-----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, IhKSEcv3eDKWnx3xWwqZVg0vKQuXHxsjtjZr9klpMJ03QwWVSEpshwk8IeETVsbb BgMQMnn2Ijcl80TH/Ns+mg== /in/edgar/work/0000912057-00-043026/0000912057-00-043026.txt : 20000930 0000912057-00-043026.hdr.sgml : 20000930 ACCESSION NUMBER: 0000912057-00-043026 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20000928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOSAN BIOSCIENCES INC CENTRAL INDEX KEY: 0001110206 STANDARD INDUSTRIAL CLASSIFICATION: [8731 ] IRS NUMBER: 943217016 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33732 FILM NUMBER: 731412 BUSINESS ADDRESS: STREET 1: 3832 BAY CENTER PLACE CITY: HAYWARD STATE: CA ZIP: 94545 BUSINESS PHONE: 5107328400 MAIL ADDRESS: STREET 1: 3832 BAY CENTER PLACE CITY: HAYWARD STATE: CA ZIP: 94545 S-1/A 1 s-1a.txt FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 2000 REGISTRATION NO. 333-33732 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- KOSAN BIOSCIENCES INCORPORATED (Exact name of Registrant as specified in its charter) DELAWARE 8731 94-3217016 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
------------------------ 3832 BAY CENTER PLACE HAYWARD, CA 94545 (510) 732-8400 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) -------------------------- DANIEL V. SANTI, M.D., PH.D. CHAIRMAN AND CHIEF EXECUTIVE OFFICER KOSAN BIOSCIENCES INCORPORATED 3832 BAY CENTER PLACE HAYWARD, CA 94545 (510) 732-8400 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: BLAIR W. STEWART RICHARD R. PLUMRIDGE ANGELA CORSILLES DARREN R. HENSLEY JASON BRANDWENE PATRICIA A. ELIAS WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP 650 PAGE MILL ROAD 370 INTERLOCKEN BLVD., SUITE 500 PALO ALTO, CA 94304 BROOMFIELD, COLORADO 80021 (650) 493-9300 (303) 410-2000
-------------------------- 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 being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, 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 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, 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 2000 PROSPECTUS 5,000,000 SHARES [LOGO] COMMON STOCK ------------------------------------------------------------ This is our initial public offering of shares of common stock. We are offering 5,000,000 shares. No public market currently exists for our common stock. We have applied to have our common stock listed on the Nasdaq National Market under the symbol "KOSN." We expect the public offering price to be between $14.00 and $16.00 per share. INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 7.
Per Share Total -------- -------- Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to Kosan......................... $ $
We have granted the underwriters a 30-day option to purchase up to 750,000 shares of common stock to cover any over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- LEHMAN BROTHERS CIBC WORLD MARKETS SG COWEN FIDELITY CAPITAL MARKETS a division of National Financial Services LLC ARTWORK [DESCRIPTION OF ARTWORK] [Front cover "KOSAN TECHNOLOGY PLATFORM" The art shows 4 cells (arranged diagonally), each containing a polyketide gene with modules of different color; an arrow leads from one cell to the next indicating a conversion, and each cell has an arrow to a polyketide structure, indicating the production of that polyketide. Each conversion has an explanatory caption by its side. The conversions indicated by color and size changes are over-production, gene manipulation and chemobiosynthesis. Following are captions that will be presented with the artwork: OVER-PRODUCTION. Genes transferred to better hosts. GENE MANIPULATION. Altered genes yield new compounds. CHEMOBIOSYNTHESIS. Synthetic starting materials yield new compounds.] TABLE OF CONTENTS
PAGE -------- Prospectus Summary...................... 3 Risk Factors............................ 7 Forward-Looking Statements.............. 14 Use of Proceeds......................... 15 Dividend Policy......................... 15 Dilution................................ 16 Capitalization.......................... 17 Selected Financial Data................. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 20 Business................................ 25
Management and Directors................ 38
PAGE -------- Related Party Transactions.............. 50 Principal Stockholders.................. 53 Description of Capital Stock............ 56 Shares Eligible for Future Sale......... 58 Underwriting............................ 60 Legal Matters........................... 63 Change in Independent Auditors.......... 63 Experts................................. 63 Where You Can Find More Information..... 63 Index to Financial Statements........... F-1
------------------------ PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS THAT WE BELIEVE MOST IMPORTANT ABOUT THIS OFFERING AND OUR BUSINESS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY FOR A COMPLETE UNDERSTANDING OF THIS OFFERING AND OUR BUSINESS. OUR BUSINESS We are a biotechnology company using our proprietary technologies to develop drug candidates from an important class of natural product compounds known as polyketides. Polyketides are naturally made in very small amounts in microorganisms and are structurally complex and difficult to make or modify by chemical means. We have developed technologies to manipulate the natural process by which polyketides are made. These technologies give us the ability to create novel polyketides thereby providing a pipeline of potential drug candidates. Polyketides have been a source of many different pharmaceuticals including antibiotics, anticancer drugs, cholesterol-lowering drugs, immunosuppressants, and other therapeutics, as well as animal health and agricultural products. Natural or semi-synthetic polyketide pharmaceuticals represent over 20 products, with sales of approximately $10 billion per year. Using our technologies, we are able to modify and produce polyketides in ways chemists cannot. Our approach mimics, accelerates and expands the evolutionary process that gave rise to this important class of molecules. We use our technologies to: - create improved versions of currently marketed pharmaceuticals that address large markets; - modify an existing polyketide used in one therapeutic area to create a new polyketide to be used in another; - transfer the ability to make a polyketide from one organism to another to enable large-scale production; and - generate large numbers of new polyketides to provide a source of new drug candidates. OUR TECHNOLOGIES Our technology platform has five components which allow us to modify, create and produce new polyketides: - polyketide gene alteration--the creation of new polyketides using our technology to manipulate the genetic instructions by which polyketides are made; - chemobiosynthesis--the creation of new polyketides by incorporating synthetic starting materials into the biological processes by which polyketides are made; - heterologous over-expression--the over-production of polyketides by transferring the genes to better hosts; - combinatorial biosynthesis--the rapid and efficient production of many different polyketides with related structures; and - screening libraries--large collections of many different polyketides that can be readily tested for biological activities of interest. 3 OUR STRATEGY Our strategy is to apply our technologies to create new polyketides for development as pharmaceutical products and to advance these drug candidates into clinical trials. We aim to: - maximize the value and minimize the risk associated with new drug development by focusing on new compounds with structures related to existing polyketides that have known utility, safety and significant market potential; - establish collaborative relationships with large pharmaceutical companies to advance our most complex programs through clinical trials and into the market, as well as to prepare and test our screening libraries; - expand and enhance our technologies and increase our capabilities for making new and useful polyketides; and - acquire or license complementary technologies or drug candidates from third parties. OUR PRODUCT DEVELOPMENT OPPORTUNITIES We have six primary programs for the discovery and development of new polyketides that are directed at infectious disease, gastrointestinal motility disorders, mucus hypersecretion, cancer, immunosuppression and nerve regeneration. These programs were selected because they represent opportunities where our technologies could improve existing products or fill unmet needs, and address large markets. Since September 1998, we have identified several polyketide antibiotic drug candidates that kill organisms that are resistant to existing products. We have developed these drug candidates in collaboration with The R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company. In August 2000, we signed a collaboration and license agreement with the Sloan-Kettering Institute for Cancer Research relating to potential anti-cancer compounds known as epothilones. 4 THE OFFERING Common stock offered by us................ 5,000,000 shares Common stock to be outstanding after this offering................................ 23,844,539 shares(1) Proposed Nasdaq National Market symbol.... KOSN Use of proceeds........................... We intend to use the net proceeds from this offering for advancing our drug candidates through preclinical and later-stage development, discovering or acquiring new drug candidates, expanding our technology platform, capital expenditures, working capital, general corporate purposes and possible future acquisitions. See "Use of Proceeds."
Unless otherwise indicated, information in this prospectus assumes: - the automatic conversion of all outstanding shares of our convertible preferred stock into 12,220,719 shares of common stock upon the closing of this offering; - no exercise of the underwriters' over-allotment option to purchase up to 750,000 shares; and - an expected increase in the authorized shares of common stock and preferred stock to 200,000,000 shares and 10,000,000 shares, respectively. - ------------------------ (1) The number of shares of common stock to be outstanding after this offering excludes: - 2,902,107 shares of common stock reserved for issuance under our 1996 stock option plan, of which 1,141,800 shares are subject to outstanding options at June 30, 2000 with a weighted average exercise price of $1.35 per share; - 300,000 shares of common stock reserved for issuance under our 2000 employee stock purchase plan approved by our board of directors in March 2000; and - 300,000 shares of common stock reserved for issuance under our 2000 non-employee director stock option plan approved by our board of directors in March 2000. Our principal executive offices are located at 3832 Bay Center Place, Hayward, California, 94545. Our phone number is (510) 732-8400. Our website is http://www.kosan.com. We do not intend for the information found on our website to be incorporated into or be a part of this prospectus. 5 SUMMARY FINANCIAL DATA The following tables summarize our financial data, and should be read together with our financial statements and the related notes, the "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The pro forma information contained in the statement of operations data gives effect to the automatic conversion of all convertible preferred stock upon the completion of this offering. The pro forma balance sheet data reflects the automatic conversion of our preferred stock into common stock on a three-for-one basis and the sale of 5,000,000 shares of our common stock at an assumed price to the public of $15.00 per share, after deducting the underwriting discounts, commissions and estimated offering expenses payable by us.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------ ---------------------------- 1997 1998 1999 1999 2000 STATEMENT OF OPERATIONS DATA: ---------- ---------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED) Total revenue......................... $ 287 $ 1,236 $ 5,346 $ 3,107 $ 2,224 Total operating expenses.............. 2,379 5,021 10,400 4,650 9,414 Loss from operations.................. (2,092) (3,785) (5,054) (1,543) (7,190) Net loss.............................. $(1,994) $(3,267) $(4,401) $(1,280) $ (6,679) Deemed dividend upon issuance of Series C convertible preferred stock............................... -- -- -- -- (11,267) ------- ------- ------- ------- -------- Net loss attributable to common stockholders........................ $(1,994) $(3,267) $(4,401) $(1,280) $(17,946) Basic and diluted net loss per share............................... $ (0.49) $ (0.77) $ (0.98) $ (0.29) $ (3.57) Shares used in computing basic and diluted net loss per share.......... 4,094 4,270 4,509 4,430 5,029 Pro forma basic and diluted net loss per share (unaudited)............... $ (0.31) $ (1.12) Shares used in computing pro forma basic and diluted net loss per share (unaudited)......................... 14,318 16,056
AS OF JUNE 30, 2000 ----------------------- ACTUAL PRO FORMA BALANCE SHEET DATA: -------- --------- (IN THOUSANDS) Cash, cash equivalents and short-term investments........... $ 25,027 $ 93,527 Working capital............................................. 22,370 90,870 Long-term investments....................................... 7,235 7,235 Total assets................................................ 36,898 105,398 Capital lease and debt obligations, less current portion.... 2,099 2,099 Accumulated deficit......................................... (18,272) (18,272) Stockholders' equity........................................ 31,777 100,277
6 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF NET LOSSES AND MAY NEVER BECOME PROFITABLE. We commenced operations in 1996 and are still in an early stage of development. We have not commercialized any products and we have incurred significant losses to date. As of June 30, 2000, we had an accumulated deficit of approximately $18.3 million. To date, our revenues have been solely from collaborations and government grants. Our expenses have consisted principally of costs incurred in research and development and from general and administrative costs associated with our operations. We have incurred net losses since our inception, including a net loss of approximately $6.7 million for the six months ended June 30, 2000. We expect our expenses to increase and to continue to incur operating losses for at least the next several years as we continue our research and development efforts for our drug candidates. The amount of time necessary to successfully commercialize any of our drug candidates is long and uncertain and successful commercialization may not occur at all. As a result, we may never become profitable. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS, WE MAY NOT BE ABLE TO SUPPORT OUR OPERATIONS. Based on our current plans, we believe our cash, cash equivalents and investments, together with the net proceeds of this offering, will be sufficient to fund our operating expenses and capital requirements through at least the next 24 months. However, the actual amount of funds that we will need during or after the next 24 months will be determined by many factors, including those discussed in this section. If additional funds are required and we are unable to obtain them on terms favorable to us, we may be required to delay, scale back or eliminate some or all of our research and development programs or to license third parties to develop or market products or technologies that we would otherwise seek to develop or market ourselves. If we raise additional funds by selling additional shares of our capital stock, the ownership interest of our stockholders will be diluted. IF WE DON'T ESTABLISH AND MAINTAIN COLLABORATIONS WITH OTHER PARTIES, THE DEVELOPMENT OF OUR PRODUCTS MAY BE DELAYED OR STOPPED. Because we do not currently possess the financial and other resources necessary to develop potential products that may result from our technologies, or the financial and other resources to complete any approval processes which may be required for these products, we must enter into collaborative arrangements to develop many of our drug candidates. If we do not maintain or further extend our current collaboration with The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson companies, which expires on December 28, 2001, or if we do not enter into new collaborative agreements, then our revenues will be reduced, and our drug candidates may not be developed, manufactured or marketed. OUR POTENTIAL PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND SUBSTANTIAL ADDITIONAL EFFORT WILL BE NECESSARY FOR DEVELOPMENT. Our technologies are new and our drug candidates are in the early stage of development. We may not develop products that prove to be safe and effective, meet applicable regulatory standards, are capable of being manufactured at reasonable costs, or can be marketed successfully. All of the potential proprietary products that we are currently developing will require significant development and investment, including extensive preclinical and clinical testing before we can submit any application for 7 regulatory approval. Before obtaining regulatory approvals for the commercial sale of any of our products, we must demonstrate through preclinical testing and clinical trials that our drug candidates are safe and effective in humans. We have not commenced clinical testing of any of our potential products, nor have we submitted any application to test any potential products in humans. Conducting clinical trials is a lengthy, expensive and uncertain process. Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the drug candidate. Our clinical trials, when commenced, may be suspended at any time if we or the U.S. Food and Drug Administration, or the FDA, believe the patients participating in our studies are exposed to unacceptable health risks. We may encounter problems in our studies which will cause us or the FDA to delay or suspend the studies. Our commencement and rate of completion of clinical trials may be delayed by many factors, including: - ineffectiveness of the study compound, or perceptions by physicians that the compound is not effective for a particular indication; - inability to manufacture sufficient quantities of compounds for use in clinical trials; - failure of the FDA to approve our clinical trial protocols; - slower than expected rate of patient recruitment; - unforeseen safety issues; or - government or regulatory delays. If any future clinical trials are not successful, our business, financial condition and results of operations will be harmed. ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES COULD HARM OUR COMPETITIVE POSITION. Our success will depend in part on our ability to obtain patents and maintain adequate protection of other intellectual property for our technologies and products in the United States and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate our competitive advantage. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these foreign countries. The patent positions of biotechnology companies, including our patent position, involve complex legal and factual questions and, therefore, validity and enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated or circumvented. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will apply for patents covering both our technologies and drug candidates as we deem appropriate. However, we may fail to apply for patents on important technologies or products in a timely fashion or at all, and in any event, the applications we do file may be challenged and may not result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages. If the use or validity of any of our patents is ever challenged, resulting in litigation or administrative proceedings, we would incur substantial costs and the diversion of management in defending the patent. In addition, we generally do not control the patent prosecution of technology that we license from others. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we would over technology we own. 8 We rely upon trade secret protection for our confidential and proprietary information. We have taken measures to protect our proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators, and consultants. Nevertheless, employees, collaborators, or consultants may still disclose our proprietary information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets. LITIGATION OR OTHER PROCEEDINGS OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT WOULD REQUIRE US TO SPEND TIME AND MONEY AND COULD PREVENT US FROM DEVELOPING OR COMMERCIALIZING PRODUCTS. Our commercial success depends in part on not infringing the patents and proprietary rights of third parties and not breaching any licenses that we have entered into with regard to our technologies and products. The biotechnology industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may have been issued relevant patents or may have filed relevant patent applications that could affect our ability to obtain patents or to operate as we would like to in our research, development, and commercialization efforts. If we wish to use technologies claimed by third parties in issued and unexpired patents, then we may need to obtain license(s) from the owner(s) of such patent(s), enter into litigation, or incur the risk of litigation. Litigation or failure to obtain necessary licenses may impede our ability to obtain collaborations or to develop our products and could prevent us or our collaborators from developing or commercializing our products. Other biotechnology and pharmaceutical companies have filed patent applications and obtained patents, and in the future will likely continue to file patent applications and obtain patents, claiming polyketide synthase genes, gene fragments, and methods for modifying such genes or gene fragments. If these patents are valid or if these applications issue into valid patents, we will have to either circumvent the claims in these patents, or obtain licenses to use the patented technology in order to use these genes or technologies in the research, development and commercialization of our products and technologies. If we are unsuccessful in circumventing or acquiring licenses to these patents, our ability to research, develop or commercialize products may be blocked. Third parties may sue us in the future to challenge our patent rights or claim infringement of their patents. An adverse determination in litigation to which we may become a party could subject us to significant liabilities to third parties, require us to license disputed rights from third parties or require us to cease using the disputed technology. We are aware of a significant number of patents and patent applications relating to aspects of our technologies and families of compounds filed by, and issued to, third parties. If any of our competitors have filed patent applications or have been granted patents claiming inventions also claimed by us, we may have to participate in an interference proceeding declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to a patent for these inventions in the United States. Such a proceeding could result in substantial cost to us even if the outcome is favorable. For example, a number of companies have cloned polyketide synthase genes and described in patents or publications technology to modify those genes or express them in heterologous hosts using recombinant DNA technology. Such companies include, for example, Abbott Laboratories (erythromycin, niddamycin); Dow Agrosciences (spinosyn); Eli Lilly and Company (tylosin, spiramycin), Novartis (soraphen, epothilone); and Merck (avermectin, lovastatin). Even if successful on priority grounds, an interference may result in loss of claims based on patentability grounds raised in the interference. Although patent and intellectual property disputes in the biotechnology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and 9 could include ongoing royalties. Furthermore, we cannot be certain that the necessary licenses would be available to us on satisfactory terms, if at all. Third parties may obtain patents in the future and then claim that the use of our technologies infringes these patents or that we are employing their proprietary technology without authorization. This is because patent applications in the United States are secret until issued into corresponding patents and the applications can be pending for several years after filing. