information be made except as set forth in Article V and in Paragraph 6.1 hereof. In the event any joint inventions relating to the subject matter of the Research Program, between the University investigators being funded by this Agreement and other investigators, result from such discussions, University shall grant to Sponsor the rights outlined in Attachment C to this Agreement, except that, in the event there exist obligations, relating to the joint inventions, to another party as a result of the involvement of the other investigators, University shall, in good faith, exercise reasonable efforts to enable Sponsor to obtain full rights to the joint invention. VII. CONFIDENTIAL INFORMATION 7.1 The parties may wish, from time to time, in connection with work contemplated under this Agreement, to disclose Confidential Information to each other. For the term of this Agreement and for a period of four (4) years following termination of this Agreement, Sponsor and University each agrees that it shall regard, maintain and preserve the secrecy and confidentiality of any and all information and data, whether in oral or written form, including but not limited to, products, processes, methods, concepts, ideas, programs, formulas, apparatuses, chemicals, organisms, molecules, prototypes, techniques, know-how, marketing plans, business plans, financial information, data, strategies, forecasts, customer lists or technical requirements of customers, or other trade secrets (collectively referred to herein as the "Proprietary Information") of the other party which may be disclosed to or obtained by it pursuant to this Agreement. Sponsor and University each agrees that it will not, at any time without the prior written consent of the other party, use or disclose the Proprietary Information belonging to the other party for any reason or in any manner whatsoever except as may be necessary for the operation of this Agreement, as explicitly authorized under this Agreement, or as required by law. 7.2 Sponsor and University shall each take the same measures to preserve the secrecy and confidentiality and avoid the unauthorized use or disclosure of the other party's Proprietary Information as such party takes to protect its own Proprietary Information. 7.3 Sponsor and University shall each limit access to the Proprietary Information to those of its employees and agents, Affiliates, sublicensees, consultants, outside contractors, governmental regulatory authorities and clinical investigators who have a reasonable need for access to such information in connection with the operation of this Agreement. The University 5 7 shall require all personnel assigned to the Research Program to comply with, and to assist the University in complying with, the terms of the Agreement, including maintaining the confidentiality of Sponsor's Confidential Information. To this end the University shall require all personnel assigned to the Research Program to individually sign a confidentiality agreement in the form attached as Attachment D. Further, each party or its Affiliates or sublicensees may disclose Proprietary Information to the United States government or other regulatory authorities to the extent that such disclosure is necessary for the prosecution and/or enforcement of patents or for authorizations to conduct clinical trials or commercially market Licensed Products, provided that such party is otherwise entitled to engage in such activities under this Agreement, or may disclose Proprietary Information as is necessary to exercise any rights which survive termination or expiration of this Agreement. All persons or entities to whom Proprietary Information is disclosed shall be subject to the non-disclosure covenants contained herein. 7.4 Sponsor and University shall each use its best efforts to disclose Proprietary Information to the other in writing and marked as proprietary. If it is necessary to first disclose such information other than in written form, the disclosing party shall, within thirty (30) days of such first disclosure, reduce the information to writing and provide the receiving party with a copy of such information marked as proprietary. 7.5 Sponsor and University each acknowledges that the disclosure of Proprietary Information under this Agreement confers no rights in the receiving party other than the right to use the Proprietary Information of the disclosing party for the operation of this Agreement. Upon termination of this Agreement, or forthwith upon the request of the other party, Sponsor and University shall promptly return to the other party all such documents, drawings, samples, specimens or reproductions thereof which may have come into its possession. 7.6 The obligations undertaken by Sponsor and University hereunder shall not apply to any portion of the Proprietary Information disclosed hereunder which: a. was known to the non-disclosing party prior to disclosure of such Proprietary Information by the disclosing party; or b. is, or shall become, other than by an act or omission of the non-disclosing party, generally available to the public; or c. shall, by lawful means, be made available to the non-disclosing party by a third party with the right to disclose; or d. is required by law to be disclosed by the non-disclosing party, provided the non-disclosing party uses its best efforts to notify the disclosing party immediately upon learning of such requirement in order to give the disclosing party reasonable opportunity to oppose such requirement; or 6 8 e. results from research and development by the receiving party or its Affiliates or sublicensees, independent of disclosures from the other party of this Agreement, provided that the persons developing such information have not had any exposure to the information received from the disclosing party; or f. Sponsor and University agree in writing may be disclosed. 7.7 In claiming the benefit of any of these exceptions, the non-disclosing party shall have the burden of establishing that a portion of the Proprietary Information is subject to such exception. VIII. PATENTS, COPYRIGHTS, AND TECHNOLOGY RIGHTS As partial consideration for payments made by Sponsor hereunder, Sponsor and University agree to the terms concerning patents, copyrights, and technology rights set forth in Attachment C. IX. LIABILITY 9.1 Sponsor agrees to hold harmless the University, its officers, agents and employees from any liability, loss or damage Sponsor may suffer as a result of claims, demands, costs or judgments against Sponsor arising out of the activities to be carried out pursuant to the obligations of this Agreement, and the use by Sponsor of the results obtained from the activities performed by University under this Agreement; provided, however, that any such liability, loss or damage resulting from the following Sub-sections "a" or "b" is excluded from this Agreement to hold harmless: a. the negligent or willful failure of University to substantially comply with any applicable FDA or other governmental requirement; or b. the negligence or willful malfeasance of any officer, agent or employee of University. 9.2 Both parties agree that upon receipt of a notice of claim or action arising from activities to be carried out pursuant to the obligations of this Agreement, the party receiving such notice will notify the other party promptly. X. INDEPENDENT CONTRACTOR For the purposes of this Agreement and all services to be provided hereunder, the parties shall be, and shall be deemed to be, independent contractors and not agents or employees of the other party. Neither party shall have authority to make any statements, representations or 7 9 commitments of any kind, or to take any action which shall be binding on the other party, except as may be expressly provided for herein or authorized in writing. XI. TERM AND TERMINATION 11.1 This Agreement shall commence with the Effective Date hereof and extend until the end of the Research Program as described herein, unless sooner terminated in accordance with the provisions of this Section ("Term"). 11.2 This Agreement maybe terminated by the mutual agreement of the parties or by either party upon thirty (30) days written notice, if the Principal Investigator's tenured appointment with the University terminates and a suitable replacement (reasonably acceptable to the Sponsor) is not identified. 11.3 In the event that either party shall be in default of its material obligations under this Agreement and shall fail to remedy such default within sixty (60) days after receipt of written notice thereof, the other party may terminate this Agreement upon expiration of the sixty (60) day period. 11.4 Termination or cancellation of this Agreement shall not affect the rights and obligations of the parties accrued prior to termination. As its sole liability upon termination, Sponsor shall pay University for all reasonable expenses incurred as of the effective termination date, including salaries for appointees. 