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any of these claims or enforcing our patents against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief which could effectively block our ability to further develop, commercialize, and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to: - pay damages; - stop using our products or methods; - develop non-infringing products or methods; and - obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter substantial delays in product introductions while we attempt to develop alternative methods or products, which we may not be able to accomplish. IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH THROUGH RECRUITING AND RETAINING SKILLED EMPLOYEES AND EXPAND OUR MANAGEMENT AND IMPROVE OUR CONTROLS AND SYSTEMS, WE MAY NOT BE ABLE TO MANAGE OUR DAY-TO-DAY OPERATIONS. We have experienced a period of rapid and substantial growth that has placed, and if this growth continues will further place, a strain on our human and capital resources. If we are unable to manage this growth effectively, then our losses could increase. The number of our employees increased from 21 on December 31, 1997 to 62 on June 30, 2000. Retaining our current employees and recruiting qualified scientific personnel to perform future research and development work will be critical to our success. Competition is intense for experienced scientists, and we may not be able to retain or recruit sufficient skilled personnel to allow us to pursue collaborations and develop our products and core technologies to the extent otherwise possible. Additionally, we are highly dependent on the principal members of our management and scientific staff, such as our two co-founders, the loss of whose services would adversely impact the achievement of our objectives. Although we maintain and are the beneficiary of $1.0 million key-man life insurance policies for the lives of each of our two co-founders, Dr. Daniel Santi, our chief executive officer, and Dr. Chaitan Khosla, a director and consultant, we do not believe the proceeds would be adequate to compensate us for their loss. Our ability to manage our operations and growth effectively requires us to continue to expend funds to expand our management and improve our controls and systems. If we are unable to successfully implement these expansions and improvements, then we may not be able to effectively manage our day-to-day operations. WE FACE INTENSE COMPETITION FROM LARGE PHARMACEUTICAL COMPANIES, BIOTECHNOLOGY COMPANIES AND ACADEMIC GROUPS. We face, and will continue to face, intense competition from organizations such as large biotechnology and pharmaceutical companies, as well as academic and research institutions and government agencies, that are pursuing competing technologies for modifying DNA. These organizations may develop technologies that are superior alternatives to our technologies. Further, our 10 competitors in the polyketide gene engineering field may be more effective at implementing their technologies to develop commercial products. Some of these competitors have entered into collaborations with leading companies within our target markets to produce polyketides for commercial purposes. Any products that we develop through our technologies will compete in multiple, highly competitive markets. Development of pharmaceutical products requires significant investment and resources. Many of the organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staffs, facilities and capabilities, and greater experience in modifying DNA, obtaining regulatory approvals, and product manufacturing and marketing. Accordingly, our competitors may be able to develop technologies and products more easily, which would render our technologies and products and those of our collaborators obsolete and noncompetitive. IF WE FACE CLAIMS IN CLINICAL TRIALS OF A DRUG CANDIDATE, THESE CLAIMS WILL DIVERT OUR MANAGEMENT'S TIME AND WE WILL INCUR LITIGATION COSTS. We face an inherent business risk of clinical trial liability claims in the event that the use or misuse of our potential products results in personal injury or death. We may experience clinical trial liability claims if our drug candidates are misused or cause harm before regulatory authorities approve them for marketing. We currently do not maintain clinical trial liability insurance coverage. Even if we do obtain an insurance policy, it may not be sufficient to cover claims that may be made against us. Clinical trial liability insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Any claims against us, regardless of their merit, could materially and adversely affect our financial condition, because litigation related to these claims would strain our financial resources in addition to consuming the time and attention of our management. If we are sued for any injuries caused by our products, our liability could exceed our total assets. WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE, OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY. Our research and development processes involve the controlled use of hazardous materials, including hazardous chemicals and radioactive and biological materials. Some of these materials may be novel, including bacteria with novel properties and bacteria that produce biologically active compounds. Our operations also produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state, and local laws and regulations govern the use, manufacture, storage, handling, and disposal of these materials. We believe that our current operations comply in all material respects with these laws and regulations. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, we could be sued for injury or contamination that results from our use or the use by third parties or our collaborators of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development, or commercialization efforts. WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER DOCUMENTS THAT MAY RESULT IN OUTCOMES WITH WHICH YOU DO NOT AGREE. Our board of directors will have the authority to issue up to 10,000,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of those shares without further vote or action by our stockholders. The rights of the holders of any preferred stock that may be issued in the future may adversely affect the rights of the holders of common stock. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock. Our certificate of incorporation will provide for staggered terms for the members of the board of directors and prevent our stockholders from acting by written consent. These provisions and other provisions of our bylaws and of Delaware law applicable to us could delay or make more difficult a merger, tender offer or proxy contest involving us. This could reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without these provisions. 11 SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS. After this offering, our officers, directors and principal stockholders (greater than 5% stockholders) will together control approximately 47.0% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of us and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider. RISKS RELATED TO THE OFFERING OUR STOCK PRICE COULD BE VOLATILE AND YOUR INVESTMENT COULD SUFFER A DECLINE IN VALUE. The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including: - announcements of technological developments in research by us or our competitors; - delay or failure in initiating, conducting, completing or analyzing clinical trials or unsatisfactory design or results of these trials; - achievement of regulatory approvals; - new products or services introduced or announced by us or our competitors; - changes in financial estimates by securities analysts; - announcements of departures or departures of key personnel; and - sales of our common stock. In addition, the stock market in general, and the Nasdaq National Market and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. If this type of litigation were instituted against us, we would be faced with substantial costs and management's attention and resources would be diverted, which could in turn seriously harm our business, financial condition and results of operations. WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CREATING INVESTOR LOSSES. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors which could cause our operating results to fluctuate include: - expiration of research contracts with collaborators or government research grants, which may not be renewed or replaced; - the success rate of our discovery efforts leading to milestones and royalties; 12 - the timing and willingness of collaborators to commercialize our products; and - general and industry specific economic conditions, which may affect our collaborators' research and development expenditures. A large portion of our expenses are relatively fixed, including expenses for facilities, equipment, and personnel. Accordingly, if revenues decline or do not grow due to expiration of research contracts or government research grants, failure to obtain new contracts or other factors, we may not be able to correspondingly reduce our operating expenses. In addition, we expect operating expenses to continue to increase. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period. Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market after the closing of this offering or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. There will be 23,844,539 shares of common stock outstanding immediately after this offering, or 24,594,539 shares if the representatives of the underwriters exercise their over-allotment option in full. The shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, except for any shares purchased by our affiliates, as defined in Rule 144 of the Securities Act. 18,844,539 shares of common stock outstanding will be restricted securities as defined in Rule 144. Of these shares, 16,449,285 shares will be subject to a lock-up agreement providing that the stockholder will not offer, sell, or otherwise dispose of any of the shares of common stock owned by them for a period of 180 days after the date of this prospectus. These shares may be sold on the 181st day after the date of this prospectus without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. Lehman Brothers Inc. may, in its sole discretion, at any time without notice, release all or any portion of the shares subject to the lock-up agreements, which would result in more shares being available for sale in the public market at an earlier date. In addition, as soon as practicable after the date of this prospectus, we intend to file a registration statement on Form S-8 with the Commission covering 3,502,107 shares of common stock reserved for issuance under our 1996 stock option plan, our 2000 employee stock purchase plan and our 2000 non-employee director stock option plan. Sales of common stock by existing stockholders in the public market, or the availability of such shares for sale, could materially and adversely affect the market price of our common stock. See "Shares Eligible for Future Sale." AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION. If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution of $10.79 per share in pro forma net tangible book value. If the holders of outstanding options exercise those options, you will incur further dilution. To the extent we raise additional capital by issuing equity securities, our stockholders may experience additional substantial dilution. See "Dilution." 13 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that relate to future events or our future financial performance. You can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential," or "continue" and variations of these words or other comparable words. Examples of these forward-looking statements include, but are not limited to, statements regarding the following: - our technologies and programs, - our ability to realize commercially valuable discoveries in our programs, - our intellectual property portfolio, - our business strategies and plans, and - our ability to develop products suitable for commercialization. Although we believe that the predictions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. The safe harbor for forward-looking statements contained in the Securities Litigation Reform Act of 1995 protects companies from liability for their forward-looking statements if they comply with the requirements of the Act. The Act does not provide the protection for initial public offerings and is not available for our forward-looking statements in this prospectus. ABOUT THIS PROSPECTUS 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 time of delivery of this prospectus or of any sale of our common stock. 14 USE OF PROCEEDS We estimate that the net proceeds from the sale of the 5,000,000 shares of common stock that we are offering will be $68.5 million after deducting estimated underwriters' discounts and commissions and estimated offering expenses and assuming an initial public offering price of $15.00 per share. If the underwriters' over-allotment option is exercised in full, we estimate that the net proceeds will be $79.0 million. We anticipate using the net proceeds from this offering for advancing our drug candidates through preclinical and later stage development, discovering or acquiring new drug candidates, expanding our technology platform, capital expenditures, working capital, general corporate purposes and possible future acquisitions. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of our product development and commercialization efforts, technological advances, the amount of proceeds actually raised in this offering and the amount of cash generated by our operations. We may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies or assets that complement our business, although we are not currently planning any acquisitions, and no portion of the net proceeds has been allocated to any particular acquisition. We have not determined the amounts we plan to spend on any of the areas listed above or the timing of these expenditures. As a result, our management will have broad discretion to allocate the net proceeds from this offering. We believe that the net proceeds of this offering, existing cash, cash equivalents and investments, will be sufficient to meet our operating expenses and capital requirements for at least the next 24 months. Pending the use of the net proceeds, we intend to invest the net proceeds in interest-bearing investment grade and U.S. government securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if any, for use in the expansion and operation of our business and do not anticipate paying cash dividends for the foreseeable future. 15 DILUTION Our pro forma net tangible book value, as of June 30, 2000, was $31.8 million, or $1.69 per share of common stock after giving effect to the automatic conversion of all outstanding shares of preferred stock into an aggregate of 12,220,719 shares of common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. After giving effect to our sale of common stock offered hereby at an assumed initial public offering price of $15.00 per share, and our receipt of the estimated net proceeds from the offering of $68.5 million, our pro forma net tangible book value as of June 30, 2000 would have been approximately $100.3 million, or $4.21 per share. This represents an immediate increase in net tangible book value of $2.52 per share to existing stockholders and an immediate dilution of $10.79 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $15.00 Pro forma net tangible book value per share before the offering................................................ $ 1.69 Increase per share attributable to new investors.......... 2.52 Pro forma net tangible book value per share after this offering.................................................. 4.21 ------ Dilution per share to new investors......................... $10.79 ======
If the underwriters' over-allotment option were exercised in full, the pro forma net tangible book value per share after this offering would be $4.50 per share, the increase in net tangible book value per share to existing stockholders would be $2.81 per share and the dilution in net tangible book value to new investors would be $10.50 per share. The following table summarizes, on a pro forma basis as of June 30, 2000, the differences between existing stockholders and the new investors with respect to the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid before deducting the underwriting discounts and commissions and our estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- -------- ------------ -------- ----------- Existing stockholders.................. 18,844,539 79% $ 46,744,000 38% $ 2.48 New investors.......................... 5,000,000 21 75,000,000 62 15.00 ---------- ----- ------------ ----- Total................................ 23,844,539 100.0% 121,744,000 100.0% ========== ===== ============ =====
The discussion and tables above assume no exercise of stock options outstanding. At June 30, 2000, there were options outstanding to purchase a total of 1,141,800 shares of common stock, with a weighted average exercise price of $1.35 per share. To the extent that any of these options are exercised, there will be further dilution to new investors. 16 CAPITALIZATION The following table shows our capitalization as of June 30, 2000: - on an actual basis; - on a pro forma basis to reflect the automatic conversion of all outstanding shares of preferred stock into common stock and the expected increase in the authorized shares of common stock and preferred stock to 200,000,000 shares and 10,000,000 shares, respectively, upon the closing of this offering; and - on a pro forma as adjusted basis to give effect to the sale of 5,000,000 shares of common stock by us in this offering at an assumed price of $15.00 per share less the estimated underwriters' discounts and commissions and our offering expenses.
AS OF JUNE 30, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Capital lease and debt obligations, less current portion.... $ 2,099 $ 2,099 $ 2,099 -------- -------- -------- Stockholders' equity: Convertible preferred stock, par value $0.001; 4,348,182 shares authorized (actual); 10,000,000 shares authorized (pro forma and pro forma as adjusted), 4,073,573 shares issued and outstanding (actual); no shares issued and outstanding (pro forma and pro forma as adjusted)....... 4 -- -- Common stock, par value $0.001; 36,000,000 shares authorized (actual); 200,000,000 shares authorized (pro forma and pro forma as adjusted), 6,623,820 shares issued and outstanding, actual; 18,844,539 shares issued and outstanding, pro forma; 23,844,539 shares issued and outstanding, pro forma as adjusted...................... 7 19 24 Additional paid-in capital.................................. 61,651 61,643 130,138 Notes receivable from stockholders.......................... (647) (647) (647) Deferred stock compensation................................. (10,906) (10,906) (10,906) Accumulated other comprehensive loss........................ (60) (60) (60) Accumulated deficit......................................... (18,272) (18,272) (18,272) -------- -------- -------- Total stockholders' equity............................ 31,777 31,777 100,277 -------- -------- -------- Total capitalization.................................. $ 33,876 $ 33,876 $102,376 ======== ======== ========
This table excludes: - 2,902,107 shares of our common stock reserved for issuance under our 1996 stock option plan, of which 1,141,800 shares are subject to outstanding options with a weighted average exercise price of $1.35 per share; - 300,000 shares available for issuance under our 2000 employee stock purchase plan approved by our board of directors in March 2000; and - 300,000 shares available for issuance under our 2000 non-employee director stock option plan approved by our board of directors in March 2000. 17 SELECTED FINANCIAL DATA You should read the following selected historical financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes appearing elsewhere in this prospectus. We have derived the selected financial data set forth below with respect to our statements of operations for the years ended December 31, 1997, 1998 and 1999 and with respect to our balance sheets at December 31, 1998 and 1999 from our financial statements that Ernst & Young LLP audited. The audited financial statements qualify the disclosure in this selected financial data. You can review the audited financial statements elsewhere in this prospectus. We have derived the statement of operations data for the period from inception (January 5, 1995) to December 31, 1995 and for the year ended December 31, 1996 and the balance sheet data as of December 31, 1996 and 1997 from our audited financial statements that we do not include in this prospectus. We have derived the selected financial data set forth below with respect to our statements of operations for the six months ended June 30, 1999 and 2000 and the balance sheet data at June 30, 2000 from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for these periods. We do not intend for the selected data in this section to replace our financial statements. Historical results are not necessarily indicative of the results that you might expect in the future.