11.5 Any provisions of this Agreement which by their nature extend beyond termination hereof shall survive such termination. XII. ATTACHMENTS Attachments A, B, C, D and E are incorporated herein and made a part hereof for all purposes. XIII. GENERAL 13.1 This Agreement may not be assigned by either party without the prior written consent of the other party; provided, however, that subject to the approval of University, which may not be unreasonably withheld, Sponsor may assign this agreement to any purchaser or transferee of all or substantially all of Sponsor's assets or stock upon prior written notice to University, and University may assign its right to receive payments hereunder. 13.2 This Agreement constitutes the entire and only agreement between the parties relating to the Research Program, and all prior negotiations, representations, agreements and understandings are superseded hereby. No agreements altering or supplementing the terms 8 10 hereof may be made except by means of a written document signed by the duly authorized representatives of the parties. 13.3 Any notice required by this Agreement by Articles VIII, IX, or XI shall be given by prepaid, first class, certified mail, return receipt requested, addressed in the case of the University to: Emory University Office of Sponsored Programs 1784 North Decatur Road, Suite 510 Atlanta, GA 30322 Attention: Nancy L. Wilkinson, M.P.H. or in the case of Sponsor to: AtheroGenics, Inc. 3065 Northwoods Circle Norcross, GA 30071 Attention: Dr. Patty Somers with a copy to: Lyon and Lyon 633 West Fifth Street, Suite 4700 Los Angeles, California 90071-2066 Attention: Carol A. Schneider, Ph.D. Notices and other communications regarding the day-to-day administration and operations of this Agreement shall be mailed or delivered, addressed in the case of University to: Emory University Office of Sponsored Projects 1784 North Decatur Road, Suite 510 Atlanta, GA 30322 Attention: Nancy L. Wilkinson, M.P.H. with a copy to: Dr. Dennis Liotta Emory University Department of Chemistry 9 11 or in the case of the Sponsor to: AtheroGenics, Inc. 3065 Northwoods Circle Norcross, GA 30071 Attention: Dr. Patty Somers or at such other addresses as may be given from time to time in accordance with the terms of this notice provision. 13.4 This Agreement shall be governed by, construed, and enforced in accordance with the internal laws of the State of Georgia. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. ATHEROGENICS, INC. EMORY UNIVERSITY By: Patricia Somers By: Nancy L. Wilkinson ------------------------------- ---------------------------- Dr. Patty Somers Nancy L. Wilkinson Title: Senior Scientist Title: Assistant Vice President for Research Date: October 14, 1996 Date: September 30, 1996 10 12 ATTACHMENT A RESEARCH PROGRAM The Principal Investigator, Dr. Dennis Liotta, will study [*]. 11 13 ATTACHMENT B PAYMENT SCHEDULE See COMPENSATION 3.1 of the Sponsored Research Agreement. 12 14 ATTACHMENT C PATENTS, COPYRIGHTS, AND TECHNOLOGY RIGHTS I. Definitions: The following terms shall have the indicated meanings when, used in this Attachment: A. "Agreement" shall mean that certain Sponsored Research Agreement to which this Attachment is affixed between Emory University ("University"), and AtheroGenics, Inc. ("Sponsor"), of even date herewith. B. "License" shall mean that certain License Agreement Between Emory University and AtheroGenics of January 1995, attached to the Agreement as Attachment E. C. "University Patent Rights" shall mean rights in any patent application or patent covering any University Invention made by the University and/or the Principal Investigator during the course of the Research Program and arising directly from the performance of said Research Program, including any continuations, continuations-in-part, divisional applications, reexaminations, reissued patents, substitutions, extensions, or additions thereto, and any corresponding foreign patent applications or patents based on such applications or patents ("University Patent Application" or "University Patent", respectively). D. "University Technology Rights" shall mean University rights under state and federal laws, including the laws of copyright, trade secret, and unfair competition, in unpatented inventions, know-how, software and other technology developed by the University and/or Principal Investigator during the Research Program and arising directly from the performance of said Research Program. E. "University Invention" shall mean any discovery, concept or idea, whether or not patentable, made by the University and/or the Principal Investigator during the Research Program, and arising directly from the performance of said Research Program, including but not limited to processes, methods, software, tangible research products, formulas and techniques, improvements thereto, and know-how related thereto. F. "Joint Patent Rights" shall mean rights owned jointly by University and Sponsor in any patent application or patent covering any Joint Invention made by the University and/or the Principal Investigator together with Sponsor and/or one or more employees of Sponsor during the course of the Research Program and arising directly from the performance of said Research Program, including any continuations, continuations-in-part, divisional applications, reexaminations, reissue patents, substitutions, extensions, or additions thereto and any corresponding foreign patent applications or patents based on such applications or patents ("Joint Patent Application" or "Joint Patent," respectively). 13 15 G. "Joint Technology Rights" shall mean University and Sponsor rights under state and federal laws, including the laws of copyright, trade secret, and unfair competition, in unpatented inventions, know-how, software and other technology developed by the University and/or Principal Investigator together with Sponsor and/or one or more employees of Sponsor during the Research Program and arising directly from the performance of said Research Program. H. "Joint Invention" shall mean any discovery, concept or idea, whether or not patentable made by the University and/or the Principal Investigator together with Sponsor and/or one or more employees of Sponsor during the Research Program, and arising directly from the performance of said Research Program, including, but not limited to processes, methods, software, tangible research products, formulas and techniques, improvements thereto, and know-how related thereto. I. "Patent Expenses and Costs" shall mean any expenses, including attorney's fees, incurred in searching, search opinions, preparing application, filing, prosecuting or maintaining a patent or patent application with respect to Patent Rights in any country in which said patentor patent application is filed. J. Capitalized terms used in this Attachment that are not defined herein shall have the meanings ascribed to such terms in the Agreement or the License. II. Ownership: Any University Patent Rights and Technology Rights and University Inventions, including copyrightable works (other than written scholarly works which are the property of the author) made during the course of the Research Program by University personnel (and not Sponsor and/or one or more employees of Sponsor) shall be the property of University. All rights and title to Joint Patent Rights and Technology Rights and Joint Inventions shall belong to University and Sponsor as joint assignees and joint owners. III. Patent Filing and Prosecution: University shall Promptly notify Sponsor of any University and/or Joint Invention made during the Research Program (which notice shall include, but is not limited to, the submission to Sponsor of the pre-publication materials as described in Article VI of the Agreement). In the event the University or Sponsor believes that such Invention involves a patentable material, Sponsor shall have the first right to file the United States Patent Application(s). Sponsor shall be primarily responsible for all patent prosecution activities pertaining to Licensed Patents assigned solely to University or assigned jointly to Sponsor and University. Sponsor shall, with Emory's approval, which shall not be unreasonably withheld, select patent counsel to prosecute all such Licensed Patents and shall provide University with copies of all communications from patent offices, filings and correspondence pertaining to such patent prosecution activities, in a timely manner, so as to give University an opportunity to comment thereon prior to any responsive filing. University shall have the right to have claims which are supported by the specification added to an application. 14 16 If Sponsor chooses not to timely file or pursue patent protection or patent maintenance for any patent application or issued patent assigned solely to University, Sponsor shall notify University prior to abandonment in such a manner as would allow University a reasonable period of time to take over prosecution or maintenance of said patent application or issued patent. Such patent application or issued patent shall then not be considered a Licensed Patent and University shall be free, at its election, to abandon or maintain the prosecution of such patent application or issued patent or grant rights to such patent application or issued patent to third parties. If Sponsor chooses not to timely file or pursue patent protection or patent maintenance for any patent application or issued patent assigned jointly to Sponsor and University, Sponsor shall, upon University's request, assign its interests in such patent application or issued patent to University. After such assignment, such patent application or issued patent shall then not be considered a Licensed Patent and University shall be free, at its election, to abandon or maintain the prosecution of such patent application or issued patent or grant rights to such patent application or issued patent to third parties. IV. Cooperation: In any case given above, the non-filing party shall use its best efforts to cooperate with the filing party in the preparation and prosecution of any application filed, including the timely review and execution of any papers or documents required in connection with the filing and prosecution of the patent application. V. Expenses and Costs: Sponsor shall bear all reasonable Patent Expenses and Costs associated with the filing and prosecution of any United States Patent Application which Sponsor files pursuant to the above. VI. Foreign Filing and Prosecution: Within nine (9) months after each United States Patent Application is filed pursuant to Paragraph 3 above, Sponsor shall elect those foreign countries in which Sponsor, after consultation with University, desires foreign patent protection and Sponsor shall timely file patent applications in all foreign countries elected. If elected by University, Sponsor shall file at least in the EPO, Canada and Japan. Sponsor shall, upon University's request, pursue prosecution of such Licensed Patents in additional countries at University's expense. The Patent Expenses and Costs relating to obtaining, issuing and maintaining any foreign patent in all foreign countries elected, as provided above, shall be paid by Sponsor, with reimbursement rights as described above. If the University so requests, Sponsor shall inform the University of any significant prosecution events in the elected foreign countries by providing copies of all prosecution papers and soliciting input into patent office responses where appropriate. VII. License: Sponsor shall have an exclusive license to University Patent Rights and University Technology Rights and/or University's ownership interest in any Joint Patent Rights and Joint Technology Rights to practice any Invention and use any technology made in the course 15 17 of the Research Program in the Licensed Field. This license shall be bound by the terms of the License Agreement, which is attached as Attachment E. University Patents shall be classed as Subgroup (iii) patents as defined in the License Agreement, and Joint Patents shall be classed as Subgroup (iv) patents. VIII. Copyright Use: Subject to confidential treatment by Sponsor of University Confidential Information that may be disclosed thereunder, University grants Sponsor a fully paid-up, non-exclusive license under its copyrights to make a reasonable number of copies for its internal needs, including derivative works thereof, from any written report prepared and delivered to Sponsor in accordance with this Agreement. ACCEPTED AND AGREED: Patricia K. Somers ------------------------------------------------ ATHEROGENICS, INC. By: Dr. Patty Somers Title: Sr. Scientist ACCEPTED AND AGREED Nancy L. Wilkinson ------------------------------------------------ EMORY UNIVERSITY By: Nancy L. Wilkinson Title: Assistant Vice President for Research 16 18 ATTACHMENT D CONFIDENTIALITY AGREEMENT The undersigned, Dennis Liota, an individual ("Individual") assigned to the Research Program, declares that he/she has read and is familiar with Sections V. (Publicity), VI. (Publication and Academic Rights), and VII. (Confidential Information) of the Sponsored Research Agreement dated as of November 1 ("Agreement") by and between Emory University and AtheroGenics, Inc. ("Sponsor"), and hereby agrees to be bound by the terms and conditions thereof. Individual further agrees to keep confidential any Confidential Information received from Sponsor for the term of the Agreement and for a period of four (4) years following the termination of the Agreement, provided that this obligation shall not apply to any information which: a. was known to Individual prior to disclosure by Sponsor, as evidenced by individual's written records; or b. is, or shall become, other than by an act or omission by Individual, generally available to the public; or c. shall, by lawful means, be made available to Individual by a third party with the right to disclose; or d. is required by law to be disclosed by Individual, provided Individual uses his/her best efforts to notify Sponsor immediately upon learning of such requirement in order to give Sponsor reasonable opportunity to oppose such requirement; or e. Sponsor agrees in writing that it may be disclosed. Dennis C. Liota November 30, 1996 - ------------------------------------ ------------------------------- Individual Date WITNESSED BY: Nancy L. Wilkinson November 30, 1996 - ------------------------------------ ------------------------------- Witness Date Nancy L. Wilkinson - ------------------------------------ name of Witness 17 19 ATTACHMENT E LICENSE AGREEMENT OF JANUARY 1995 18 EX-10.06 9 ex10-06.txt CONSULTING AGREEMENT 1 EXHIBIT 10.06 [ATHEROGENICS, INC. LOGO] May 11, 2000 William Scott, Ph.D. 1021 Creamery Road Newton, PA 18940 Dear Bill: We would like to establish a consulting, advisory and related services arrangement with you to obtain your advice and guidance in the area of research and development. We propose that you serve as a consultant to AtheroGenics, Inc. ("AGI") for up to six months, beginning May 1, 2000. Either party may terminate this agreement at any time, for any or no reason. Your title during this consulting agreement will be Vice President -- Research. During this time, AGI would expect you to advise us by telephone, correspondence, and by visitation at mutually convenient times. You agree to be available onsite at least two days per week on average, with a mutually agreeable visitation schedule to be subsequently developed by us. In return for your service, we propose to compensate you at the rate of $900 per day onsite, payable monthly, plus expenses. I understand you will submit an invoice to AGI for these payments. In addition, you will be awarded 1000 shares of AGI common stock as follows: Upon commencement of this agreement, AGI will award you 3000 shares for your services related to the first three months of this agreement. Subsequently, at the commencement of each month of service, we will award you an additional 1000 shares for the month's services. As is AGI's practice with all of our consultants and advisors, we must require that you do not, without our prior approval, directly or indirectly, use for yourself or for others, or disclose to any third party, any secret or confidential information, knowledge or data regarding our products, processes, or research work, during the term of this agreement or thereafter. We would expect you not to publish or present any information learned during the course of consulting with AGI without our prior written permission. As is also customary, AGI would expect you to agree that any inventions and discoveries, whether or not patentable, which you may conceive or reduce to practice as a result of the consulting or advisory services rendered to us, shall be the sole property of AGI. You will agree to cooperate with AGI in taking all steps which AGI believes necessary or desirable to secure its rights in this property. Upon termination of this agreement, or at any time we so request, you agree to return all papers, records, and other documents which we may furnish or make available to you. 8995 Westside Parkway - Alpharetta, Georgia 30004 - Phone 678-336-2500 - Fax: 678-336-2501 2 Bill Scott, Ph.D. May 11, 2000 Page Two In this engagement as a consultant, you are an independent contractor and shall not be deemed to be employed by AtheroGenics. AtheroGenics is hereby contracting with you for these services, and you have the right to determine the method, manner