FROM INCEPTION (JANUARY 5, SIX MONTHS ENDED 1995) TO YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ----------------------------------------- ------------------- STATEMENT OF OPERATIONS DATA: 1995 1996 1997 1998 1999 1999 2000 - ----------------------------- -------------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Contract revenue........................... $ -- $ -- $ 10 $ 974 $ 5,206 $ 3,027 $ 2,084 Grant revenue.............................. -- 200 277 262 140 80 140 ------ ------- ------- ------- ------- ------- -------- Total revenues........................... -- 200 287 1,236 5,346 3,107 2,224 Operating expenses: Research and development (1)............. 197 1,286 1,922 4,030 8,587 3,838 7,621 General and administrative (1)........... 281 402 457 991 1,813 812 1,793 ------ ------- ------- ------- ------- ------- -------- Total operating expenses................. 478 1,688 2,379 5,021 10,400 4,650 9,414 ------ ------- ------- ------- ------- ------- -------- Loss from operations....................... (478) (1,488) (2,092) (3,785) (5,054) (1,543) (7,190) Other income, net.......................... -- 35 98 518 653 263 511 ------ ------- ------- ------- ------- ------- -------- Net loss................................... $ (478) $(1,453) $(1,994) $(3,267) $(4,401) $(1,280) $ (6,679) ====== ======= ======= ======= ======= ======= ======== Deemed dividend upon issuance of Series C convertible preferred stock.............. -- -- -- -- -- -- (11,267) ------ ------- ------- ------- ------- ------- -------- Net loss attributable to common stockholders............................. $ (478) $(1,453) $(1,994) $(3,267) $(4,401) $(1,280) $(17,946) ====== ======= ======= ======= ======= ======= ======== Basic and diluted net loss per share....... $(0.16) $ (0.47) $ (0.49) $ (0.77) $ (0.98) $ (0.29) $ (3.57) ====== ======= ======= ======= ======= ======= ======== Shares used in computing basic and diluted net loss per share....................... 2,934 3,081 4,094 4,270 4,509 4,430 5,029 Pro forma basic and diluted net loss per share (unaudited)........................ $ (0.31) $ (1.12) ======= ======== Shares used in computing pro forma basic and diluted net loss per share (unaudited).............................. 14,318 16,056 ======= ========
- ------------------------ (1) Includes non-cash charges for stock-based compensation as follows (in thousands):
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- Research and development............................... $ -- $ -- $ 964 $403 $2,597 General and administrative............................. -- -- 181 -- 708 ------ ------ ------ ---- ------ $ -- $ -- $1,145 $403 $3,305 ====== ====== ====== ==== ======
18
AS OF DECEMBER 31, ---------------------------------------------------- AS OF BALANCE SHEET DATA: 1995 1996 1997 1998 1999 JUNE 30, 2000 - ------------------- -------- -------- -------- -------- -------- -------------- (IN THOUSANDS) Cash, cash equivalents and short-term investments................................. $ 31 $ 1,465 $ 2,019 $ 6,328 $ 2,022 $ 25,027 Working capital............................... (257) 1,369 1,976 4,267 750 22,370 Long-term investments......................... -- -- -- 9,073 8,442 7,235 Total assets.................................. 62 1,965 2,757 17,201 14,157 36,898 Capital lease and debt obligations, less current portion........................ -- -- 385 1,004 1,591 2,099 Accumulated deficit........................... (478) (1,930) (3,924) (7,192) (11,593) (18,272) Stockholders' equity.......................... (226) 1,721 2,111 13,759 10,471 31,777
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR "SELECTED FINANCIAL DATA," OUR FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW We are a biotechnology company that has proprietary technologies to develop potential pharmaceutical products that will address large markets. We use our technologies to make new drug candidates derived from an important class of natural product compounds known as polyketides. Our product opportunities currently target the areas of infectious disease, gastrointestinal motility, mucus hypersecretion, cancer, immunology and nerve regeneration. In infectious disease, we have a collaboration with The R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company, focusing on the development of a next generation antibiotic. In cancer, we have a collaboration with the Sloan-Kettering Institute for Cancer Research focusing on the development of potential anti-cancer compounds known as epothilones. We have incurred significant losses since our inception. As of June 30, 2000, our accumulated deficit was $18.3 million. We expect to incur additional operating losses over the next several years as we continue to develop our technologies and fund internal product research and development. STOCK-BASED COMPENSATION Stock-based compensation expense for the year ended December 31, 1999 and for the six months ended June 30, 2000 represents the difference between the exercise price of an option and the deemed fair value of our common stock on the date of the grant calculated in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. We recorded total deferred stock-based compensation of $11.1 million in the six months ended June 30, 2000 and $2.9 million in 1999. Subsequent to June 30, 2000 we recorded deferred stock-based compensation of $1.4 million for stock options granted from July 1, 2000 through August 31, 2000. Such amounts are included as a reduction of stockholders' equity and are being amortized to expense using the graded vesting method over the vesting periods of the underlying options, which are generally four years. Stock-based compensation has been allocated to research and development expense and general and administrative expense, as appropriate. Based on deferred stock-based compensation recorded as of August 31, 2000, we expect to record amortization for deferred stock-based compensation approximately as follows: $3.8 million for the remaining six months in 2000, $4.7 million in 2001, $2.6 million in 2002, $1.1 million in 2003 and $106,000 in 2004. In connection with the grants of stock options and restricted stock to non-employees, we recognize compensation on a ratable basis over the related service period. We recognized other stock-based compensation for non-employees of $752,000 for the six months ended June 30, 2000 and $610,000 in 1999. In addition, we expect to recognize other stock-based compensation in connection with stock options and restricted stock granted to non-employees of $662,000 for the remaining six months in 2000, $1.3 million in 2001, $979,000 in 2002, $318,000 in 2003 and $58,000 in 2004. The measurement of stock-based compensation to our non-employees is subject to periodic adjustment as our stock price changes and as the underlying securities vest. As such, changes to these measurements could be substantial should we experience significant changes in our stock price. See Notes 1 and 9 of our financial statements. 20 RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 REVENUE. Our revenues decreased to $2.2 million for the six months ended June 30, 2000 from $3.1 million for the six months ended June 30, 1999. This decrease was due to a $1.0 million non-recurring milestone payment recognized in 1999 under our collaboration with The R.W. Johnson Pharmaceutical Research Institute. Total contract revenues under this collaboration were $2.1 million for the six months ended June 30, 2000 and $2.9 million for the six months ended June 30, 1999, inclusive of the $1.0 million non-recurring milestone payment. The initial term of our collaboration with The R.W. Johnson Pharmaceutical Research Institute has been extended to December 28, 2001. If we do not maintain or further extend this agreement, our revenues will significantly decrease thereafter, unless we enter into additional collaborations. RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses consist primarily of stock-based compensation, salaries and other personnel-related expenses, facility related expenses, lab consumables and depreciation of facilities and equipment. Research and development expenses increased to $7.6 million for the six months ended June 30, 2000 from $3.8 million for the six months ended June 30, 1999. This increase was due in large part to an increase in the stock-based compensation to $2.6 million for the six months ended June 30, 2000 from $403,000 for the six months ended June 30, 1999. The remainder of the increase was primarily due to increased payroll and personnel related expenses, including recruiting and relocation expenses. We expect our research and development expenses will increase substantially to fund the expansion of our technology platform, support our collaborative research programs and advance our in-house research programs into later stages of development. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $1.8 million for the six months ended June 30, 2000 from $812,000 for the six months ended June 30, 1999. This increase was primarily due to amortization of deferred stock-based compensation of $708,000 for the six months ended June 30, 2000. No such expenses were recognized during the same period in 1999. We expect our general and administrative expenses will increase in the future to support the continued growth of our research and development efforts and to fulfill our obligations associated with being a publicly held company. INTEREST INCOME. Interest income increased to $678,000 for the six months ended June 30, 2000 from $334,000 for the six months ended June 30, 1999. This increase was due to higher average investment balances due to the $24.6 million in net proceeds received in connection with the issuance of Series C convertible preferred stock in March 2000 combined with higher yields earned on investment balances. INTEREST EXPENSE. Interest expense increased to $167,000 for the six months ended June 30, 2000 from $71,000 for the six months ended June 30, 1999. The increase resulted from additional debt financing associated with our capital purchases along with a higher cost of capital due to rising interest rates during the first half of 2000. BENEFICIAL CONVERSION FEATURE. In March 2000, we sold 804,196 shares of Series C convertible preferred stock (convertible into 2,412,588 shares of common stock at the closing of this offering) for net proceeds of approximately $24.6 million. After evaluating the fair value of our common stock in contemplation of this offering, we determined that the issuance of the Series C convertible preferred stock resulted in a beneficial conversion feature calculated in accordance with Emerging Issues Task Force Consensus No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features." The beneficial conversion feature was reflected as a deemed dividend of $11.3 million in our financial statements for the six months ended June 30, 2000. 21 YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUE. Our revenues increased to $5.3 million in 1999 from $1.2 million in 1998. This increase primarily reflected the full year of funding under our corporate collaboration with The R.W. Johnson Pharmaceutical Research Institute which was established in September 1998. Total contract revenues earned under this collaboration were $5.0 million in 1999 and $969,000 in 1998. Also included in 1999 contract revenue was $1.2 million of non-recurring milestone payments earned under this agreement. The initial term of our collaboration with The R.W. Johnson Pharmaceutical Research Institute has been extended to December 28, 2001. If we do not maintain or further extend this agreement, our revenues will significantly decrease thereafter, unless we enter into additional collaborations. RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses increased to $8.6 million in 1999 from $4.0 million in 1998. The increase was primarily due to increases in employee costs as our scientific headcount increased to 43 individuals in December 1999 from 17 in January 1998 and higher occupancy expenses associated with our move to a larger facility in March 1999. In addition, we recorded $964,000 in stock-based compensation in 1999. No such expense was recorded in 1998. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $1.8 million in 1999 from $991,000 in 1998. This increase was primarily due to additional staffing as our administrative headcount increased to 10 in December 1999 from 6 in January 1998. In addition, we recorded $181,000 in stock-based compensation in 1999. No such expense was recorded in 1998. INTEREST INCOME. Interest income increased to $679,000 in 1999 from $598,000 in 1998. This increase resulted from higher average investment balances due to contract revenue received under our collaboration with The R.W. Johnson Pharmaceutical Research Institute. INTEREST EXPENSE. Interest expense increased to $196,000 in 1999 from $80,000 in 1998. This increase resulted from additional debt financing associated with our fixed asset purchases. OTHER INCOME. For the year ended December 31, 1999, other income included a $170,000 termination fee received from the landlord of our previously occupied facility for the buy-out of the rights to our sublease agreement. YEARS ENDED DECEMBER 31, 1998 AND 1997 REVENUE. Our revenue increased to $1.2 million in 1998 from $287,000 in 1997. This increase was attributable to the initiation of our corporate collaboration with The R.W. Johnson Pharmaceutical Research Institute in September 1998. RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses increased to $4.0 million in 1998 from $1.9 million in 1997. The increase was primarily due to increases in employee related costs as our scientific headcount increased to 37 at December 1998 from 12 in January 1997. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $991,000 in 1998 from $457,000 in 1997. This increase was primarily due to higher employee and consulting costs to support our expanding research and development activities. INTEREST INCOME. Interest income increased to $598,000 in 1998 from $154,000 in 1997. This increase resulted from higher investment balances arising from our April 1998 private placement of Series B convertible preferred stock and contract revenue received under our collaboration with The R.W. Johnson Pharmaceutical Research Institute. INTEREST EXPENSE. Interest expense increased to $80,000 in 1998 from $56,000 in 1997. This increase resulted from additional debt financing associated with our fixed asset purchases. 22 PROVISION FOR INCOME TAXES We incurred net operating losses in the years ended December 31, 1999 and 1998, and consequently did not pay federal, state or foreign income taxes. As of December 31, 1999, we had federal and state net operating loss carryforwards of approximately $9.6 million and $4.1 million, respectively. We also had federal research and development tax credit carryforwards of approximately $300,000. If not utilized, the net operating losses and credit carryforwards will expire at various dates beginning in 2002 through 2019. Use of the net operating losses and credits may be subject to a substantial annual limitation due to the change in the ownership provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. See Note 10 of our financial statements. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations from inception primarily through sales of convertible preferred stock, totaling $45.6 million in net proceeds, contract payments under our collaboration agreement, equipment financing arrangements and government grants. As of June 30, 2000, we had $32.3 million in cash and investments compared to $10.5 million as of December 31, 1999. Our funds are currently invested in U.S. Treasury and government agency obligations, investment-grade asset-backed securities and corporate obligations. Our operating activities used cash of $2.9 million for the six months ended June 30, 2000 compared to $1.1 million for the six months ended June 30, 1999. Our net loss of $6.7 million for the six months ended June 30, 2000 was partially offset by non-cash expenses of $3.8 million related to stock-based compensation and depreciation expense. Cash used in operating activities was $3.9 million in the year ended December 31, 1999 compared to $1.2 million in the year ended December 31, 1998. Cash used in 1999 operating activities were primarily to fund our net operating losses. Non-cash charges of $1.8 million related to stock-based compensation and depreciation expenses were nearly offset by working capital changes of $1.3 million. The $1.2 million used for 1998 operations consisted of our $3.3 million net loss for the period, partially offset by depreciation and working capital changes of $2.1 million. Our investing activities, excluding changes in our investments, for the six months ended June 30, 2000 used cash of $808,000 compared to $1.1 million for the six months ended June 30, 1999 reflecting facility improvements and capital expenditures as we continue to enhance our laboratory capabilities. Investing activities in 1999, excluding changes in our investments, used cash of $1.8 million compared to $1.2 million in 1998 as a result of capital purchases and leasehold improvements. Cash provided by financing activities was $25.5 million for the six months ended June 30, 2000 compared to $1.2 million for the six months ended June 30, 1999. Financing activities included $24.6 million in net proceeds from the issuance of our Series C convertible preferred stock in March 2000. Cash provided by financing activities was $898,000 in 1999 compared to $15.7 million in 1998. 1998 financing activities included $14.9 million in net proceeds from the issuance of our Series B convertible preferred stock in April 1998. In January 2000, we secured a $2.0 million line of credit for facility improvements and equipment purchases. As of June 30, 2000 we had drawn down $1.3 million and had $700,000 remaining available under this credit facility. For periods subsequent to June 30, 2000, we have estimated our non-cancelable commitments under our collaboration with Sloan-Kettering to be approximately $700,000 in addition to our internal development efforts under this agreement. We have no material non-cancelable commitments under the Stanford and Harvard collaborations. 23 We believe our existing cash and investments, together with the proceeds of this offering, will be sufficient to meet our anticipated cash requirements for at least 24 months. Our future capital uses and requirements depend on numerous forward-looking factors. These factors include, but are not limited to the following: - Our ability to establish and the scope of any new collaborations; - The progress and number of research programs carried out by us; - The progress and success of preclinical and clinical trials of our drug candidates; - Our ability to maintain our existing collaboration with The R.W. Johnson Pharmaceutical Research Institute; - The costs and timing of obtaining, enforcing and defending our patent and intellectual rights; - The costs and timing of regulatory approvals; and - Expenses associated with unforeseen litigation. For the next several years, we do not expect our operations to generate the amounts of cash required for our future cash needs. In order to fulfill our cash requirements, we expect to finance future cash needs through the sale of equity securities, strategic collaborations and debt financing. We cannot assure you that additional financing or collaboration and licensing arrangements will be available when needed or that, if available, will be on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs, to lose rights under existing licenses or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose or may adversely affect our ability to operate as a going concern. If additional funds are obtained by issuing equity securities, substantial dilution to existing stockholders may result. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve principal while at the same time maximize 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 principal amount of the investment to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and corporate obligations. The table below presents the principal amounts of our investments and equipment loans by expected maturity and related weighted average interest rates at December 31, 1999:
2000 2001 2002 2003 TOTAL FAIR VALUE -------- -------- -------- -------- -------- ---------- (IN THOUSANDS) Debt securities: U.S. treasury.................... $ -- $1,300 $ -- $ -- $1,300 $1,290 Corporate bond................... 1,000 -- -- -- 1,000 990 Average interest rate.............. 5.6% 5.6% -- -- 5.6% Asset-backed securities............ -- -- -- -- 7,198 7,152 Average interest rate.............. -- -- -- -- 5.9% Equipment financing................ 447 497 616 311 1,871 1,871 Average interest rate.............. 10.8% 10.8% 10.8% 11.0% 10.8%
24 BUSINESS OVERVIEW We are a biotechnology company using our proprietary technologies to develop drug candidates from an important class of natural product compounds known as polyketides. Polyketides are naturally made in very small amounts in microorganisms and are difficult to make or modify chemically. Using our proprietary technologies we are able to create, modify and produce polyketides in ways that chemists cannot. Creating novel polyketides should provide us with a pipeline of potential drug candidates that address large markets. We can make improved versions of a known polyketide pharmaceutical product and are able to change a polyketide used in one therapeutic area to create a new polyketide used for another. We can take the genetic instructions for making a polyketide out of one microorganism and put them into another microorganism which provides a more favorable environment to grow and produce more of the polyketides. Our strategy is to use our technologies to create new polyketides for development as pharmaceutical products. We plan to produce those polyketides at the levels required to support clinical development and commercialization. We have programs to exploit all aspects of our technology. Our programs in the areas of infectious disease and immunosuppression are directed to the development of improved versions of existing products. Our programs in the areas of gastrointestinal motility, mucus hypersecretion, and nerve regeneration are directed to the development of new drugs derived from drugs developed for other indications. Our program in the area of cancer is directed to the large scale production and development of a polyketide that is produced in very low amounts naturally. All of our programs address large markets. OVERVIEW OF POLYKETIDES Polyketides are complex natural products that are produced by microorganisms. There are about 7,000 known polyketides, from which numerous pharmaceutical products in many therapeutic areas have been derived. The following table illustrates the many different uses for polyketides. SELECTED POLYKETIDE PRODUCTS AND THEIR USES
PRODUCT (TRADE NAME) USE - -------------------- -------------------- Azithromycin (Zithromax)................................. Antibacterial Clarithromycin (Biaxin).................................. Antibacterial Erythromycin............................................. Antibacterial Rifamycin (Rifampin)..................................... Antibacterial Tetracyclines............................................ Antibacterial Doxorubicin (Adriamycin)................................. Anticancer Amphotericin B........................................... Antifungal Lovastatin (Mevacor)..................................... Cholesterol-lowering Pravastatin (Pravacol)................................... Cholesterol-lowering Simvastatin (Zocor)...................................... Cholesterol-lowering Tacrolimus (FK506, Prograf).............................. Immunosuppressant Sirolimus (Rapamycin).................................... Immunosuppressant Spinosad................................................. Insecticide Avermectin............................................... Veterinary Product