and means by which the services will be performed. Except to the extent that your work must be performed on or with AtheroGenics' resources, all equipment used in providing the services shall be provided by you. AtheroGenics will not withhold any amount that would normally be withheld from an employee's pay, nor shall you participate in any benefits or incentive programs of any sort that AtheroGenics offers to its employees. Inasmuch as AtheroGenics and you are contractors independent of one another, neither has the authority to bind the other to any third person or otherwise to act in any way as the representative of the other, unless otherwise expressly agreed to in writing signed by both parties hereto. If this proposal is satisfactory to you, please sign and date both copies of this letter agreement, retain one for your files, and return one copy to me to indicate your acceptance. Please fill in your social security number below for use in issuing your checks. Sincerely, ATHEROGENICS, INC. /s/ R. Medford/by Mark P. Colonnese - ---------------------------------------- Russell M. Medford, MD, Ph.D. President and Chief Executive Officer ACCEPTED: William A. Scott ------------------------------ Name Date: 5-11-00 ------------------------------ Soc. Sec. No. ***-**-**** ------------------------------ Cc Jody Farmer EX-10.08 10 ex10-08.txt 1997 EQUITY OWNERSHIP PLAN 1 EXHIBIT 10.08 [LOGO] ATHEROGENICS, INC. EQUITY OWNERSHIP PLAN 2 TABLE OF CONTENTS
Page ---- SECTION 1 DEFINITIONS 1 1.1 Definitions 1 SECTION 2 GENERAL TERMS 5 2.1 Purpose of the Plan 5 2.2 Stock Subject to the Plan 5 2.3 Administration of the Plan 5 2.4 Eligibility and Limits 5 SECTION 3 TERMS OF AWARDS 6 3.1 Terms and Conditions of All Awards 6 3.2 Terms and Conditions of Options 6 (a) Option Price 7 (b) Option Term 7 (c) Payment 7 (d) Conditions to the Exercise of an Option 7 (e) Termination of Incentive Stock Option 7 (f) Special Provisions for Certain Substitute Options 8 3.3 Terms and Conditions of Stock Appreciation Rights 8 (a) Payment 8 (b) Conditions to Exercise 8 3.4 Terms and Conditions of Stock Awards 8 3.5 Treatment of Awards Upon Termination of Employment 9 SECTION 4 RESTRICTIONS ON STOCK 10 4.1 Escrow of Shares 10 4.2 Forfeiture of Shares 10 4.3 Restrictions on Transfer 10
ii 3 TABLE OF CONTENTS (continued)
Page ---- SECTION 5 GENERAL PROVISIONS 11 5.1 Withholding 11 5.2 Changes in Capitalization; Merger; Liquidation 11 5.3 Cash Awards 12 5.4 Compliance with Code 12 5.5 Right to Terminate Employment 12 5.6 Restrictions on Delivery and Sale of Shares; Legends 12 5.7 Non-alienation of Benefits 13 5.8 Termination and Amendment of the Plan 13 5.9 Stockholder Approval 13 5.10 Choice of Law 13 5.11 Effective Date of Plan 13
iii 4 ATHEROGENICS, INC. EQUITY OWNERSHIP PLAN AtheroGenics, Inc. hereby establishes this Plan to be called the AtheroGenics, Inc. Equity Ownership Plan to encourage employees of the Company to acquire an equity interest in the Company, to make monetary payments to certain employees based upon the value of the Company's Stock, or based upon achieving certain goals on a basis mutually advantageous to such employees and the Company and thus provide an incentive for continuation of the efforts of the employees for the success of the Company, for continuity of employment and to further the interests of the shareholders. SECTION 1 DEFINITIONS 1.1 Definitions. Whenever used herein, the masculine pronoun shall be deemed to include the feminine, the singular to include the plural, unless the context clearly indicates otherwise, and the following capitalized words and phrases are used herein with the meaning thereafter ascribed: (a) "Administrator" means the Board or its designee(s). (b) "Award" means any Stock Option, Stock Appreciation Right, Restricted Stock or Performance Award granted under the Plan. (c) "Beneficiary" means the person or persons designated by a Participant to exercise an Award in the event of the Participant's death while employed by the Company, or in the absence of such designation, the executor or administrator of the Participant's estate. (d) "Board" means the Board of Directors of the Company. (e) "Cause" means conduct by the Participant amounting to (1) fraud or dishonesty against the Company, (2) willful misconduct, repeated refusal to follow the reasonable directions of an individual or group authorized to give such directions, or knowing violation of law in the course of performance of the duties of Participant's employment with the Company, (3) repeated absences from work without a reasonable excuse, (4) intoxication with alcohol or drugs while on the Company's premises during regular business hours, (5) a conviction or plea of guilty or nolo contendere to a felony or a crime involving dishonesty, or (6) a breach or violation of the terms of any employment or other agreement to which Participant and the employer are party. (f) "Change in Control" shall be deemed to have occurred if (i) a tender offer shall be made and consummated of the ownership of 50% or more of the outstanding voting securities of the Company, (ii) the Company shall be merged or consolidated with another -1- 5 corporation and as a result of such merger or consolidation less than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Securities Exchange Act of 1934) of any party to such merger or consolidation, (iii) the Company shall sell substantially all of its assets to another corporation which corporation is not wholly owned by the Company, or (iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the Securities Exchange Act of 1934, shall acquire 50% or more of the outstanding voting securities of the Company (whether directly, indirectly beneficially or of record). For purposes hereof, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Securities Exchange Act of 1934. (g) "Code" means the Internal Revenue Code of 1986, as amended. (h) "Company" means AtheroGenics, Inc. a Georgia corporation. (i) "Constructive Discharge" means a Termination of Employment by the Participant on account of (i) any material reduction in the Participant's Compensation, (ii) any material reduction in the level or scope of job responsibility or status of the Participant occurring without the consent of the Participant, or (iii) any relocation to an office of the Company which is more than fifty (50) miles from the office where the Participant was previously located to which the Participant has not agreed. (j) "Disability" has the same meaning as provided in the long-term disability plan maintained by the Company. In the event of a dispute, the determination of Disability shall be made by the Administrator. If, at any time during the period that this Plan is in operation, the Company does not maintain a long term disability plan, Disability shall mean a physical or mental condition which, in the judgment of the Administrator, permanently prevents a Participant from performing his usual duties for the Company or such other position or job which the Company makes available to him and for which the Participant is qualified by reason of his education, training and experience. In making its determination the Administrator may, but is not required to, rely on advice of a physician competent in the area to which such Disability relates. The Administrator may make the determination in its sole discretion and any decision of the Administrator will be binding on all parties. (k) "Disposition" means any conveyance, sale, transfer, assignment, pledge or hypothecation, whether outright or as security, inter vivos or testamentary, with or without consideration, voluntary or involuntary. (l) "Equity Ownership Agreement" means an agreement between the Company and a Participant or other documentation evidencing an Award. (m) "Expiration Date" means, the last date upon which an Award can be exercised. -2- 6 (n) "Fair Market Value" means, for any particular date, (i) for any period during which the Stock shall be listed for trading on a national securities exchange or the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the closing price per share of Stock on such exchange or the NASDAQ closing bid price as of the close of such trading day, or (ii) the market price per share of Stock as determined in good faith by the Board in the event (i) above shall not be applicable. If the Fair Market Value is to be determined as of a day when the securities markets are not open, the Fair Market Value on that day shall be the Fair Market Value on the next succeeding day when the markets are open. (o) "Incentive Stock Option" means an incentive stock option, as defined in Code Section 422, and described in Plan Section 3.2. (p) "Initial Public Offering" means the first instance in which the Company Stock is offered for sale to the public following successful registration of the