25 We focus on polyketides because of their demonstrated ability to treat many different disease conditions. To understand what we do and why we believe our company can develop valuable, new polyketide pharmaceutical products, one needs to understand how polyketides are made. Unlike most classes of compounds, different polyketides often have unrelated structures. The common features that link the polyketides as a class are the sequence of reactions by which they are formed, and the intermediate compounds made in these reactions. Each polyketide is produced by a unique polyketide synthase, or PKS, which is a large enzyme composed of many component enzymes. There are two types of PKSs, modular and iterative. Modular PKSs contain many enzymes, each of which is used only once during polyketide production, while iterative PKSs may use some enzymes several times. Erythromycin is an example of a polyketide made by a modular PKS. Erythromycin is not only a valuable antibiotic product but is also used in the production of the antibiotics azithromycin and clarithromycin. A modular PKS is composed of multiple proteins. The instructions for making these proteins is contained in the DNA, or genome, of the microorganism that produces the modular PKS. Each protein has its own set of instructions, which is called the gene for the protein. The complete set of genes for a modular PKS that produces a polyketide is called a gene cluster. When any gene of a polyketide gene cluster is identified, the entire cluster can be easily obtained. We accomplish this by using recombinant DNA technology, which is a set of techniques that enable scientists to combine or alter DNA from different organisms. [GRAPH] [DESCRIPTION OF POLYKETIDE SYNTHESIS] [THE ARTWORK IS A DEPICTION OF A POLYKETIDE (PKS) GENE CLUSTER, WITH 4 MODULES INDICATED; UNDERNEATH EACH MODULE IS THE 2-CARBON UNIT BUILDING BLOCK OF POLYKETIDES IT SPECIFIES. UNDERNEATH THE 4 BUILDING BLOCKS (IN A ROW) IS THE CORRESPONDING PKS, SHOWING THE COMPONENT ENZYMES OF EACH OF THE 4 MODULES AND THE INTERMEDIATE POLYKETIDE CHAINS FORMED AT EACH MODULE. FINALLY, AT THE BOTTOM LEFT THERE IS A DEPICTION OF THE BUILDING BLOCKS USED BY THE PKS WITH AN ARROW LEADING FROM THE BUILDING BLOCKS TO THE PKS; AT THE RIGHT THERE IS A DOWNWARD ARROW LEADING FROM THE PKS TO THE POLYKETIDE SHOWN IN THE RIGHT, LOWER CORNER.] 26 To understand how we modify the gene cluster for a modular PKS to create new polyketides, an understanding of how a modular PKS actually makes or synthesizes a polyketide is necessary. The synthesis of a polyketide essentially involves the linking of a number of small building block compounds to form the larger polyketide. A modular PKS can be functionally subdivided into units called modules, each of which is responsible for a single building block used in the synthesis. Synthesis begins at the first module, called the loading module, located at one end of the PKS, and continues to the end through multiple extender modules, each of which adds and modifies another building block. This process creates a chain of building blocks that forms the polyketide; in many instances the chain is linked to itself to form a ring. Because each module codes for one building block, the number of modules in a PKS codes for the size of the polyketide. Each module contains three essential enzyme activities responsible for connecting the polyketide building blocks. One of these activities selects which building block (there are at least 4 different building blocks) is used, and the other two are involved in linking the building block to the growing chain and passing the chain to the next module. A module may also have 1, 2, or 3 additional enzymes that modify the building blocks once they are incorporated into the chain. The structure of a polyketide can therefore be viewed as being determined by the types, order and number of modules in a modular PKS. The types of modules dictate which building blocks are used, the order of the modules dictates the sequence of building blocks, and the number of modules dictates the number of building blocks in, or size of, the polyketide. Modifying, adding or deleting the modules results in specific and predictable changes to the structure of the polyketide. OUR STRATEGY Our goal is to use our technologies to create a pipeline of drug candidates that can be developed into pharmaceuticals and advanced into clinical trials. Our focus is on drug candidates that address large markets. Our strategy includes the following components: MAXIMIZE VALUE, MINIMIZE RISK. We apply our technologies to generate a pipeline of drug candidates that improve existing pharmaceutical products. By improving the properties of currently marketed pharmaceuticals, we believe we can create novel products that take advantage of the known utility, safety, development path and market for existing drugs to reduce the risk and time required for development. ESTABLISH COLLABORATIVE RELATIONSHIPS. We have entered into a collaboration with The R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company, in the area of infectious disease. We plan to establish additional collaborative relationships with large pharmaceutical companies to move our drug candidates into and through clinical trials and to the market, prepare and screen our polyketide libraries, apply our technologies to create new polyketides and develop large-scale production systems. ENHANCE LEADERSHIP POSITION OF OUR TECHNOLOGY PLATFORM. We will expand and enhance our technologies by increasing in-house research activities. We will continue to extend the reach of our technologies through strategic alliances or acquisitions. We plan to broaden and protect our intellectual property portfolio and in-license patents that complement our core technologies. ACQUIRE COMPLEMENTARY TECHNOLOGIES AND PRODUCTS. We have a collaboration and license agreement with Sloan-Kettering in the area of cancer therapeutics. We may acquire or license additional complementary technologies or product candidates from other third parties. OUR TECHNOLOGY PLATFORM Our technology platform has five components: polyketide gene alteration, chemo-biosynthesis, heterologous over-expression, combinatorial biosynthesis, and screening libraries. Together, our 27 technologies enable us to modify, create and produce proprietary polyketides with potential for development as valuable pharmaceutical products. POLYKETIDE GENE ALTERATION The structure of a polyketide is primarily determined by variation in the number, order and type of modules in the PKS. Our technologies enable us to make these alterations in a specific, directed manner, and thus we can control the polyketide structure. Polyketides are structurally complex compounds that are difficult to make or modify chemically. Because each building block of a polyketide is selected by a specific module of the PKS, we use our technologies to make precise structural changes by altering the module that specifies the targeted building block. We use our technologies to improve properties of known biologically active molecules. This can be done by using our technology to change a portion of the polyketide that cannot be chemically modified to one that can, allowing us to make subsequent chemical modifications not otherwise feasible. We can also make changes in the structure of existing proprietary polyketide products to create a new polyketide proprietary to us. In addition, by changing the order, type and number of modules, we can create entirely new libraries of polyketides as sources of new compounds both for screening for new activities and for improving a lead compound. CHEMO-BIOSYNTHESIS We incorporate chemically synthesized fragments into complicated polyketide structures, permitting changes in their structures and properties in ways that have not been achieved by any other process. This has enabled us to produce novel polyketides used in the production of the drug candidates in our collaboration with The R.W. Johnson Pharmaceutical Research Institute. First, we disable the loading and first extender modules in a PKS by altering the gene that contains the instructions for these modules. This prevents formation of the two-building-block intermediate that feeds the second extender module, but leaves the remainder of the PKS fully functional. Then, microorganisms containing this modified PKS are fed our chemically synthesized fragments that substitute for the natural building-block intermediate. HETEROLOGOUS OVER-EXPRESSION We can isolate a polyketide gene cluster from one organism and transfer it to another. This is important because many polyketides are produced by microorganisms that are difficult or slow to grow, or in which recombinant DNA methods have not been developed. In addition, polyketides are often produced in small amounts in organisms that naturally produce them, which can limit their commercial development. We have created microorganisms for efficient polyketide manipulation and production. Our proprietary technologies allow us to transfer polyketide genes to these microorganisms to enable easier manipulation and increased production of polyketides necessary for commercialization. COMBINATORIAL BIOSYNTHESIS We have developed a technology to produce large collections, called libraries, of polyketides rapidly and efficiently. Because the approximately 7,000 naturally occurring polyketides have yielded many pharmaceutical products, we believe that libraries of new polyketides may do likewise. To create these libraries we separate the large polyketide gene cluster into several fragments. Each of these fragments is then genetically manipulated to produce numerous variations. We then reassemble the gene cluster with all possible combinations of the altered fragments to create large polyketide libraries. Because many different combinations of the altered fragments can be assembled simultaneously, our combinatorial biosynthesis technology is used to produce large polyketide libraries. For example, we 28 believe our scientists have created the largest number of erythromycin analogs produced by genetic engineering. [GRAPH] [DESCRIPTION OF ARTWORK] [The artwork is a depiction of the process of combinatorial biosynthesis. 1) The first drawing depicts a PKS gene cluster, and underneath it are individual modules obtained from other PKS gene clusters. 2) The second drawing shows the incorporation of new individual modules into the gene cluster to make hybrid gene clusters. 3) The third drawing shows a number of cells containing individual (colored) hybrid genes. 4) The fourth drawing shows cell colonies, each producing a different polyketide (color-coded)] 5) The fifth drawing shows test tubes containing individual polyketides (color-coded)]. SCREENING LIBRARIES In addition to our polyketide libraries made by combinatorial biosynthesis, we have acquired a collection of over 10,000 soil microorganisms. The collection is unusual because it has been pre-selected for bioactivities from a larger group of over 100,000 microorganisms. Our collection shows antibiotic, antiviral, and pesticidal activities, as well as activity specific to one or more of about 20 enzyme targets. We believe that the lead compounds from this library, together with our technologies, will provide new drug candidates for our product pipeline. OUR PRODUCT DEVELOPMENT OPPORTUNITIES Our primary programs are currently directed at discovery and development of polyketides for infectious disease, gastrointestinal motility disorders, mucus hypersecretion, cancer, immunosuppression and nerve regeneration. These programs were selected because they represent opportunities where our technologies could improve upon existing products or fill unmet needs, and because each addresses large markets. We are able to maintain a diverse portfolio of drug candidates because the fundamental aspects of our technology generally apply to all modular PKS gene clusters. INFECTIOUS DISEASE Clarithromycin, marketed as Biaxin, and azithromycin, marketed as Zithromax, are polyketide-derived antibiotics that show high potency, a broad spectrum of activity and few side effects. These products had revenues in 1999 of approximately $2.3 billion. However, organisms are emerging that are resistant to these two drugs. Ketolides, analogs of the polyketide erythromycin, possess the potency and spectrum of activity shown by clarithromycin and azithromycin, but are effective against these resistant 29 organisms. Aventis Pharmaceuticals has recently filed a New Drug Application with the FDA for a ketolide and Abbott Laboratories also has a ketolide in clinical trials. We have a collaborative research agreement with The R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company, to discover and develop a next-generation ketolide. Our collaboration was established in September 1998, and has already resulted in several proprietary ketolides that we believe have activities competitive with other ketolides. One of these compounds is currently undergoing preclinical evaluation. GASTROINTESTINAL MOTILITY One of the actions of erythromycin is stimulation of gastrointestinal movement, or GI motility. Therefore, erythromycin-derived compounds called motilides may be useful to treat diseases such as gastroparesis and gastroesophageal reflux disease, also known as GERD or heartburn, that are unresponsive to antacids. The leading product currently used for stimulation of GI motility is cisapride, marketed as Propulsid, which had sales of approximately $1 billion in 1999. Cisapride has been reported to have side effects, including arrhythmias and various drug interactions. Cisapride's manufacturer has announced that Cisapride will no longer be marketed in the United States and several other countries. Motilides have an entirely different mechanism of action and should not have the same side effects. Chugai Pharmaceuticals has a motilide candidate in clinical trials. Many compounds in our erythromycin library can readily be converted into motilides. We have prepared several proprietary motilides with IN VITRO activity comparable to the motilide in clinical trials. In addition, our technologies enable the preparation of numerous new motilides that could not easily be made chemically. We expect to have drug candidates to advance into preclinical testing within a year. MUCUS HYPERSECRETION Mucus hypersecretion, or excessive production of mucus, is a major, problematic symptom of asthma, chronic obstructive pulmonary disease, or COPD, cystic fibrosis and allergic rhinitis, including hay fever. Mucus hypersecretion in these diseases results from the release of mucus from abnormally high numbers of large mucus-secreting cells called goblet cells. There is no effective treatment for this type of mucus hypersecretion from which to determine market potential, but we believe, based on disease prevalence, that the market potential is large. Our scientists, in collaboration with scientists at the University of California, San Francisco, have discovered a potential target for inhibiting mucus hypersecretion. We have prepared a non-antibiotic analog of erythromycin that inhibits this target, and are using our technologies to optimize its activity. Although this is an early-stage project, we believe we will have drug candidates to advance into preclinical testing within a year. CANCER Many cancers are treated by paclitaxel, marketed as Taxol, which had revenues in 1999 of approximately $1.5 billion. However, some tumors are resistant to Taxol. Epothilone, a polyketide with an identical mechanism of action and similar potency to Taxol, is active against Taxol-resistant tumors. A major problem with the further development of epothilone is that its sole natural source produces small amounts. Moreover, one of the most effective forms of epothilone, epothilone D, represents only about 10% of the total epothilones produced. Although epothilone has been chemically synthesized, the synthesis is not readily amenable to large-scale production. Our technology allows polyketide genes to be moved from the natural producer organism to another to produce greater quantities of the polyketide. Our scientists have cloned and expressed the epothilone gene cluster in two different organisms and demonstrated production of all 30 important forms of epothilone, including epothilone D. We believe we can increase current yields of the important types of epothilone using our technologies. We also expect to produce proprietary analogs of epothilone. In August 2000, we entered into a collaboration and license agreement with Sloan-Kettering to discover and develop epothilone compounds, including an epothilone compound that is in preclinical development by Sloan-Kettering. We expect to initiate clinical trials of this compound in 2001. IMMUNOSUPPRESSION Prograf, also known as FK506, is one of the most widely used immunosuppressants for organ transplantation, with 1999 worldwide revenues of approximately $259 million. Additionally, FK506 has been approved in Japan to treat atopic dermatitis and approval for this indication is pending in the United States. It is also in clinical trials to treat psoriasis and rheumatoid arthritis. The enzyme P450-3A metabolizes FK506 at a single site to destroy over 90% of the drug. A major problem is that P450-3A levels are variable among individuals and fluctuate in the presence of other drugs. As a result, FK506 metabolism is variable in different people and its dosage must be carefully individualized and monitored to avoid under- or over-dosing. If the sites at which FK506 is metabolized by P450-3A could be blocked without affecting biological activity, the variable metabolism of the drug might be avoided. The primary sites of metabolism of FK506 are different from those required for activity, so we do not expect their modification to prevent metabolism to be detrimental. These sites of metabolism cannot be protected by chemical modification, but can be protected using our technology. We are modifying these sites in an FK506 analog, FK520, to make proprietary, metabolically stable analogs. We expect to have drug candidates to advance into preclinical testing within a year. NERVE REGENERATION The immunosuppressive effect of FK506 is generated by concurrent binding to two proteins, FKBP and calcineurin. However, analogs of FK506 that bind to FKBP but not calcineurin stimulate nerve regeneration without immunosuppression. Such compounds could be used to treat peripheral and spinal cord injury, Parkinson's disease, and other diseases involving nerve degeneration. We are converting our metabolically stable FK520 analogs to compounds that can be used for nerve regeneration without immunosuppression. This conversion involves a chemical modification that prevents the compounds from binding to a protein, calcineurin, involved in immunosuppression. Our analogs may have advantages because we expect them to be orally available, have well-characterized pharmacokinetic properties, and penetrate the blood brain barrier. We expect to have drug candidates to advance into preclinical testing within a year. INTELLECTUAL PROPERTY Our intellectual property consists of patents, copyrights, trade secrets and know-how. Our ability to compete effectively depends in large part on our ability to obtain patents for our technologies and products, maintain trade secrets and operate without infringing the rights of others and to prevent others from infringing on our proprietary rights. We will be able to protect our technologies from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents, or are effectively maintained as trade secrets. Accordingly, patents or other proprietary rights are an essential element of our business. As of August 31, 2000, we owned four U.S. patents and one foreign patent (which expire beginning in 2013) and had exclusive license rights to nine U.S. patents and five foreign patents (which expire beginning in 2013) owned by Stanford University and two foreign patents (which expire beginning in 2014) owned by the Sloan-Kettering Institute for Cancer Research. On that date, we also had 43 U.S. patent applications and 31 foreign patent applications, as well as the exclusive rights to 21 U.S. patent applications and 45 foreign patent applications. 31 We have exclusive rights to technologies developed by Dr. Chaitan Khosla and claimed in a series of issued and pending patents filed by Stanford University beginning in 1993. These patents include claims to recombinant expression of polyketide synthase enzymes and production of polyketides using recombinantly expressed enzymes, as well as useful hosts, vectors and methods of library production. To date, nine of these patents have issued by the U.S. Patent Office. We have also entered into an agreement with Stanford University that grants us an exclusive option to license certain new technologies involving polyketides and their production developed by Dr. Khosla. We have exclusive rights to technology developed by Dr. S. Danishefsky claimed in a series of issued and pending patents filed by Sloan-Kettering. These patents include claims to epothilone compounds and methods of making and using epothilones. We have an issued U.S. patent claiming the production of polyketide libraries using our proprietary multi-vector technology and the production of polyketides in E. COLI and yeast. We have applied for patents claiming the production of polyketides in plant cells, polyketide gene clusters cloned and expressed in heterologous hosts, and novel polyketide compounds generated in our drug discovery and development programs. Our policy is to file patent applications to protect technology, compounds and improvements commercially important to our business. We also rely on trade secrets to protect our technology, especially where patent protection is deemed inappropriate or unobtainable. We protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, collaborators and certain contractors. There can be no assurance that proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS JOHNSON & JOHNSON Effective September 28, 1998, we signed a two-year collaborative agreement with The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson companies, which has been extended through December 2001. Under the terms of the agreement, we use our technologies to produce specific novel antibiotics on a best efforts basis. The agreement provides for payments to us, including for research and development, and for reaching certain milestones. In addition to creating a three-year collaborative research term, the agreement grants several licenses that include: - a research license, whereby we and The R.W. Johnson Pharmaceutical Research Institute grant each other a non-exclusive license, with no sublicense rights, to make and use methods and material covered under the parties' respective patents to carry out research during the term of the agreement; - a screening license, whereby we grant to The R.W. Johnson Pharmaceutical Research Institute a non-transferable exclusive license, with the right to grant sublicenses, to conduct screening for antibiotic activity; and - a development and commercialization license, whereby we grant to The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. exclusive worldwide rights to make, use, develop and sell the licensed products as defined in the agreement. The development, marketing, and sale of drugs resulting from this collaboration will be undertaken by The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. Should the development efforts result in a marketable product, we will receive royalty payments based on 32 product sales as well as payments based on reaching research and development milestones. We recognized $2.1 million of contract revenue for the six months ended June 30, 2000, $5.0 million for the year ended December 31, 1999 and $969,000 for the same period in 1998, pursuant to this agreement. Such amounts, excluding initial and milestone payments, approximated research and development expenses under this collaboration. Included in such amounts is the ratable portion of a $1 million up-front fee received upon signing the agreement, which is being recognized over the initial two-year term of the agreement. Included in 1999 contract revenue were $1.2 million of non-recurring milestone payments earned under this agreement. The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. can, until January 28, 2001, reduce research funding for the third year of the research term, and after December 28, 2000, can terminate the agreement as a whole upon payment of a termination fee. After the research term under this agreement ends, The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. can terminate the agreement as a whole or with respect to any pharmaceutical product upon three months' written notice and they or we may terminate the agreement upon 90 days' written notice upon a material breach of the agreement. If The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. terminate the agreement or reduce the research funding for the third year of the research term, rights to compounds developed under the agreement revert to us except for rights to compounds being commercialized by The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. So long as The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. are actively developing or commercializing a product under the agreement, the agreement does not terminate until the last patent claiming the product or its manufacture or use expires or, in the absence of any such patent, until ten years after the first commercial sale of the product. SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH Effective August 26, 2000, we signed a collaboration and license agreement with the Sloan-Kettering Institute for Cancer Research relating to epothilones. Under the agreement, we will use our technologies to produce a specific epothilone compound to be tested in clinical trials and work collaboratively with Sloan-Kettering to develop new compounds and production methods and to conduct clinical trials. Under the agreement, we are required to pay to Sloan-Kettering an initial license fee and annual maintenance fees as well as payments for research and development costs, including the costs of clinical trials, and, should the development efforts result in a marketable product, royalty payments based on product sales as well as payments for reaching clinical development milestones. Based on preclinical work done by Sloan-Kettering, the agreement contemplates the initiation of Phase I clinical trials during 2001. In addition to creating a collaborative research program with at least a two year term, the agreement grants licenses that include: - A research license, whereby we and Sloan-Kettering grant each other a license to make and use methods and material covered under each of our patents to carry out research during the term of the agreement; and - A development and commercialization license, with the right to sublicense, whereby Sloan-Kettering grants us exclusive worldwide rights, with the conditional right to sublicense, to make, use, develop and sell the licensed products. At any time prior to the initiation of the Phase II clinical trials contemplated by the agreement, if we and Sloan-Kettering jointly determine that the objectives of the collaboration cannot be met, then the agreement terminates. Also, if we are unable to produce or otherwise provide the materials required for Phase II clinical trials within specified time periods in advance of the conclusion of the Phase I clinical trials, Sloan-Kettering has the right to terminate the agreement. Upon termination, all 33 rights granted by one party to the other revert to the granting party. Otherwise, so long as we are actively developing or commercializing a product under the agreement, the agreement does not terminate until the last patent claiming the product or its manufacture or use expires or, in the absence of any such patents, until ten years after the first commercial sale of the product. STANFORD UNIVERSITY Effective March 11, 1996, we entered into an exclusive license agreement with the Board of Trustees of the Leland Stanford Junior University, or Stanford University, for certain technology and related patent rights now contained in nine issued U.S. patents and five foreign patents, as well as 45 U.S. and foreign patent applications, and materials for the recombinant production of novel polyketides. Under the terms of the agreement, we pay annual license fees to Stanford University, make milestone payments and pay royalties on net sales resulting from successful products originating from the licensed technology. In March 2000, an amendment to the agreement was signed that provides us an exclusive option to acquire an exclusive license to future patents or patent applications as determined by Stanford which are related to certain technology developed by Dr. Khosla related to polyketides and their production. We may terminate this agreement with respect to any country or patent or in its entirety on 60 days' advance notice. Stanford University may terminate this agreement if we are in default for failure to make royalty payments or required reports or for making materially incorrect reports or for a material breach of the agreement and do not cure the breach within 60 days after being notified of the breach by Stanford University. Otherwise, the agreement does not terminate until the last patent claiming a product licensed under the agreement or its manufacture or use expires or, in the absence of such patents, until ten years after the first commercial sale of the product. HARVARD COLLEGE Effective December 2, 1998, we entered into an exclusive license agreement with the President and Fellows of Harvard College for certain technology and related patent rights for the production of polyketides. In connection with the license agreement, which gives us the exclusive license rights to the technology in five patent applications, we paid a non-refundable license fee and will pay annual maintenance fees, milestones and royalties on net sales of products originating from the licensed technology. We may terminate this agreement in its entirety on 90 days' advance notice and payment of a nominal termination fee. Harvard College may terminate this agreement if we are in default for failure to make royalty or other payments and do not make such payments within 45 days of receiving notice from Harvard College or if we are in default for failure to make required reports or for making materially incorrect reports or for a material breach of the agreement and do not cure the breach, if a period for cure is allowed, within 90 days or less after being notified of the breach by Harvard College. Otherwise, the agreement does not terminate until the last patent claiming a product licensed under the agreement or its manufacture or use expires. We made total payments under the Stanford University and Harvard College collaborations for the years ended December 31, 1997, 1998 and 1999, and the six months ended June 30, 2000 of $25,000, $32,500, $42,500, and $42,500, respectively. For periods subsequent to June 30, 2000, we have estimated our non-cancelable commitments under the Sloan-Kettering collaboration to be approximately $700,000 in addition to internal development efforts under this agreement. We have no material non-cancelable commitments under the Stanford and Harvard collaborations. 34 COMPETITION The pharmaceutical and biotechnology industries are intensely competitive. Many companies, including biotechnology, chemical and pharmaceutical companies, are actively engaged in research and development of drugs for the treatment of the same diseases and conditions as our potential product candidates. Many of these companies have substantially greater financial and other resources, larger research and development staffs, and more extensive marketing and manufacturing organizations than we do. In addition, some of them have considerable experience in preclinical testing, clinical trials and other regulatory approval procedures. There are also academic institutions, governmental agencies and other research organizations that are conducting research in areas in which we are working. They may also market commercial products, either on their own or through collaborative efforts. We face significant competition from large pharmaceutical companies that are pursuing the same or similar technologies, including polyketide manipulation, as the technologies used by us in our drug discovery efforts. For example, a number of companies have cloned polyketide synthase genes and described in patents or publications technology to modify those genes or express them in heterologous hosts using recombinant DNA technology. Such companies include, for example, Abbott Laboratories (erythromycin, niddamycin); Dow Agrosciences (spinosyn); Eli Lilly and Company (tylosin, spiramycin), Novartis (soraphen, epothilone); and Merck (avermectin, lovastatin). We also face competition from biotechnology companies that engage in research similar to our own. For example, Biotica Ltd., is a biotechnology company that has published patent applications and entered into collaborations with pharmaceutical companies relating to efforts to modify polyketide synthase genes using recombinant DNA technology. We expect to encounter significant competition for any of the pharmaceutical products we plan to develop. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before their competitors may achieve a significant competitive advantage. We are aware that many other companies or institutions are pursuing development of drugs and technologies directly targeted at applications for which we are developing our drug compounds. Aventis Pharmaceuticals has filed a new drug application for a ketolide compound, and Abbott Laboratories has a ketolide compound in clinical trials. Chugai Pharmaceuticals has a motilide compound in clinical trials. We believe that two other large pharmaceutical companies have epothilone compounds in clinical trials. Because we have not yet initiated clinical trials for our own ketolide, motilide and epothilone compounds, it is likely that, even if we are successful in developing a product, one or more of these compounds of our competitors will be approved and marketed as products before our own. This could place us and our collaborators at a significant disadvantage, especially in the event our compounds do not have superior properties or cost advantages, and prevent us from realizing significant commercial benefit from such products. Developments by others may render our drug candidates or technologies obsolete or noncompetitive. We face and will continue to face intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions and for licenses to additional technologies. These competitors, either alone or with their collaborative partners, may succeed in developing technologies or products that are more effective than ours. To compete successfully, we must develop proprietary positions and patented drugs for therapeutic markets that have not been satisfactorily addressed by conventional research strategies and, in the process, expand our technical expertise. Our potential products, even if successfully tested and developed, may not be adopted by physicians over other products and may not offer economically feasible alternatives to other therapies. 35 GOVERNMENT REGULATION The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our potential products. The process required by the FDA before our products may be marketed in the United States generally involves the following: - preclinical laboratory and animal tests; - submission of an investigational new drug, or IND, application, which must become effective before clinical trials may begin; - adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use; and - FDA approval of a new drug application, or NDA, or biologics license application, or BLA. The testing and approval process requires substantial time, effort, and financial resources, and we cannot be certain that any approvals for any of our potential products will be granted on a timely basis, if at all. Prior to commencing clinical trials, which are typically conducted in three sequential phases, we must submit an IND application to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trial. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND may not result in FDA authorization to commence a clinical trial. Further, an independent institutional review board at the medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences. We may not successfully complete any of the three phases of testing of any of our potential products within any specific time period, if at all. Furthermore, the FDA or an institutional review board or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The results of product development, preclinical studies and clinical studies are submitted to the FDA as part of a NDA or BLA. The FDA may deny a NDA or BLA if the applicable regulatory criteria are not satisfied or may require additional clinical data. Even if such data is submitted, the FDA may ultimately decide that the NDA or BLA does not satisfy the criteria for approval. Once issued, the FDA may withdraw product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially, based upon the type, complexity and novelty of the product or indication. Government regulation may delay or prevent marketing of potential products or new indications for a considerable period of time and impose costly procedures upon our activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations which could delay, limit or prevent regulatory approval. 36 Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain additional regulatory approvals for any of our products would have a material adverse effect on our business. Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with good manufacturing practices, which impose certain procedural and documentation requirements upon us and our third party manufacturers. We cannot be certain that we or our suppliers will be able to comply with the good manufacturing practices regulations and other FDA regulatory requirements. Outside the United States, our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Community, or EC, registration procedures are available to companies wishing to market a product in more than one EC member state. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, a marketing authorization will be granted. This foreign regulatory approval process involves all of the risks associated with FDA clearance. LITIGATION We are not currently involved in any litigation. EMPLOYEES As of June 30, 2000 we had 62 full-time employees, 32 of whom hold Ph.D. degrees and 51 of whom were engaged in research and development activities. We believe that our relations with our employees are good. FACILITIES Our facilities consist of approximately 44,000 square feet of research and office space located in Hayward, California that is leased to us until 2003. We believe that our facility will meet our space requirements for research and development and administration functions into the year 2002, and beyond that time, that suitable additional space will be available on commercially reasonable terms. 37 MANAGEMENT AND DIRECTORS The following table provides information regarding our directors, executive officers and key employees:
NAME AGE TITLE - ---- --- ----- Daniel V. Santi, M.D., Ph.D............... 58 Chief Executive Officer and Chairman of the Board of Directors Michael S. Ostrach........................ 48 Chief Operating Officer Brian Metcalf, Ph.D....................... 54 Senior Vice President, Chief Scientific Officer Robert G. Johnson, Jr., M.D., Ph.D........ 48 Vice President, Medical Affairs and Corporate Development Susan M. Kanaya........................... 37 Vice President, Finance and Chief Financial Officer Kevin Kaster.............................. 40 Vice President, Intellectual Property Susan B. Dillon, Ph.D..................... 47 Vice President, Pharmacological Sciences C. Richard Hutchinson, Ph.D............... 56 Vice President, New Technologies Chaitan Khosla, Ph.D...................... 35 Director Jean Deleage, Ph.D........................ 60 Director Raymond Whitaker, Ph.D.................... 52 Director Peter Davis, Ph.D......................... 56 Director Christopher Walsh, Ph.D................... 56 Director
- ------------------------ DANIEL V. SANTI, M.D., PH.D., is one of our co-founders, and has served as Chairman of the Board of Directors since our inception. In November 1998, Dr. Santi was appointed as our Chief Executive Officer. He is on leave of absence from his position as Professor of Biochemistry and Biophysics, and of Pharmaceutical Chemistry at University of California, San Francisco. Dr. Santi was one of the original members of the Scientific Advisory Boards of Chiron Corporation and Mitotix, Inc., and has served as a consultant to several large pharmaceutical companies. In 1988, Dr. Santi founded and served as Chairman of the Board of Directors of the biotechnology firm Protos, a subsidiary of Chiron Corporation, which was merged with Chiron in 1992. Dr. Santi was also founder and Chairman of Parnassus Pharmaceuticals. Dr. Santi has published over 275 scientific papers and is inventor on many patents in combinatorial chemistry and other areas. Dr. Santi received a Ph.D. in medicinal chemistry from the State University of New York, his M.D. from the University of California, San Francisco, and his B.S. in pharmacy from the State University of New York. MICHAEL S. OSTRACH has served as our Chief Operating Officer since October 1998. Prior to joining Kosan as Vice President, Corporate Development in October 1997, Mr. Ostrach worked as an independent consultant for biotechnology companies from October 1996 to October 1997. Mr. Ostrach was Executive Vice President and Chief Operating Officer of Neurobiological Technologies, Inc., a publicly-held biotechnology company from 1994 to 1996. From 1981 to 1991, he was a Senior Vice President at Cetus Corporation. In 1991, Cetus Corporation merged into Chiron Corporation and during 1992 Mr. Ostrach was a Vice President of Chiron Corporation and a founder and the President of Chiron Technologies, a Chiron business unit. Mr. Ostrach received his B.A. from Brown University and his J.D. from Stanford Law School. BRIAN W. METCALF, PH.D. has served as our Senior Vice President and Chief Scientific Officer since March 2000. From 1983 to 2000, Dr. Metcalf held a number of executive management positions with SmithKline Beecham, most recently as Senior Vice President, Discovery Chemistry & Platform Technologies worldwide. Prior to joining SmithKline Beecham, Dr. Metcalf held positions with Merrell 38 Research Center from 1973-1983. Dr. Metcalf is a director of Argonaut Technologies, Inc. Dr. Metcalf received his B.S. and Ph.D. in organic chemistry from the University of Western Australia. ROBERT G. JOHNSON, JR., M.D., PH.D. has served as our Vice President, Medical Affairs and Corporate Development since September 2000. From 1998 to September 2000, Dr. Johnson was employed by Chiron Corporation, a biotechnology company, serving as Vice President, Pharmacology and Preclinical Affairs through 1999 and most recently as Vice President, Corporate Development. From 1991 to 1998, Dr. Johnson was Director of Pharmacology at Merck & Co., Inc., a pharmaceutical company. In addition, Dr. Johnson was a member of the faculty at the University of Pennsylvania from 1987 to 1991 and at Harvard Medical School from 1985 to 1987. Dr. Johnson received his B.A. and Ph.D in biophysics and his M.D. from the University of Pennsylvania. SUSAN M. KANAYA has served as our Vice President, Finance and Chief Financial Officer since November 1999. Prior to joining Kosan, Ms. Kanaya was most recently Vice President, Finance and Treasurer at SUGEN, Inc., a publicly-held biotechnology company that was recently acquired by Pharmacia & Upjohn, Inc. Since joining SUGEN in 1994, Ms. Kanaya held various positions in finance. Before joining SUGEN, Ms. Kanaya was the Controller at 50/50 Micro Electronics, Inc. and at Power Up Software Corporation. Ms. Kanaya received her B.S. in business administration from the University of California, Berkeley. KEVIN KASTER has served as our Vice President, Intellectual Property since August 1998. Prior to joining Kosan, he was Vice President, Intellectual Property at Geron Corporation. Prior to joining Geron in 1994, Mr. Kaster managed the patent group at Affymax N.V. between 1991 and 1994. Between 1988 and 1991, he was a Patent Attorney at Cetus Corporation. After receiving a B.S., magna cum laude, in chemistry and molecular biology from Vanderbilt University, Mr. Kaster joined Eli Lilly and Co. as an Associate Biologist, later becoming a patent technician. Mr. Kaster received his J.D. from Indiana University, Indianapolis. SUSAN B. DILLON, PH.D., has served as our Vice President, Pharmacological Sciences since May 2000. From 1988 to 2000, Dr. Dillon held a number of management positions with SmithKline Beecham, most recently as Director, Molecular Virology and Host Defense. Dr. Dillon received her B.S. in Medical Technology from State University of New York at Buffalo, her M.S. in Medical Technology from Temple University School of Medicine and her Ph.D. in Microbiology and Immunology from Thomas Jefferson University. C. RICHARD HUTCHINSON, PH.D. has served as our Vice President, New Technologies since March 2000. From 1971 to 2000, Dr. Hutchinson served on the faculty of the University of Wisconsin-Madison, most recently as Professor of Medicinal Chemistry, School of Pharmacy and Professor of Bacteriology. Dr. Hutchinson received his B.S. in pharmacy from Ohio State University and his Ph.D. in organic chemistry from the University of Minnesota. CHAITAN KHOSLA, PH.D., is one of our co-founders and has served as our director since our inception. Dr. Khosla has been Associate Professor of chemical engineering, chemistry and biochemistry at Stanford University since 1997, and has been a faculty member since 1992. Dr. Khosla is co-chairman of our Scientific Advisory Board. Dr. Khosla is the inventor of the combinatorial biosynthesis technology that we licensed from Stanford University. He is the recipient of several awards, including the 1999 Alan T. Waterman award by the National Science Foundation, the 1999 Eli Lilly Award in biological chemistry, and the 2000 ACS Award in pure science. Dr. Khosla is the author of over 90 publications and is an inventor on numerous patents. Dr. Khosla received his B. Tech. from the Indian Institute of Technology, Bombay, India and his Ph.D. from the California Institute of Technology. 