Stock with the Securities and Exchange Commission. (q) "Involuntary Termination" means a Termination of Employment but does not include a Termination of Employment for Cause or a Voluntary Resignation. (r) "Non-Qualified Stock Option" means a stock option, other than an option qualifying as an Incentive Stock Option, described in Plan Section 3.2. (s) "Non-Employee Board Member" means a member of the Board who is not an employee of the Company. (t) "Option" means a Non-Qualified Stock Option or an Incentive Stock Option. (u) "Over 10% Owner" means an individual who at the time an Incentive Stock Option is granted owns Stock possessing more than 10% of the total combined voting power of the Company or one of its Parents or Subsidiaries, determined by applying the attribution rules of Code Section 424(d). (v) "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, with respect to Incentive Stock Options, at the time of granting of the Option, each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. (w) "Participant" means an individual who receives an Award hereunder. (x) "Plan" means the AtheroGenics, Inc. Equity Ownership Plan. (y) "Retirement" means a Termination of Employment after attaining the normal retirement age specified in the qualified retirement plan maintained by the Company. -3- 7 (z) "Stock" means the Company's common stock. (aa) "Stock Appreciation Right" means a stock appreciation right described in Plan Section 3.3. (ab) "Stock Award" means a stock award described in Plan Section 3.4. (ac) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, with respect to Incentive Stock Options, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possession 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. (ad) "Termination of Affiliation" means the termination of a business relationship, for any reason, between an advisor or consultant who is a Participant and the Company or its affiliates. A Termination of Affiliation shall be deemed to have occurred as of the date written notice to that effect is received by the Participant. (ae) "Termination of Employment" means the termination of the employee-employer relationship between a Participant and the Company and its affiliates regardless of the fact that severance or similar payments are made to the Participant, for any reason, including, but not by way of limitation, a Voluntary Resignation, Constructive Discharge, Involuntary Termination, death, Disability or Retirement. The Administrator shall, in its absolute discretion, determine the effect of all matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a leave of absence constitutes a Termination of Employment, or whether a Termination of Employment is for Cause or is a Constructive Discharge. With regard to a member of the Board, Termination of Employment shall mean the date on which the individual ceases to be a member of the Board for any reason. (af) "Vested" means that an Award is nonforfeitable and exercisable with regard to a designated number of shares of Stock. (ag) "Voluntary Resignation" means a Termination of Employment as a result of the Participant's resignation but does not include a Constructive Discharge. -4- 8 SECTION 2 GENERAL TERMS 2.1 Purpose of the Plan. The Plan is intended to (a) provide incentive to employees of the Company and its affiliates to stimulate their efforts toward the continued success of the Company and to operate and manage the business in a manner that will provide for the long-term growth and profitability of the Company; (b) encourage stock ownership by employees by providing them with a means to acquire a proprietary interest in the Company by acquiring shares of Stock or to receive compensation which is based upon appreciation in the value of Stock; and (c) provide a means of obtaining and rewarding employees, directors, advisors and consultants. 2.2 Stock Subject to the Plan. Subject to adjustment in accordance with Section 5.2, 1,484,416 shares of Stock (the "Maximum Plan Shares") are hereby reserved and subject to issuance under the Plan. At no time shall the Company have outstanding Awards and shares of Stock issued in respect to Awards in excess of the Maximum Plan Shares. To the extent permitted by law, the shares of Stock attributable to the nonvested, unpaid, unexercised, unconverted or otherwise unsettled portion of any Award that is forfeited, canceled, expired or terminated for any reason without becoming vested, paid, exercised, converted or otherwise settled in full shall again be available for purposes of the Plan. 2.3 Administration of the Plan. The Plan shall be administered by the Administrator. The Administrator shall have full authority in its discretion to determine the employees of the Company or its affiliates to whom Awards shall be granted and the terms and provisions of Awards, subject to the Plan. Subject to the provisions of the Plan, the Administrator shall have full and conclusive authority to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the respective Equity Ownership Agreements and to make all other determinations necessary or advisable for the proper administration of the Plan. The Administrator's determination under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan (whether or not such persons are similarly situated). The Administrator's decisions shall be final and binding on all Participants. 2.4 Eligibility and Limits. Participants in the Plan shall be selected by the Administrator. No Participant may be granted Awards in excess of 30% of the Maximum Plan Shares. In the case of Incentive Stock Options, the aggregate Fair Market Value (determined as at the date an Incentive Stock Option is granted) of Stock with respect to which Stock Options intended to meet the requirements of Code Section 422 become exercisable for the first time by an individual during any calendar year under all plans of the Company and its Parents and Subsidiaries shall not exceed $100,000; provided further, that if the limitation is exceeded, the Incentive Stock Option(s) which cause the limitation to be exceeded shall be treated as Non-Qualified Stock Option(s). -5- 9 SECTION 3 TERMS OF AWARDS 3.1 Terms and Conditions of All Awards. (a) The number of shares of Stock as to which an Award shall be granted shall be determined by the Administrator in its sole discretion, subject to the provisions of Sections 2.2 and 2.4 as to the total number of shares available for grants under the Plan. (b) Each Award shall be evidenced by an Equity Ownership Agreement in such form as the Administrator may determine is appropriate, subject to the provisions of the Plan. (c) The date an Award is granted shall be the date on which the Administrator has approved the terms and conditions of the Equity Ownership Agreement and has determined the recipient of the Award and the number of shares covered by the Award and has taken all such other action necessary to complete the grant of the Award. (d) The Administrator may provide in any Equity Ownership Agreement a vesting schedule. The vesting schedule shall specify when such Awards shall become Vested and thus exercisable. The Administrator may accelerate the vesting schedule set forth in the Equity Ownership Agreement if the Administrator determines that it is in the best interests of the Company and Participant to do so. Notwithstanding any vesting schedule which may be specified in an Equity Ownership Agreement, or any determination made by the Administrator, no award will vest if, to do so, would create a situation in which the exercisability of any such Award would result in an "excess parachute payment" within the meaning of Section 280G of the Code. (e) Awards shall not be transferable or assignable except by will or by the laws of descent and distribution and shall be exercisable, during the Participant's lifetime, only by the Participant, or in the event of the Disability of the Participant, by the legal representative of the Participant. 