39 JEAN DELEAGE, PH.D., has served as our director since April 1996. He is a founder and managing general partner of Alta Partners, a venture capital partnership investing in information technologies and life science companies. From 1979 to 1996, Dr. Deleage was a managing partner of Burr, Egan, Deleage & Co., a venture capital firm. Dr. Deleage was the founder of Sofinnova, a venture capital firm in France, and Sofinnova, Inc., the U.S. subsidiary of Sofinnova. Dr. Deleage is a director of Flamel Technologies, S.A., Aclara BioSciences, Inc. and several privately held companies. Dr. Deleage received a Baccalaureate in France, a Masters Degree in electrical engineering from the Ecole Superieure d'Electricite, and a Ph.D. in economics from the Sorbonne. RAYMOND WHITAKER, MBA, PH.D., has served as our director since April 1998. Dr. Whitaker has been Vice President of S.R. One, Ltd., the venture investment affiliate of SmithKline Beecham, since 1997. From 1992 to 1996, he was Director, Worldwide Business Development, SmithKline Beecham Pharmaceuticals. He has over twenty-five years of international business development experience. His previous appointments include Director, Corporate Development at Recordati SpA, Milan, Italy, and Director, Business Development with Laboratories Delagrange--SESIF in Paris, France. He is a member of the Board of Directors of CPBD, Inc., Electrosols Limited, OnyVax Limited and Xenogen Corporation. Dr. Whitaker received his Ph.D. in biochemistry, his M.B.A. and his B.S. in biochemistry and mathematics from the National University of Ireland, University College Dublin. PETER DAVIS, PH.D., has served as our director since April 1998. Dr. Davis has been a member of the Executive Committee of Pulsar International, S.A., an affiliate of A.G. Biotech Capital since 1993. Dr. Davis was a faculty member at the Wharton School of the University of Pennsylvania, where he was Director of the Applied Research Center and Director of Executive Education. He is a Board member of several Pulsar companies including Bionova Holdings Inc. and Seminis, Inc. He is also a Board member of Lutron Electronics, Inc., Instromedix, Inc., C.H. Werfen and Celsa S.A. Dr. Davis received his B.A. in physics from Cambridge University, his Masters Degree in operations research from the London School of Economics and his Ph.D. in operations research from the Wharton School. CHRISTOPHER WALSH, PH.D., has served as our director since April 1996. Dr. Walsh has been the Hamilton Kuhn Professor of biological chemistry and molecular pharmacology at Harvard Medical School since 1991 and formerly was President of the Dana-Farber Cancer Institute and Chairman of the Department of Biological Chemistry and Molecular Pharmacology at Harvard Medical School. He has performed extensive research in enzyme stereochemistry, reaction mechanisms and the mechanisms of action of anti-infective and immunosuppressive agents. He is co-chairman of the Kosan Scientific Advisory Board. Dr. Walsh is also a member of the board of directors of Diacrin, Inc. and Versicor Inc. Dr. Walsh received his A.B. in biology from Harvard University and Ph.D. in life sciences from The Rockefeller University, New York. In April 1998, Mr. Ostrach consented, without admitting or denying the Securities and Exchange Commission's allegations and conclusions, to the entry of a Commission administrative order requiring future compliance with Rule 102 of the Commission's Regulation M, a regulation which prohibits participants in a public stock offering from purchasing securities for their own account until the public distribution is complete. The administrative order resulted from Mr. Ostrach's purchase of 600 shares of Neurobiological Technologies, Inc., or NTI, common stock during a restricted period preceding a 1996 stock offering by NTI. SCIENTIFIC ADVISORY BOARD The following individuals are members of our Scientific Advisory Board, or SAB: CHAITAN KHOSLA, PH.D., is co-chairman of our SAB and a member of our board of directors. CHRISTOPHER WALSH, PH.D., is co-chairman of our SAB and a member of our board of directors. 40 HOMER A. BOUSHEY, M.D., is a Professor of Medicine at the University of California, San Francisco. Dr. Boushey is an expert in clinical research on the causes and treatment of asthma and serves as Principal Investigator for UCSF's Asthma Clinical Research Center. DAVID CANE, PH.D., is Professor of Chemistry at Brown University. Dr. Cane is an expert in the biosynthesis of natural products, with particular emphasis on macrolide polyketides and terpenes. SAMUEL DANISHEFSKY, PH.D., is Professor of Chemistry at Columbia University. Dr. Danishefsky is an expert in synthetic organic chemistry. SIR DAVID A. HOPWOOD, PH.D., is Professor and Head of the Genetics Dept. at John Innes Institute, Norwich, U.K. Dr. Hopwood is an expert in Streptomyces genetics, molecular biology and the genetic manipulation of polyketide genes. IVAN KOMPIS, PH.D., has an extensive background in natural products chemistry, in particular antibacterial agents. Dr. Kompis recently retired from Hoffmann-La Roche, where he held the position of Deputy Director of the Department of Infectious Diseases since 1987. MOHAMMED A. MARAHIEL, PH.D., is Professor of Biochemistry at Philipps University, Marburg, Germany. Dr. Marahiel is an expert in the field of non-ribosomal peptide biosynthesis. HARUO SETO, PH.D., is Professor of the Institute of Molecular and Cellular Biosciences, University of Tokyo, Japan. Dr. Seto has an extensive background in the structure, biosynthesis and screening of antibiotics. CHI-HUEY WONG, PH.D. is the Ernest W. Hahn Professor of Chemistry at the Scripps Research Institute, La Jolla, California. Dr. Wong's areas of expertise include chemical-enzymatic organic synthesis, mechanism-based inhibition of carbohydrate-mediated biological recognitions, enzyme inhibition and organic and bioorganic reaction mechanisms. BOARD COMPOSITION Dr. Santi is currently the chairman of the board of directors. Immediately following the sale of securities under this registration statement, our board of directors will consist of six directors divided into three classes with each class serving for a term of three years. - Drs. Khosla and Whitaker will be the Class A directors whose terms expire at the annual meeting of stockholders to be held in 2001; - Drs. Walsh and Davis will be the Class B directors whose terms will expire at the annual meeting of stockholders to be held in 2002; and - Drs. Deleage and Santi will be the Class C directors whose terms will expire at the annual meeting of stockholders to be held in 2003. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following the election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors may have the effect of delaying or preventing change in our control or management. COMMITTEES OF THE BOARD COMPENSATION COMMITTEE. The compensation committee, which is composed of Drs. Davis, Deleage and Walsh, reviews and recommends to our board of directors the compensation and benefits 41 of all our officers and establishes and reviews general policies relating to compensation and benefits to our employees. AUDIT COMMITTEE. The audit committee, which is comprised of Drs. Whitaker, Davis and Deleage, reviews our internal accounting procedures and the services provided by our independent auditors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the compensation committee is currently, or has ever been at any time since our formation, one of our officers or employees, nor has served as a member of the board of directors or compensation committee of any entity that has one or more officers serving as a member of our board of directors or compensation committee. COMPENSATION OF DIRECTORS We reimburse our non-employee directors for expenses incurred in connection with attending board and committee meetings but do not compensate them for their services as board or committee members. We have in the past granted non-employee directors options to purchase our common stock pursuant to the terms of our stock option plans, and our board continues to have the discretion to grant options to new non-employee directors. On March 14, 2000, we granted an option to purchase 15,000 shares of common stock to director Dr. Christopher Walsh. See "Management--Stock Plans--2000 Non-Employee Director Stock Option Plan" and "Related Party Transactions." EMPLOYMENT AGREEMENTS We require each of our employees to enter into confidentiality agreements prohibiting the employee from disclosing any of our confidential or proprietary information. At the time of commencement of employment, our employees also generally sign offer letters specifying basic terms and conditions of employment. In September 2000, we entered into an agreement with Robert G. Johnson, Jr., M.D., Ph.D. in connection with his appointment as Vice President, Medical Affairs and Corporate Development. Under the agreement, Dr. Johnson is entitled to receive an annual salary of $230,000, a $50,000 sign-on bonus and an option to purchase 192,000 shares of our common stock at fair value. In addition, Dr. Johnson is entitled to a housing loan of $150,000 which will be secured by a deed of trust on Dr. Johnson's residence, 50% of which will be forgiven on the third anniversary date of his employment and the remainder of which will be forgiven on the fourth anniversary date. Dr. Johnson is also entitled to monthly mortgage assistance of $1,000 during the first three years of employment. Either we or Dr. Johnson may terminate his employment at any time for any reason. If we terminate Dr. Johnson without cause, he will receive six months of salary continuation and six additional months of vesting of his stock options will be accelerated. In March 2000, we entered into an agreement with Brian Metcalf, Ph.D. in connection with his appointment as Senior Vice President and Chief Scientific Officer. Under the agreement, Dr. Metcalf is entitled to receive an annual salary of $280,000, a $100,000 sign-on bonus and an option to purchase 300,000 shares of our common stock at fair value. The option was subsequently granted with an exercise price of $1.00 per share. In addition, Dr. Metcalf is entitled to a housing loan up to $400,000, which will be secured by a deed of trust on Dr. Metcalf's principal residence, and five years of monthly mortgage assistance to support up to a $400,000 mortgage. Either we or Dr. Metcalf may terminate his employment at any time for any reason. If we terminate Dr. Metcalf without cause during his first three years of employment, he will receive twelve months of salary continuation. Further, if such termination occurred after one year from his date of hire, six additional months of vesting of his stock options will be accelerated. 42 In October 1999, we entered into an agreement with Susan M. Kanaya in connection with her appointment as Vice President, Finance and Chief Financial Officer. Under the agreement, Ms. Kanaya is entitled to receive an annual salary of $172,500, a $20,000 sign-on bonus and an option to purchase 150,000 shares of our common stock at fair value. The option was subsequently granted with an exercise price of $0.33 per share. In addition, Ms. Kanaya is entitled to a $50,000 loan to replace an existing loan arrangement with her former employer, which is forgiven on the third anniversary date of her employment with us. Either we or Ms. Kanaya may terminate her employment at any time for any reason. If we terminate Ms. Kanaya's employment without cause during the first two years of employment, she will receive six months of salary continuation and an additional six months of vesting on her stock options. If such termination occurs following a change in control, the period of salary continuation will be twelve months. In November 1998, we entered into an agreement with Daniel V. Santi, M.D., Ph.D. in connection with his appointment as our Chief Executive Officer. Under the agreement, Dr. Santi is entitled to receive an annual base salary of $250,000, adjusted annually by a minimum of a percentage change equal to the annual percentage change in the Consumer Price Index, and an option to purchase 750,000 shares of our common stock at $0.33 per share. The option was subsequently granted with an exercise price of $0.37 per share, 110% of fair value, because of a provision in our 1996 stock option plan. Either we or Dr. Santi may terminate his employment at any time for any reason. If we terminate Dr. Santi without cause, he will receive a lump sum severance payment in the amount equal to eighteen months of his then current base salary, and eighteen months accelerated vesting of the shares subject to the stock option. In July 1998, we entered into an agreement with Kevin Kaster in connection with his appointment as Vice President, Intellectual Property. Under the agreement, Mr. Kaster is entitled to receive an annual base salary of $180,000 and an option to purchase 180,000 shares of our common stock at fair value. The option was subsequently granted with an exercise price of $0.33 per share. Either we or Mr. Kaster may terminate his employment at any time for any reason. If we terminate Mr. Kaster without cause during the first three and one-half years of employment, he will receive an amount equal to six months of his then current base salary and will accelerate the vesting of the lesser of (a) six months of his original stock option grant and (b) the remainder of his original stock option grant. Drs. Santi, Khosla, Metcalf and Johnson, Messrs. Ostrach and Kaster and Ms. Kanaya each have stock option or stock purchase agreements which contain acceleration clauses providing for 100% vesting of the unvested shares in the event of a change in control. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation that we paid during 1999 to our Chief Executive Officer and to our four other most highly compensated executive officers who received salary and bonus compensation of more than $100,000 during 1999 on an annualized basis. All option grants were made under our 1996 stock option plan. 43 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES ------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY BONUS OTHER OPTIONS - --------------------------- -------- -------- -------- ------------ Daniel V. Santi .................................... $250,812 -- -- -- Chairman and Chief Executive Officer Michael S. Ostrach ................................. 191,667 -- -- -- Chief Operating Officer Susan M. Kanaya(1) ................................. 26,870 $20,000 -- 150,000 Vice President, Finance and Chief Financial Officer Kevin Kaster ....................................... 190,559 -- -- 37,500 Vice President, Intellectual Property Daniel Chu(2) ...................................... 172,560 -- $46,800 -- Former Vice President, Research
- ------------------------ (1) Ms. Kanaya joined Kosan in November 1999. Her annual salary is $190,000. (2) Dr. Chu resigned as Vice President, Research, effective November 30, 1999. His other compensation represents a separation payment. OPTION GRANTS The following table sets forth summary information regarding the option grants made to our Chief Executive Officer and four of our other executive officers whose salary and bonus was in excess of $100,000 on an annualized basis during 1999. Options granted to purchase shares of our common stock under our 1996 stock option plan are generally immediately exercisable by the optionee but are subject to a right of repurchase pursuant to the vesting schedule of each specific grant. In the event that a purchaser ceases to provide service to us, we have the right to repurchase any of that person's unvested shares of common stock at the original option exercise price. The purchase price per share is equal to the deemed fair value of our common stock on the date of grant as determined by our board of directors. The percentage of total options was calculated based on options to purchase an aggregate of 464,100 shares of common stock granted under our 1996 stock option plan in 1999. The potential realizable value was calculated based on the ten-year term of the options and assumed rates of stock appreciation of 5% and 10%, compounded annually from the date the options were granted to their expiration date based on the fair value of the common stock on the date of grant. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represent our estimate of our future stock price. For our employees and officers, 25% of the option grant generally vests on the one-year anniversary of employment, and the remainder vest in a series of equal monthly installments beginning on the one-year anniversary of employment and continuing over the next three years of service. See "Management--Stock Plans" for a description of the material terms of these options. 44 OPTION GRANTS IN 1999
PERCENTAGE OF POTENTIAL REALIZABLE NUMBER OF TOTAL VALUE AT ASSUMED ANNUAL SECURITIES OPTIONS RATES OF STOCK APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------- NAME GRANTED FISCAL YEAR (PER SHARE) DATE 5% 10% - ---- ---------- ------------- ----------- ---------- ------------ ------------- Daniel V. Santi................. -- -- -- -- $ -- $ -- Michael S. Ostrach(1)........... -- -- -- -- -- -- Susan M. Kanaya(2).............. 150,000 32% $0.33 11/04/09 81,363 129,557 Kevin Kaster(3)................. 37,500 8% 0.33 08/06/09 19,372 32,389 Daniel Chu...................... -- -- -- -- -- --
- ------------------------ (1) In February 2000, we granted Mr. Ostrach an option to purchase 75,000 shares of common stock at an exercise price of $0.42 per share, which was equal to the fair value of the common stock on the date of grant as determined by the board of directors. These options vest over a four-year period from the date of grant. (2) In March 2000, we granted Ms. Kanaya an option to purchase 15,000 shares of common stock at an exercise price of $1.00 per share, which was equal to the fair value of the common stock on the date of grant. These options vest over a four-year period from the date of grant. (3) In February 2000, we granted Mr. Kaster an option to purchase 37,500 shares of common stock at an exercise price of $0.42 per share, which was equal to the fair value of the common stock on the date of grant as determined by the board of directors. These options vest over a four-year period from the date of grant. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table provides summary information concerning the shares of common stock represented by outstanding stock options held by our Chief Executive Officer and four of our other most highly compensated executive officers with annualized base salaries in excess of $100,000 as of December 31, 1999. Options granted to purchase shares of our common stock under our 1996 stock option plan are generally immediately exercisable by optionees but are subject to a right of repurchase pursuant to the vesting schedule of each specific grant. The repurchase option generally lapses over a four-year period with 25% lapsing after the first year and the remainder in equal monthly installments thereafter over a three-year period. In the event that a purchaser ceases to provide service to us, we have the right to repurchase any of that person's unvested shares of common stock at the original option exercise price. Amounts shown in the value realized column were calculated based on the difference between the option exercise price and the fair value of the common stock on the date of exercise, without taking into account any taxes that may be payable in connection with the transaction, multiplied by the number of shares of common stock underlying the option. 45
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(2) ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ----------- ----------- ------------- ----------- ------------- Daniel V. Santi................. -- -- -- -- -- -- Michael S. Ostrach.............. -- -- 330,000 -- $4,875,750 -- Susan M. Kanaya................. -- -- 150,000 -- 2,200,000 -- Kevin Kaster.................... -- -- 217,500 -- 3,190,000 -- Daniel Chu...................... -- -- -- -- -- --
- ------------------------ (1) Based on an assumed initial public offering price of $15.00 per share, minus the per-share exercise price, multiplied by the number of shares issued upon exercise of the option. (2) The value of unexercised in-the-money options is calculated based on the difference between an assumed initial public offering price of $15.00 per share and the exercise price for these shares, multiplied by the number of shares underlying the option. STOCK PLANS 1996 STOCK OPTION PLAN Our 1996 stock option plan was adopted by our board of directors in June 1996 and approved by the stockholders in June 1996. This plan provides for the grant of incentive stock options to our employees and nonstatutory stock options to our employees, directors and consultants. The board of directors approved amendments to the stock option plan to increase the number of shares reserved under the stock option plan in October 1998, October 1999 and March 2000. The stockholders approved these amendments in October, 1998, November, 1999 and March 2000, respectively. As of June 30, 2000, 5,100,000 shares of common stock were reserved for issuance under this plan. Of these shares, 2,197,893 shares were issued upon exercise of stock options, 1,141,800 shares were subject to outstanding options and 1,760,307 shares were available for future grant. Our board of directors or a committee appointed by the board administers the stock option plan and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting of the options. The exercise price of nonstatutory options must generally be at least 85% of the fair market value of the common stock on the date of grant. The exercise price of incentive stock options cannot be lower than 100% of the fair market value of the common stock on the date of the grant and, in the case of incentive stock options granted to holders of more than 10% of our voting power, not less than 110% of the fair market value. The term of an incentive stock option cannot exceed ten years, and the term of an incentive stock option granted to a holder of more than 10% of our voting power cannot exceed five years. A participant may not transfer rights granted under our stock option plan other than by will, the laws of descent and distribution or as otherwise provided under the stock option plan. Options granted under our stock option plan are immediately exercisable. Unvested shares are subject to our right of repurchase in the event the employee, director or consultant ceases his or her employment with us. Our board of directors may not, without the adversely affected optionee's prior written consent, amend, modify or terminate the stock option plan if the amendment, modification or termination would impair the rights of optionees. Our stock option plan will terminate in 2006 unless terminated earlier by the board of directors. 46 2000 EMPLOYEE STOCK PURCHASE PLAN Our 2000 employee stock purchase plan was adopted by our board of directors in March 2000, and we expect will be approved by our stockholders prior to the closing of the offering, but it will not become effective until the closing of this offering. A total of 300,000 shares of our common stock has been reserved for issuance under the 2000 employee stock purchase plan. The 2000 employee stock purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code, contains a 6 month offering period. The offering period generally starts on the first trading day on or after October 1 and April 1 of each year, except for the first such offering period which commences on the first trading day on or after the effective date of this offering and ends on the last trading day on or before March 31. Employees are eligible to participate if they are employed by us for at least 20 hours per week and more than five months in any calendar year. However, employees may not be granted an option to purchase stock under the 2000 employee stock purchase plan if they either: - immediately after grant, own stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock; or - hold rights to purchase stock under our employee stock purchase plans which accrue at a rate which exceeds $25,000 worth of stock for each calendar year. The 2000 employee stock purchase plan permits participants to purchase our common stock through payroll deductions of up to 15% of the participant's compensation. Compensation is defined as the participant's base gross earnings but exclusive of incentive compensation and bonuses. The maximum number of shares a participant may purchase during a single purchase period is 15,000 shares. Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each purchase period. The price of stock purchased under the 2000 employee stock purchase plan is generally 85% of the lower of the fair market value of the common stock either: - at the beginning of the offering period; or - at the end of the purchase period. In the event the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, the participants will be withdrawn from the current offering period following exercise and automatically re-enrolled in a new offering period. The new offering period will use the lower fair market value as of the first date of the new offering period to determine the purchase price for future purchase periods. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us. Rights granted under the 2000 employee stock purchase plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the 2000 employee stock purchase plan. The 2000 employee stock purchase plan provides that, in the event we merge with or into another corporation or there is a sale of substantially all of our assets, each outstanding option may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set. The 2000 employee stock purchase plan will terminate in 2010. Our board of directors has the authority to amend or terminate the 2000 employee stock purchase plan, except that no such action may adversely affect any outstanding rights to purchase stock under the 2000 employee stock purchase plan. 47 2000 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Non-employee directors are entitled to participate in our 2000 non-employee director stock option plan, or the director option plan. The director option plan was adopted by our board of directors in March 2000 and we expect will be approved by our stockholders prior to the closing of the offering, but it will not become effective until the closing of this offering. The director option plan has a term of ten years, unless terminated sooner by our board of directors. A total of 300,000 shares of our common stock have been reserved for issuance under the director option plan. The director option plan generally provides for an automatic initial grant of an option to purchase 7,500 shares of our common stock to each non-employee director on the date which the later of the following events occur: - the effective date of the director option plan; or - the date when a person first becomes a non-employee director. After the initial grant, a non-employee director will automatically be granted subsequent options to purchase 3,750 shares of our common stock each year on the date of our annual stockholder's meeting, if on such date he or she has served on our board of directors for at least six months. Each initial option grant and each subsequent option grant shall have a term of 10 years. Each initial option grant will vest as to 25% of the shares subject to the option on each anniversary of its date of grant and each subsequent option grant will vest as to 100% of the shares subject to the option on each anniversary of its date of grant. The exercise price of all options will be 100% of the fair market value per share of our common stock on the date of grant. The director option plan provides that in the event of our merger with or into another corporation, or a sale of substantially all of our assets, each option will become fully vested and exercisable for a period of thirty days from the date our board of directors notifies the optionee of the option's full exercisability, after which period the option shall terminate. Options granted under the director option plan must be exercised within three months of the end of the optionee's tenure as a director of the Company, or within 12 months after such director's termination by death or disability, but in no event later than the expiration of the option's ten year term. No option granted under the director option plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by the optionee. LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION MATTERS Our certificate of incorporation and bylaws limit the liability of our directors, officers, employees, and other agents to the fullest extent permitted by Delaware law. However, we will indemnify a person in connection with a proceeding initiated by such person only if such proceeding was authorized by our board. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for - breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions; or - any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal or state securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. 48 We believe that indemnification under our bylaws and certificate of incorporation covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee, or other agent for any liability arising out of his or her actions in this capacity, regardless of whether the bylaws permit indemnification. We have entered and intend to continue to enter into agreements to indemnify our directors, in addition to the indemnification provided for in our bylaws. These agreements, among other things, indemnify our directors and officers for certain expenses (including attorneys' fees), judgments, fines, and settlement amounts incurred by any such person in any action or proceeding, including any action by or in our right arising out of such person's services as one of our directors or such person's services to any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. See "Related Party Transactions." There is no pending litigation or proceeding involving any of our directors or officers in which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. 49 RELATED PARTY TRANSACTIONS SALES OF SECURITIES From January 1997 through March 2000, we issued the following securities in private placement transactions: - 571,429 shares of our Series A convertible preferred stock in January 1997 at a per share purchase price of $4.20 for aggregate proceeds of approximately $2.4 million, convertible into 1,714,287 shares of common stock upon the closing of this offering. - 1,818,182 shares of our Series B convertible preferred stock in April 1998 at a per share purchase price of $8.25 for aggregate proceeds of approximately $15.0 million, convertible into 5,454,546 shares of common stock upon the closing of this offering. - 804,196 shares of our Series C convertible preferred stock in March 2000 at a per share purchase price of $31.00 for aggregate proceeds of approximately $24.9 million, convertible into 2,412,588 shares of common stock upon the closing of this offering. Our certificate of incorporation provides that our Series A and B convertible preferred stock will automatically convert into common stock in the event this offering results in proceeds to us of at least $15.0 million and the offering price per share is at least $7.00. Our Series C convertible preferred stock will automatically convert into common stock in the event this offering results in proceeds to us of at least $25.0 million and the offering price per share is at least $11.00. The following executive officers, directors and holders of more than five percent of our voting securities purchased securities in the amounts as of the dates shown below.
SHARES OF CONVERTIBLE PREFERRED STOCK COMMON --------------------------------------- STOCK SERIES A SERIES B SERIES C ----------------- ----------- ----------- ----------- DIRECTORS AND EXECUTIVE OFFICERS Daniel V. Santi, M.D., Ph.D.(1)............. 2,899,494 229,761 24,244 -- Chaitan Khosla, Ph.D.(2)............. 1,763,571 7,143 -- -- Michael S. Ostrach..... 330,000 -- -- -- Susan Kanaya........... 165,000 -- -- -- Kevin Kaster........... 217,500 -- -- -- 5% STOCKHOLDERS AG Biotech Capital LLC(3)............... -- -- 484,848 16,129 Alta California Partners, L.P.(4).... 156,789 462,968 5,415 23,654 Alta Embarcadero Partners, LLC(4)..... 4,656 13,224 237,009 540 Franklin Biotechnology Discovery Fund(5).... -- -- -- 387,097 Lombard Odier & Cie(6)............... -- -- 363,636 58,065 S.R. One, Limited(7)... -- -- 303,030 16,129 Price per share........ $0.0003 to $1.00 $ 4.20 $ 8.25 $ 31.00 Date(s) of Issuance.... Jan 1995 - Apr 00 Jan 97 Apr 98 Mar 00
- ------------------------ (1) Dr. Santi received 229,761 shares of Series A convertible preferred stock in exchange for the surrender of certain shares previously held by him. See note 9 of our financial statements. All 50 shares of convertible preferred stock owned by Dr. Santi will convert into 762,015 shares of common stock upon the closing of this offering. (2) Dr. Khosla received 7,143 shares of Series A convertible preferred stock in exchange for his surrender of certain shares previously held by him. See Note 9 of our financial statements. All shares of convertible preferred stock owned by Dr. Khosla will convert into 21,429 shares of common stock upon the closing of this offering. (3) Peter Davis, one of our directors, is a member of the Executive Committee of Pulsar International, S.A., an affiliate of AG Biotech Capital LLC. All shares of convertible preferred stock owned by AG Biotech Capital LLC will convert into 1,502,931 shares of common stock upon the closing of this offering. (4) Jean Deleage, one of our directors, is a general partner of Alta Partners, an affiliate of Alta California Partners and Alta Embarcadero Partners. All shares of convertible preferred stock owned by Alta California Partners, L.P. and Alta Embarcadero Partners, LLC will convert into 2,228,430 shares of common stock upon the closing of this offering. (5) All shares of convertible preferred stock owned by Franklin Biotechnology Discovery Fund will convert into 1,161,291 shares of common stock upon the closing of this offering. (6) All shares of convertible preferred stock owned by Lombard Odier & Cie will convert into 1,265,103 shares of common stock upon the closing of this offering. (7) Raymond Whitaker, one of our directors, is Vice President of S.R. One, Limited, the venture investment affiliate of SmithKline Beecham. All shares of convertible preferred stock owned by S.R. One, Limited will convert into 957,477 shares of common stock upon the closing of this offering. OTHER TRANSACTIONS PROMISSORY NOTES. Stock options granted under our 1996 Stock Option Plan are immediately exercisable as to both vested and unvested shares, with unvested shares being subject to a right of repurchase in our favor in the event of termination of employment or consultancy prior to vesting of all shares. These individuals pay the exercise price for their outstanding options pursuant to full recourse promissory notes secured in part by the common stock underlying the options. The notes bear interest at the Applicable Mid Term Federal Rate at the time of exercise. Principal and interest is due on the earlier of the employee's or consultant's termination date or three years after the date of the promissory note. As of June 30, 2000, the original and outstanding principal amounts of each promissory note by a director or executive officer are set forth below.
ORIGINAL AND OUTSTANDING INTEREST ACCRUED DIRECTOR OR EXECUTIVE OFFICER ISSUANCE DATE NOTE AMOUNT RATE INTEREST - ----------------------------- -------------- ------------ -------- -------- Daniel V. Santi................ December 1998 $275,000 4.47% $18,854 Michael S. Ostrach............. February 2000 74,250 6.46% 1,719 Susan M. Kanaya................ February 2000 50,000 6.46% 1,157 Susan M. Kanaya................ April 2000 15,000 6.60% 179 Kevin Kaster................... February 2000 72,500 6.46% 1,678 Chaitan Khosla................. September 1999 71,500 5.89% 3,252
EXECUTIVE OFFICER LOANS. In connection with Dr. Brian Metcalf's relocation to California, we loaned Dr. Metcalf $400,000 in May 2000 and received a full recourse promissory note, which bears interest at 6.3% per year, and is secured by a deed of trust on Dr. Metcalf's principal residence. Principal and 51 accrued interest is payable in full on the earlier of May 30, 2005 or the date on which Dr. Metcalf voluntarily terminates his employment with us. In accordance with the terms of our employment agreement with Susan M. Kanaya, we loaned Ms. Kanaya $52,900 in March 2000 and received a full recourse promissory note, which bears interest at 6.35% per year, and is secured by a deed of trust on Ms. Kanaya's principal residence. Such loan and accrued interest is forgivable on November 4, 2002. In the event Ms. Kanaya voluntarily terminates her employment with us prior to November 4, 2002, principal and accrued interest is payable in full. CONSULTING AGREEMENTS. In December 1998, we entered into an amended and restated consulting agreement with our co-founder and director, Dr. Chaitan Khosla. Under the terms of this agreement, Dr. Khosla is entitled to receive consulting fees of not less than $100,000 per year and was granted an option to purchase 195,000 shares of our common stock at an exercise price of $0.37 per share which vest over a four year period. Total consulting fees paid to Dr. Khosla totaled $104,279 in 1999, $126,171 in 1998 and $61,846 in 1997. Either Kosan or Dr. Khosla may terminate his consultancy at any time for any reason. If we terminate Dr. Khosla without cause or as a result of a change in control, he will receive the greater of (i) any compensation payable during the extended term of his consulting agreement or (ii) an amount equal to two times his then-current annual compensation. Further, all of Dr. Khosla's stock options and other similar equity rights will immediately vest in full. In December 1995, we entered into a consulting agreement with our director, Dr. Christopher Walsh. Under the terms of this agreement, Dr. Walsh is entitled to receive $1,000 per day for consultations and entered into a restricted stock purchase agreement which provided for the purchase of 60,000 shares of common stock at a purchase price of $0.0007 per share, which vest over five years. In March 2000, we granted Dr. Walsh an additional option to purchase 15,000 shares of common stock at a purchase price of $1.00 per share, which vest over a four-year period. Total consulting fees paid to Dr. Walsh totaled $4,000 in 1999, $2,000 in 1998 and $4,000 in 1997. INDEMNIFICATION AGREEMENTS. We have entered into indemnification agreements with Drs. Davis, Deleage, Khosla, Santi, Walsh and Whitaker, Mr. Ostrach, Ms. Kanaya and Mr. Kaster. We intend to enter into indemnification agreements with all of our directors and officers for the indemnification of those persons to the full extent permitted by law. We also intend to execute these agreements with our future directors and officers. STOCK OPTIONS. Stock option grants to our executive officers and directors are described in this prospectus under the captions "Management--Compensation of Directors," "--Executive Compensation" and "--Option Grants." EVALUATION AGREEMENT Effective in March 1998, we entered into a 14-month evaluation agreement with Savia Corporation and DNA Plant Technologies. The evaluation program was for the development of intellectual property and technology for use in the field of production of polyketides in plants. We received revenue of approximately $90,000 upon signing the agreement for work performed to that date. The agreement was terminated effective December 31, 1999. Under the terms of the termination agreement we received approximately $160,000 for development services performed through December 31, 1999. Dr. Davis, one of our board members, is also a board member of the company that controls DNA Plant Technologies. 52 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of our common stock as of August 31, 2000, as adjusted to reflect the sale of common stock in this offering. Information is given for: - each stockholder who is known by us to beneficially own more than five percent of our common stock; - each of our directors and executive officers; and - all of our directors and officers as a group. Percentage of ownership in the following table is calculated based on 19,006,026 shares of our common stock and convertible preferred stock on an as-converted basis outstanding as of August 31, 2000 and 24,006,026 shares of common stock outstanding after completion of this offering. Beneficiary ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person are deemed outstanding. Those shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws, where applicable. 53
AMOUNT OF SHARES BENEFICIALLY OWNED AS OF AUGUST 31, 2000 ----------------------------------------- PERCENTAGE OF TOTAL OUTSTANDING SHARES BENEFICIALLY OWNED ------------------- NUMBER OF SHARES BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING - ------------------------------------ ------------------- -------- -------- Daniel V. Santi, M.D., Ph.D.(1)......................... 3,645,009 19.2% 15.2% Jean Deleage, Ph.D. (2)................................. 2,389,875 12.6% 10.0% Alta Partners One Embarcadero Center, Suite 4050 San Francisco, CA 94111 Peter Davis, Ph.D. (3).................................. 1,502,931 7.9% 6.3% AG Biotech Capital, LLC c/o Viridian Management, LLC 686 N. DuPont Boulevard #220 Milford, DE 19963 Lombard Odier & Cie (4)................................. 1,265,103 6.7% 5.3% Sihlstrasse 20 8021 Zurich, Switzerland Kurt von Emster (5)..................................... 1,161,291 6.1% 4.8% Franklin Biotechnology Discovery Fund 777 Mariners Island Boulevard San Mateo, CA 94404 Raymond Whitaker, Ph.D. (6)............................. 957,477 5.0% 4.0% S.R. One, Limited Four Tower Bridge West Conshohoken, PA 19428 Chaitan Khosla, Ph.D. (7)............................... 1,785,000 9.4% 7.4% Christopher Walsh, Ph.D. (8)............................ 79,500 * * Michael S. Ostrach (9).................................. 405,000 2.1% 1.7% Brian W. Metcalf, Ph.D. (10)............................ 300,000 1.6% 1.2% Susan M. Kanaya (11).................................... 165,000 * * Kevin Kaster (12)....................................... 255,000 1.3% 1.1% Daniel Chu (13)......................................... 67,500 * * All current directors and executive officers as a group (10 persons)(14)...................................... 11,484,793 59.1% 47.0%
- ------------------------ * Less than one percent (1%) (1) Includes 390,624 shares that are subject to our right of repurchase as of August 31, 2000 if Dr. Santi is no longer an employee, director or consultant with us. Dr. Santi is located at 3832 Bay Center Place, Hayward, CA 94545. (2) Consists of 2,389,875 shares beneficially owned by Alta Partners including 1,632,900 shares held directly by Alta California Partners, L.P. and 756,975 shares held directly by Alta Embarcadero Partners, LLC. Dr. Deleage, one of our directors, is the managing general partner of Alta Partners and disclaims beneficial ownership of such shares except to the extent of his proportionate pecuniary interest therein. (3) Consists of 1,502,931 shares held directly by AG Biotech Capital LLC. Dr. Davis, one of our directors, is a member of the Executive Committee of Pulsar International, S.A., an affiliate of 54 AG Biotech Capital. Dr. Davis disclaims beneficial ownership of the shares held by AG Biotech Capital except to the extent of his proportionate pecuniary interest therein. (4) Lombard Odier & Cie is a private Swiss banking institution. The shares consist of shares held by Lombard Odier for the benefit of certain Swiss publicly traded mutual funds and private and institutional clients over which Lombard Odier has sole voting and dispositive power through its asset managers. No single person exercises voting and dispositive control over the shares held by Lombard Odier. (5) Kurt von Emster is Vice President, Franklin Advisors and Portfolio Manager/Analyst for Franklin Templeton Group and is deemed to share investment power with respect to the 1,161,291 shares held directly by Franklin Biotechnology Discovery Fund. Mr. von Emster disclaims beneficial ownership of such shares. (6) Consists of 957,477 shares held directly by S.R. One, Limited. Dr. Whitaker, one of our directors, is Vice President of S.R. One, Limited, the venture investment affiliate of SmithKline Beecham. Dr. Whitaker disclaims beneficial ownership of the shares held by S.R. One, Limited except to the extent of his proportionate pecuniary interest therein. (7) Includes 113,748 shares that are subject to our right of repurchase as of August 31, 2000 if Dr. Khosla is no longer an employee, director or consultant with us. Dr. Khosla is located at 3832 Bay Center Place, Hayward, CA 94545. (8) Includes the following: (i) 3,999 shares that are subject to our right of repurchase as of August 31, 2000; and (ii) 19,500 shares that are subject to option as of August 31, 2000, of which 13,437 would be subject to our right of repurchase in the event of exercise if Dr. Walsh is no longer an employee, director or consultant with us. (9) Includes the following. (i) 124,374 shares that are subject to our right of repurchase as of August 31, 2000; and (ii) 75,000 shares that are subject to option as of August 31, 2000, of which 65,625 would be subject to our right of repurchase in the event of exercise if Mr. Ostrach is no longer an employee, director or consultant with us. (10) Consists of 300,000 shares that are subject to option as of August 31, 2000, all of which would be subject to our right of repurchase in the event of exercise if Dr. Metcalf is no longer an employee, director or consultant with us. (11) Consists of 165,000 shares that are subject to our right of repurchase as of August 31, 2000. (12) Includes the following: (i) 118,125 shares that are subject to our right of repurchase as of August 31, 2000; and (ii) 37,500 shares that are subject to option as of August 31, 2000, of which 32,811 would be subject to our right of repurchase in the event of exercise if Mr. Kaster is no longer an employee, director or consultant with us. (13) Dr. Chu resigned as Vice President, Research, effective November 30, 1999. (14) Includes shares included pursuant to notes (1) through (3) and (6) through (12) above. 