3.2 Terms and Conditions of Options. At the time any Option is granted, the Administrator shall determine whether the Option is to be an Incentive Stock Option or a Non-Qualified Stock Option, and the Option shall be clearly identified as to its status as an Incentive Stock Option or a Non-Qualified Stock Option. At the time any Incentive Stock Option is exercised, the Company shall be entitled to place a legend on the certificates representing the shares of Stock purchased pursuant to the Option to clearly identify them as shares of Stock purchased upon exercise of an Incentive Stock Option. An Incentive Stock Option may only be granted within ten (10) years from the date the Plan, as amended and restated, is adopted or the date such Plan is approved by the Company's stockholders, whichever is earlier. Incentive stock options may only be granted to employees of the Company. (a) Option Price. Subject to adjustment in accordance with Section 5.2 and the other provisions of this Section 3.2, the exercise price (the "Exercise Price") per share of the -6- 10 Stock purchasable under any Option shall be as set forth in the applicable Equity Ownership Agreement. With respect to each grant of an Incentive Stock Option to a Participant who is not an Over 10% Owner, the Exercise Price per share shall not be less than the Fair Market Value on the date the Option is granted. With respect to each grant for an Incentive Stock Option to a Participant who is an Over 10% Owner, the Exercise Price shall not be less than 110% of the Fair Market Value on the date the Option is granted. (b) Option Term. The Equity Ownership Agreement shall set forth the term of each option. Any Incentive Stock Option granted to a Participant who is not an Over 10% Owner shall not be exercisable after the expiration of ten (10) years after the date the Option is granted. Any Incentive Stock Option granted to an Over 10% Owner shall not be exercisable after the expiration of five (5) years after the date the Option is granted. In either case, the Administrator may specify a shorter term and state such term in the Equity Ownership Agreement. (c) Payment. Payment for all shares of Stock purchased pursuant to exercise of an Option shall be made in any form or manner authorized by the Administrator in the Equity Ownership Agreement or by amendment thereto, including, but not limited to, cash or, if the Equity Ownership Agreement provides, (i) by delivery or deemed delivery (based on an attestation to the ownership thereof) to the Company of a number of shares of Stock which have been owned by the holder for at least six (6) months prior to the date of exercise having an aggregate Fair Market Value on the date of exercise equal to the Exercise Price or (ii) by tendering a combination of cash, and Stock. Payment shall be made at the time that the Option or any part thereof is exercised, and no shares shall be issued or delivered upon exercise of an option until full payment has been made by the Participant. The holder of an Option, as such, shall have none of the rights of a stockholder. (d) Conditions to the Exercise of an Option. Each Option granted under the Plan shall be exercisable by whom, at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Administrator shall specify in the Equity Ownership Agreement; provided, however, that subsequent to the grant of an Option, the Administrator, at any time before complete termination of such Option, may accelerate the time or times at which such Option may be exercised in whole or in part, including, without limitation, upon a Change in Control and may permit the Participant or any other designated person acting for the benefit of the Participant to exercise the Option, or any portion thereof, for all or part of the remaining Option term notwithstanding any provision of the Equity Ownership Agreement to the contrary. (e) Termination of Incentive Stock Option. With respect to an Incentive Stock Option, in the event of Termination of Employment of a Participant, the Option or portion thereof held by the Participant which is unexercised shall expire, terminate, and become unexercisable no later than the expiration of three (3) months after the date of Termination of Employment; provided, however, that in the case of a holder whose Termination of Employment is due to death or Disability, one (1) year shall be substituted for such three (3) month period. For purposes of this Subsection (e), Termination of Employment of the Participant shall not be deemed to have occurred if the Participant is employed by another corporation (or a parent or -7- 11 subsidiary corporation of such other corporation) which has assumed the Incentive Stock Option of the Participant in a transaction to which Code Section 424(a) is applicable. (f) Special Provisions for Certain Substitute Options. Notwithstanding anything to the contrary in this Section 3.2, any Option issued in substitution for an option previously issued by another entity, which substitution occurs in connection with a transaction to which Code Section 424(a) is applicable, may provide for an exercise price computed in accordance with such Code Section and the regulations thereunder and may contain such other terms and conditions as the Administrator may prescribe to cause such substitute Option to contain as nearly as possible the same terms and conditions (including the applicable vesting and termination provisions) as those contained in the previously issued option being replaced thereby. 3.3 Terms and Conditions of Stock Appreciation Rights. A Stock Appreciation Right may be granted in connection with all or any portion of a previously or contemporaneously granted Award or not in connection with an Award. A Stock Appreciation Right shall entitle the Participant to receive the excess of (1) the Fair Market Value of a specified or determinable number of shares of the Stock at the time of payment or exercise over (2) a specified price which, in the case of a Stock Appreciation Right granted in connection with an Option, shall be not less than the Exercise Price for that number of shares. A Stock Appreciation Right granted in connection with an Award may only be exercised to the extent that the related Award has not been exercised, paid or otherwise settled. The exercise of a Stock Appreciation Right granted in connection with an Award shall result in a pro rata surrender or cancellation of any related Award to the extent the Stock Appreciation Right has been exercised. (a) Payment. Upon payment or exercise of a Stock Appreciation Right, the Company shall pay to the Participant the appreciation in cash or shares of Stock (valued at the aggregate Fair Market Value on the date of payment or exercise) as provided in the Equity Ownership Agreement or, in the absence of such provision, as the Administrator may determine. (b) Conditions to Exercise. Each Stock Appreciation Right granted under the Plan shall be exercisable or payable at such time or times, or upon the occurrence of such event or events, and in such amounts, as the Administrator shall specify in the Equity Ownership Agreement; provided, however, that subsequent to the grant of a Stock Appreciation Right, the Administrator, at any time before complete termination of such Stock Appreciation Right, may accelerate the time or times at which such Stock Appreciation Right may be exercised or paid in whole or in part. 3.4 Terms and Conditions of Stock Awards. The number of shares of Stock subject to a Stock Award and restrictions or conditions on such shares, if any, shall be as the Administrator determines, and the certificate for such shares shall bear evidence of any restrictions or conditions. Subsequent to the date of the grant of the Stock Award, the Administrator shall have the power to permit, in its discretion, an acceleration of the expiration of an applicable restriction period with respect to any part or all of the shares awarded to a Participant. The Administrator may require a cash payment from the Participant in an amount no greater than the aggregate Fair -8- 12 Market Value of the shares of Stock awarded determined at the date of grant in exchange for the grant of a Stock Award or may grant a Stock Award without the requirement of a cash payment. 3.5 Treatment of Awards Upon Termination of Employment or Affiliation. Except as otherwise provided by Plan Section 3.2(e), any award under this Plan to a Participant who incurs a Termination of Employment or Affiliation may be canceled, accelerated, paid or continued, as provided in the Equity Ownership Agreement or, in the absence of such provision, as the Administrator may determine. The portion of any award exercisable in the event of continuation or the amount of any payment due under a continued award may be adjusted by the Administrator to reflect the Participant's period of service from the date of grant through the date of the Participant's Termination of Employment or Affiliation or such other factors as the Administrator determines are relevant to its decision to continue the award. SECTION 4 RESTRICTIONS ON STOCK 4.1 Escrow of Shares. Any certificates representing the shares of Stock issued under the Plan shall be issued in the Participant's name, but, if the Equity Ownership Agreement so provides, the shares of Stock shall be held by a custodian designated by the Administrator (the "Custodian"). Each Equity Ownership Agreement providing for transfer of shares of Stock to the Custodian shall appoint the Custodian as the attorney-in-fact for the Participant for the term specified in the Equity Ownership Agreement, with full power and authority in the Participant's name, place and stead to transfer, assign and convey to the Company any shares of Stock held by the Custodian for such Participant, if the Participant forfeits the shares under the terms of the Equity Ownership Agreement. During the period that the Custodian holds the shares subject to this Section, the Participant shall be entitled to all rights, except as provided in the Equity Ownership Agreement, applicable to shares of Stock not so held. Any dividends declared on shares of Stock held by the Custodian shall, as the Administrator may provide in the Equity Ownership Agreement, be paid directly to the Participant or, in the alternative, be retained by the Custodian until the expiration of the term specified in the Equity Ownership Agreement and shall then be delivered, together with any proceeds, with the shares of Stock to the Participant or the Company, as applicable. 4.2 Forfeiture of Shares. Notwithstanding any vesting schedule set forth in any Equity Ownership Agreement, in the event that the Participant violates a non competition agreement as set forth in the Equity Ownership Agreement, all Awards and shares of Stock issued to the holder pursuant to the Plan shall be forfeited; provided, however, that the Company shall return to the holder the lesser of any consideration paid by the Participant in exchange for Stock issued to the Participant pursuant to the Plan for the then Fair Market Value of the Stock forfeited hereunder. 4.3 Restrictions on Transfer. The Participant shall not have the right to make or permit to exist any Disposition of the shares of Stock issued pursuant to the Plan except as provided in the Plan or the Equity Ownership Agreement. Any Disposition of the shares of Stock issued under the Plan by the Participant, not made in accordance with the Plan or the -9- 13 Equity Ownership Agreement, including, but not limited to, any right of repurchase or right of first refusal, shall be void. The Company shall not recognize, or have the duty to recognize, any Disposition not made in accordance with the Plan and the Equity Ownership Agreement, and the shares of Stock so transferred shall continue to be bound by the Plan and the Equity Ownership Agreement. -10- 14 SECTION 5 GENERAL PROVISIONS 5.1 Withholding. The Company shall deduct from all cash distributions under the Plan any taxes required to be withheld by federal, state or local government. Whenever the Company proposes or is required to issue or transfer shares of Stock under the Plan or upon the vesting of any Stock Award, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares or the vesting of such Stock Award. A Participant may pay the withholding tax in cash, or, if the Equity Ownership Agreement provides, a Participant may also elect to have the number of shares of Stock he is to receive reduced by, or with respect to a Stock Award, tender back to the Company, the smallest number of whole shares of Stock which, when multiplied by the Fair Market Value of the shares determined as of the Tax Date (defined below), is sufficient to satisfy federal, state and local, if any, withholding taxes arising from exercise or payment of an Award (a "Withholding Election"). A Participant may make a Withholding Election only if both of the following conditions are met: (a) The Withholding Election must be made on or prior to the date on which the amount of tax required to be withheld is determined (the "Tax Date") by executing and delivering to the Company a properly completed notice of Withholding Election as prescribed by the Administrator; and (b) Any Withholding Election made will be irrevocable; however, the Administrator may in its sole discretion approve or give no effect to the Withholding Election. 5.2 Changes in Capitalization; Merger; Liquidation. (a) The number of shares of Stock reserved for the grant of Options, Dividend Equivalent Rights, Performance Unit Awards, Phantom Shares, Stock Appreciation Rights and Stock Awards; the number of shares of Stock reserved for issuance upon the exercise or payment, as applicable, of each outstanding Option, Dividend Equivalent Right, Performance Unit Award, Phantom Share and Stock Appreciation Right and upon vesting or grant, as applicable, of each Stock Award; the Exercise Price of each outstanding Option and the specified number of shares of Stock to which each outstanding Dividend Equivalent Right, Phantom Share and Stock Appreciation Right pertains may be proportionately adjusted by the Administrator for any increase or decrease in the number of issued shares of Stock resulting from a subdivision or combination of shares or the payment of a stock dividend in shares of Stock to holders of outstanding shares of Stock or any other increase or decrease in the number of shares of Stock outstanding effected without receipt of consideration by the Company. (b) In the event of a merger, consolidation or other reorganization of the Company or tender offer for shares of Stock, the Administrator may make such adjustments with respect to awards and take such other action as it deems necessary or appropriate to reflect or in anticipation of such merger, consolidation, reorganization or tender offer, including, without limitation, the substitution of new awards, the termination or adjustment of outstanding awards, -11- 15 the acceleration of awards or the removal of restrictions on outstanding awards. Any adjustment pursuant to this Section 5.2 may provide, in the Administrator's discretion, for the elimination without payment therefore of any fractional shares that might otherwise become subject to any Award. (c) The existence of the Plan and the Awards granted pursuant to the Plan shall not affect in any way the right or power of the Company to make or authorize any adjustment, reclassification, reorganization or other change in its capital or business structure, any merger or consolidation of the Company, any issue of debt or equity securities having preferences or priorities as to the Stock or the rights thereof, the dissolution or liquidation of the Company, any sale or transfer of all or any part of its business or assets, or any other corporate act or proceeding. 5.3 Cash Awards. The Administrator may, at any time and in its discretion, grant to any holder of an Award the right to receive, at such times and in such amounts as determined by the Administrator in its discretion, a cash amount which is intended to reimburse such person for all or a portion of the federal, state and local income taxes imposed upon such person as a consequence of the receipt of the Award or the exercise of rights thereunder. 5.4 Compliance with Code. All Incentive Stock Options to be granted hereunder are intended to comply with Code Section 422, and all provisions of the Plan and all Incentive Stock Options granted hereunder shall be construed in such manner as to effectuate that intent. 5.5 Right to Terminate Employment. Nothing in the Plan or in any Award shall confer upon any Participant the right to continue as an employee or officer of the Company or any of its affiliates or affect the right of the Company or any of its affiliates to terminate the Participant's employment at any time. 5.6 Restrictions on Delivery and Sale of Shares; Legends. Each Award is subject to the condition that if at any time the Administrator, in its discretion, shall determine that the listing, registration or qualification of the shares covered by such Award upon any securities exchange or under any state or federal law is necessary or desirable as a condition of or in connection with the granting of such Award or the purchase or delivery of shares thereunder, the delivery of any or all shares pursuant to such Award may be withheld unless and until such listing, registration or qualification shall have been effected. If a registration statement is not in effect under the Securities Act of 1933 or any applicable state securities laws with respect to the shares of Stock purchasable or otherwise deliverable under Awards then outstanding, the Administrator may require, as a condition of exercise of any Option or as a condition to any other delivery of Stock pursuant to an Award, that the Participant or other recipient of an Award represent, in writing, that the shares received pursuant to the Award are being acquired for investment and not with a view to distribution and agree that shares will not be disposed of except pursuant to an effective registration statement, unless the Company shall have received an opinion of counsel that such disposition is exempt from such requirement under the Securities Act of 1933 and any applicable state securities laws. The Company may include on certificates representing shares delivered pursuant to an Award such legends referring to the foregoing -12- 16 representations or restrictions or any other applicable restrictions on resale as the Company, in its discretion, shall deem appropriate. 5.7 Non-alienation of Benefits. Other than as specifically provided with regard to the death of a Participant, no benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge; and any attempt to do so shall be void. No such benefit shall, prior to receipt by the Participant, be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Participant. 5.8 Termination and Amendment of the Plan. The Board at any time may amend or terminate the Plan without stockholder approval; provided, however, that the Board may condition any amendment on the approval of stockholders of the Company if such approval is necessary or advisable with respect to tax, securities or other applicable laws. No such termination or amendment without the consent of the holder of an Award shall adversely affect the rights of the Participant under such Award. 5.9 Stockholder Approval. The Plan shall be submitted to the stockholders of the Company for their approval within twelve (12) months before the adoption of the Plan by the Board. If such approval is not obtained, any Award granted hereunder shall be void. 5.10 Choice of Law. The laws of the State of Georgia shall govern the Plan, to the extent not preempted by federal law. 5.11 Effective Date of Plan. The Plan shall be effective as of July 30, 1997. * * * * * * * * * * ATHEROGENICS, INC. ATTEST: By: /s/ Russell M. Medford /s/ Mark Colonnese ------------------------------ -------------------------------- Russell M. Medford, MD, PhD Mark Colonnese President and C.E.O. Assistant Secretary [CORPORATE SEAL] -13- 17 AMENDMENT NO. 1 TO ATHEROGENICS, INC. EQUITY OWNERSHIP PLAN THIS AMENDMENT NO. 1 to the ATHEROGENICS, INC. EQUITY OWNERSHIP PLAN (the "Plan"), made by ATHEROGENICS, INC. (the "Company"), effective as of the 2nd day of February, 2000 (subject to the approval of the Company's shareholders, as provided below): WITNESSETH: WHEREAS, the Board of Directors of the Company (the "Board") has previously adopted the Plan, and pursuant to Section 5.8 thereof, the Board has the right to amend the Plan at any time (subject to certain restrictions not applicable in this case); and WHEREAS, at its meeting on February 2, 2000, the Board approved and recommended to the shareholders of the Company an increase the number of shares of the Company's common stock available for issuance upon the exercise of stock options which may be granted under the Plan; NOW, THEREFORE, the Plan is amended as follows, effective as stated above: 1. Section 2.2 of the Plan shall be amended in its entirety as follows: "2.2 Stock Subject to the Plan. Subject to adjustment in accordance with Section 5.2, 3,724,416 shares of Stock (the "Maximum Plan Shares") are hereby reserved and subject to issuance under the Plan. At no time shall the Company have outstanding Awards and shares of Stock issued in respect to Awards in excess of the Maximum Plan Shares. To the extent permitted by law, the shares of Stock attributable to the nonvested, unpaid, unexercised, unconverted or otherwise unsettled portion of any Award that is forfeited, canceled, expired or terminated for any reason without becoming vested, paid, exercised, converted or otherwise settled in full shall again be available for purposes of the Plan." 2. This amendment shall not take effect unless approved by the shareholders of the Company prior to February 2, 2001. 3. All other provisions of the Plan not inconsistent herewith are hereby confirmed and ratified. IN WITNESS WHEREOF, the Company has caused this Amendment No. 1 to the Plan to be executed by its duly authorized officer as of the date first above written. ATHEROGENICS, INC. By: /s/ RUSSELL M. MEDFORD, M.D., PH.D. ------------------------------------- Russell M. Medford, M.D., Ph.D. President and Chief Executive Officer APPROVED BY SHAREHOLDERS: January 28, 2000 18 AMENDMENT NO. 2 TO THE ATHEROGENICS, INC. EQUITY OWNERSHIP PLAN THIS AMENDMENT NO. 2 to the ATHEROGENICS, INC. EQUITY OWNERSHIP PLAN (the "Plan"), made by ATHEROGENICS, INC. (the "Company"), effective as stated in Section 2 below: W I T N E S S E T H: WHEREAS, the Board of Directors of the Company (the "Board") has previously adopted the Plan, and pursuant to Section 5.8 thereof, the Board has the right to amend the Plan at any time (subject to certain restrictions not applicable in this case); and WHEREAS, the Board has determined that it would be consistent with the purposes of the AtheroGenics, Inc. 1997 Equity Ownership Plan (the "Plan") and in the Company's best interest to amend the Plan to permit the grant of non-qualified stock options to an entity of which a Director is an affiliate (the "Alternate Grantee") in circumstances under which the Director, by reason of his/her relationship to the Alternate Grantee, may be contractually or otherwise barred from receiving, in his/her individual capacity, option grants made to him by reason of his service as a Director; NOW, THEREFORE, the Plan is amended as follows, effective as stated below: 1. Section 2.4 of the Plan shall be amended in its entirety as follows: "2.4 Eligibility and Limits. "(a) Participants in the Plan shall be selected by the Administrator from among the classes of recipients specified in Section 2.1(c), provided, however, that (i) only individuals who are employees of the Company on the date of grant may receive Incentive Stock Options and (ii) under the circumstances specified below in this subsection (a), an Alternate Grantee who is an affiliate of a Director may, at the discretion of the Administrator, be granted Non-Qualified Stock Options even if such entity does not meet the criteria of Section 2.1(c). A grant of Non-Qualified Stock Options may be made to an Alternate Grantee if the Administrator in its discretion determines that (i) a Director to whom an option grant would normally be made is barred from receiving or retaining such grant by contractual or legal restrictions applicable to him/her by virtue of his/her relationship to an entity of which he/she is an affiliate (the "Alternate Grantee"), (ii) the Director has refused or waived the grant originally intended for him/her (and such grant has been cancelled) and has informed the Administrator of the identity of the Alternate Grantee; (iii) there is an appropriate exemption under the Securities Act of 1933 19 pursuant to which a grant to the Alternate Payee may be made without meeting the registration requirements of such act; and (iv) it would be consistent with the purposes of the Plan and in the Company's best interest to make such a grant of Non-Qualified Stock Options to Alternate Grantee. "(b) In the case of Incentive Stock Options, the aggregate Fair Market Value (determined at the date an Incentive Stock Option is granted) of Stock with respect to which Stock Options intended to meet the requirements of Code Section 422 become exercisable for the first time by an individual during any calendar year under all plans of the Company and its Parents and subsidiaries shall not exceed $100,000; provided further, that if the limitation is exceeded, the Incentive Stock Option(s) which cause the limitation to be exceeded shall be treated as Non-Qualified Stock Option(s)." 2. This amendment shall be effective from and after the date of its adoption by the Board, provided that the Administrator may make option grants to Alternate Grantees only with respect to Stock Options which were granted (or which would have been granted but for the contractual or legal restrictions referenced above) to a Director on or after January 28, 2000. 3. All other provisions of the Plan not inconsistent herewith are hereby confirmed and ratified. IN WITNESS WHEREOF, the Company has caused this Amendment No. 2 to the Plan to be executed by its duly authorized officer as of the date first above written. ATHEROGENICS, INC. By: /s/ Michael A. Henos --------------------------- Title: CHAIRMAN OF THE BOARD ------------------------ [ADOPTED BY THE BOARD OF DIRECTORS JUNE 22, 2000] 2 EX-23.01 11 ex23-01.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 18, 2000, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-31140) and related Prospectus of AtheroGenics, Inc. for the Registration of 6,000,000 shares of its common stock. /s/ Ernst & Young LLP Atlanta, Georgia July 12, 2000 EX-23.03 12 ex23-03.txt CONSENT OF KING & SPALDING 1 EXHIBIT 23.03 [KING & SPALDING LETTERHEAD] 191 PEACHTREE STREET ATLANTA, GEORGIA 30303-1763 TELEPHONE: 404/572-4600 FACSIMILE: 404/572-5100 DIRECT DIAL: DIRECT FAX: 404/572-4600 404/572-5100 CONSENT FORM The undersigned hereby consents to the use of our name and the Statement with respect to us that appears under the heading "Experts" in the Registration Statement on Form S-1 and related prospectus of AtheroGenics, Inc. KING & SPALDING Dated: July 13, 2000 /s/ KING & SPALDING -----END PRIVACY-ENHANCED MESSAGE-----