55 DESCRIPTION OF CAPITAL STOCK Our certificate of incorporation, the filing of which will occur at the closing of this offering, authorizes the issuance of up to 200,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share, the rights and preferences of which may be established from time to time by our board of directors. As of June 30, 2000, after giving effect to the conversion of all of our preferred stock into common stock, 18,844,539 shares of common stock were outstanding. As of June 30, 2000, we had 100 stockholders. COMMON STOCK Each holder of common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences to which holders of convertible preferred stock issued after the sale of the common stock offered hereby may be entitled, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of convertible preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and the shares of common stock offered by us in this offering, when issued and paid for, will be, fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which we may designate in the future. PREFERRED STOCK Upon the closing of this offering, the board of directors will be authorized, subject to any limitations prescribed by law, without stockholder approval, from time to time to issue up to an aggregate of 10,000,000 shares of convertible preferred stock, $0.001 par value per share, in one or more series, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the 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 convertible 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. We have no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS Pursuant to the Third Amended and Restated Registration Rights Agreement entered into between us and holders of 13,226,481 shares of common stock and holders of shares of common stock issuable upon conversion of our Series A, Series B and Series C convertible preferred stock, we are obligated, under limited circumstances and subject to specified conditions and limitations, to use our reasonable best efforts to register the registrable shares. We must use our reasonable best efforts to register shares subject to such registration rights if we: - receive written notice from holders of 50% or more of the registrable shares requesting that we effect a registration with respect to at least 20% of the registrable shares then held by the holders requesting registration; - decide to register our own securities; or 56 - both receive written notice from any holder or holders of the registrable shares requesting that we effect a registration on Form S-3 (a shortened form of registration statement) with respect to the registrable shares, and are then eligible to use Form S-3 (which at the earliest could occur 12 calendar months after the closing of this offering). However, in addition to certain other conditions and limitations, if we are proposing to issue registered shares and the underwriters request to decrease the number of shares registered, we can limit the number of registrable shares included in the registration statement. The underwriters have requested that no registrable shares be registered in this offering. In addition, the holders of these registration rights have entered into lockup agreements and waived their registration rights until 180 days following the completion of this offering. DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS Certain provisions of our certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions will create a classified board of directors, will allow us to issue preferred stock without any vote or further action by the stockholders, require advance notification of stockholder proposals and nominations of candidates for election as directors, eliminate cumulative voting in the election of directors and eliminate shareholder action by written consent. In addition, our bylaws will provide that special meetings of the stockholders may be called only by the Chairman of the Board, the President, or board of directors and that the authorized number of directors may be changed only by resolution of the board of directors. These provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in our control. In addition, we will be subject to Section 203 of the Delaware General Corporation Law. This law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder, unless any of the following conditions are met. First, this law does not apply if prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder. Second, the law does not apply if upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer. Third, the law does not apply if at or after the date of the transaction, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for our common stock is Chase Mellon Shareholder Services LLC. 57 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market could reduce prevailing market prices. Furthermore, since certain shares will not be available for sale shortly after this offering because of contractual and legal restrictions on resale as described below, sales of substantial amounts of our common stock in the public market after any restrictions on sale lapse could adversely affect the prevailing market price of the common stock and impair our ability to raise equity capital in the future. Upon completion of the offering, we will have 23,844,539 outstanding shares of common stock, assuming no exercise of the over-allotment option and no exercises of outstanding options after June 30, 2000. Of these shares, all of the shares sold in the public offering will be freely tradable without restriction or further registration under the Securities Act, unless these shares are purchased by affiliates. The remaining 18,844,539 shares of common stock held by existing stockholders are restricted securities. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration described below under Rules 144, 144(k) or 701 promulgated under the Securities Act. As a result of contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, the restricted shares will be available for sale in the public market as follows: - unless held by affiliates, the 5,000,000 shares sold in the public offering will be freely tradable upon completion of the offering; - 16,449,285 shares will be eligible for sale upon the expiration of the lock-up agreements, described below, beginning 180 days after the date of this prospectus; and - 213,403 shares will be eligible for sale upon the exercise of vested options 180 days after the date of this prospectus. LOCK-UP AGREEMENTS We, our directors, officers, employees and other stockholders, who together hold 98.8 percent of our securities, have entered into lock-up agreements in connection with this offering. These lock-up agreements generally provide that these holders will not offer, sell, contract to sell, grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the date of this prospectus without the prior written consent of Lehman Brothers Inc. Notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold until these agreements expire or are waived by Lehman Brothers Inc. RULE 144 In general, under Rule 144 as currently in effect, after the expiration of the lock-up agreements, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - one percent of the number of shares of common stock then outstanding, which will equal approximately 238,445 shares immediately after this offering; and - the average weekly trading volume of our common stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice and the availability of current public information about us. 58 RULE 144(K) Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, may sell these shares without complying with the manner of sale, public information, volume limitation or notice requirements of Rule 144. RULE 701 Rule 701, as currently in effect, permits our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract to resell such shares in reliance upon Rule 144, but without compliance with certain restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 90 days after effectiveness without complying with the holding period requirement and that non-affiliates may sell such shares in reliance on Rule 144 90 days after effectiveness without complying with the holding period, public information, volume limitation or notice requirements of Rule 144. REGISTRATION RIGHTS Upon completion of this offering, the holders of 13,226,481 shares of our common stock, or their transferees, will be entitled to rights with respect to the registration of their shares under the Securities Act. Registration of their shares under the Securities Act would result in these shares becoming freely tradeable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of such registration. STOCK OPTIONS Ninety days after the date of this prospectus, shares issued upon exercise of options that we granted prior to the date of this offering will also be available for sale in the public market pursuant to Rule 701 under the Securities Act of 1933, subject to the expiration of lock-up agreements. As of June 30, 2000, options to purchase a total of 1,141,800 shares of our common stock were outstanding, 106,950 of which were vested. Upon the closing of this offering, we intend to file a registration statement to register for resale the 3,502,107 shares of common stock reserved for issuance under our 1996 stock option plan, our 2000 employee stock purchase plan and our 2000 non-employee director stock option plan. We expect the registration statement to become effective immediately upon filing. Shares issued upon the exercise of stock options granted under these plans will be eligible for sale in the public market from time to time, subject to vesting provisions, Rule 144 volume limitations applicable to our affiliates and, in the case of some options, the expiration of lock-up agreements. 59 UNDERWRITING Under the terms of an underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below, for whom Lehman Brothers Inc., CIBC World Markets Corp., SG Cowen Securities Corporation and Fidelity Capital Markets, a division of National Financial Services LLC, are acting as representatives, have severally agreed to purchase from us the respective number of shares of common stock opposite their names below:
UNDERWRITER NUMBER OF SHARES - ----------- ---------------- Lehman Brothers Inc. ...................................... CIBC World Markets Corp. .................................. SG Cowen Securities Corporation............................. Fidelity Capital Markets, a division of National Financial Services LLC.............................................. ----- Total..................................................... =====
The underwriting agreement provides that the underwriters are obligated to purchase all of the shares of common stock in the offering if any are purchased, other than those covered by the over-the-allotment option described below. Lehman Brothers Inc., on behalf of the underwriters, expects to deliver the shares on or about , 2000. We have granted the underwriters a 30 day option after the date of the underwriting agreement to purchase, from time to time, in whole or in part, up to 750,000 shares at the public offering price less underwriting discounts and commissions. The option may be exercised to cover over-allotments, if any, made in connection with the offering. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional shares based on the underwriter's percentage underwriting commitment in the offering as indicated in the preceding table. The representatives of the underwriters have advised us that the underwriters propose to offer shares of common stock directly to the public at the public offering price on the cover of this prospectus and to selected dealers, who may include the underwriters, at this public offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may re-allow, a discount from the concession not in excess of $ per share to other dealers. After the completion of the offering, the representatives may change the public offering price and other selling terms. The following table summarizes the underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' overallotment option to purchase 750,000 additional shares. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to the Company for the shares.
PAID BY US --------------------------------------------- NO EXERCISE OF FULL EXERCISE OF OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION --------------------- --------------------- Per Share.............................. $ $ Total.................................. $ $
We estimate that the total expense of this offering, excluding the underwriting discounts and commissions, will be approximately $1,250,000. We have applied for quotation of our common stock on the NASDAQ National Market under the symbol "KOSN." 60 We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and liabilities incurred in connection with the directed share program referred to below, and to contribute to payments that the underwriters may be required to make for these liabilities. Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation between us and the underwriters. The factors that the representatives will consider in determining the public offering price include: - the history and prospects for the industry in which we compete; - the ability of our management and our business potential and earning prospects; - the prevailing securities markets at the time of this offering; and - the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Securities Exchange Act. - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specific maximum. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. The underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the issuer in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Naked short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering. Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the 61 representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice. The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of shares offered by them. We, our directors, officers, employees and other stockholders holding 98.8 percent of our securities have agreed not to offer to sell, sell or otherwise dispose of, directly or indirectly, any shares of capital stock or any securities that may be converted into or exchanged for any shares of capital stock for a period of 180 days from the date of the prospectus without the prior written consent of Lehman Brothers Inc., except that we may issue and grant options to purchase shares of common stock under our option plans and pursuant to collaborative relationships that we establish or acquisitions of assets, products or technologies from others. See "Shares Eligible for Future Sale." At our request, Lehman Brothers Inc. has reserved up to 250,000 shares of the common stock offered by this prospectus for sale pursuant to a directed share program to our employees, directors and friends at the initial public offering price on the cover page of this prospectus. These persons must commit to purchase no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Lehman Brothers Inc., CIBC World Markets Corp. and SG Cowen Securities Corporation intend to distribute and deliver this prospectus only by hand or mail and intend to use only printed prospectuses. Fidelity Capital Markets, a division of National Financial Services LLC, is acting as an underwriter of this offering and will be facilitating electronic distribution through the Internet. Purchasers of the shares of common stock offered in this prospectus may be required to pay stamp taxes and other charges under the laws and practices of the county of purchase, in addition to the offering price listed on the cover of this prospectus. 62 LEGAL MATTERS Wilson Sonsini Goodrich & Rosati, Professional Corporation, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. The underwriters have been represented by Brobeck, Phleger & Harrison LLP. An investment partnership composed of current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially owns 16,437 shares of our common stock. CHANGE IN INDEPENDENT AUDITORS Effective May 28, 1998, Ernst & Young LLP was engaged as our independent auditors and replaced Coopers & Lybrand L.L.P. (now, PricewaterhouseCoopers LLP), who were dismissed as our independent auditors in May 1998. The decision to change auditors was approved by our Board of Directors. The audit reports of PricewaterhouseCoopers LLP for the years ended December 31, 1997 and 1996 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits through December 31, 1997 and through May 1998, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statements disclosure or auditing scope or procedures, which disagreements, if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement. PricewaterhouseCoopers LLP has not audited or reported on any of the financial statements or information included in this prospectus. For purposes of this filing, the financial statements at December 31, 1997, 1996 and 1995 as well as the financial statements for the years ended December 31, 1997 and 1996 and the period from inception (January 5, 1995) to December 31, 1995 have been audited by Ernst & Young LLP. Prior to May 28, 1998, we had not consulted with Ernst & Young LLP on items that involved our accounting principles or the form of audit opinion to be issued on our financial statements. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements at December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999, as set forth in their report. We have 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. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C., a registration statement on Form S-1 under the Securities Act, with respect to the common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to us and our common stock, reference is made to the registration statement and the exhibits and schedules filed as part of the registration statement. Statements contained in this prospectus as to the contents of any contract or document filed as an exhibit to the registration statement are qualified by reference to the applicable exhibit as filed. A copy of the registration statement, and the exhibits and schedules to the registration statement, as well as reports and other information filed by us with the SEC may be inspected without charge at the public reference facilities maintained by the SEC in Room 1025, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all of any part of the registration statement may be 63 obtained from those offices upon the payment of the fees prescribed by the SEC. You can obtain information about the operation of the public reference facilities by calling the SEC at 1-800-SEC-0330. In addition, registration statements and other filings we make with the SEC through its electronic data gathering, analysis and retrieval, or EDGAR, system, including our registration statement, are publicly available through the Internet. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The SEC's web site is http://www.sec.gov. As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, will file periodic reports, proxy statements and other information with the SEC. 64 KOSAN BIOSCIENCES INCORPORATED INDEX TO FINANCIAL STATEMENTS
PAGE -------- Report of Ernst & Young LLP, Independent Auditors........... F-2 Balance Sheets as of December 31, 1998 and 1999............. F-3 Statements of Operations for the years ended December 31, 1997, 1998 and 1999....................................... F-4 Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999.......................... F-5 Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999....................................... F-6 Notes to Financial Statements............................... F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Kosan Biosciences Incorporated We have audited the accompanying balance sheets of Kosan Biosciences Incorporated as of December 31, 1998 and 1999, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kosan Biosciences Incorporated 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 accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Palo Alto, California March 10, 2000, except for the first paragraph of Note 9, as to which the date is September 28, 2000. F-2 KOSAN BIOSCIENCES INCORPORATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PRO FORMA STOCKHOLDERS' DECEMBER 31, EQUITY AT ------------------- JUNE 30, JUNE 30, 1998 1999 2000 2000 -------- -------- ----------- ------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 3,049 $ 1,032 $ 19,015 Short-term investments.................................... 3,279 990 6,012 Other receivables......................................... 168 498 112 Prepaid expenses and other current assets................. 209 325 253 ------- -------- -------- Total current assets........................................ 6,705 2,845 25,392 Property and equipment, net................................. 1,407 2,587 2,974 Long-term investments....................................... 9,073 8,442 7,235 Notes receivable from related party......................... 12 87 711 Other assets................................................ 4 196 586 ------- -------- -------- Total assets................................................ $17,201 $ 14,157 $ 36,898 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 333 $ 486 $ 750 Accrued liabilities....................................... 98 626 1,209 Deferred revenue.......................................... 1,719 409 125 Current portion of capital lease obligation............... 118 127 174 Current portion of equipment loan......................... 170 447 764 ------- -------- -------- Total current liabilities................................... 2,438 2,095 3,022 Equipment loan, less current portion........................ 700 1,424 2,046 Capital lease obligation, less current portion.............. 304 167 53 Stockholders' equity: Convertible preferred stock, $0.001 par value; 4,348,182 shares authorized, 3,269,377 3,269,377 and 4,073,573 shares issued and outstanding at December 31, 1998 and 1999 and June 30, 2000, respectively (none pro forma) (aggregate liquidation preference of $21,095 and $46,025 at December 31, 1999 and June 30, 2000, respectively)........................................... 3 3 4 $ -- Common stock, $0.001 par value, 36,000,000 shares authorized, 5,187,951, 5,480,544 and 6,623,820 shares issued and outstanding at December 31, 1998 and 1999 and June 30, 2000, respectively, (18,844,539 shares issued and outstanding pro forma).............................. 5 5 7 19 Additional paid-in capital................................ 21,227 24,848 61,651 61,643 Notes receivable from stockholders........................ (275) (349) (647) (647) Deferred stock-based compensation......................... -- (2,377) (10,906) (10,906) Accumulated other comprehensive income (loss)............. (9) (66) (60) (60) Accumulated deficit....................................... (7,192) (11,593) (18,272) (18,272) ------- -------- -------- -------- Total stockholders' equity.................................. 13,759 10,471 31,777 $ 31,777 ------- -------- -------- -------- Total liabilities and stockholders' equity.................. $17,201 $ 14,157 $ 36,898 ======= ======== ========
See accompanying notes. F-3 KOSAN BIOSCIENCES INCORPORATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE 30, ------------------------------ --------------------------- 1997 1998 1999 1999 2000 -------- -------- -------- ------------ ------------ (UNAUDITED) Revenues: Contract revenue........................ $ 10 $ 974 $ 5,206 $ 3,027 $ 2,084 Grant revenue........................... 277 262 140 80 140 ------- ------- ------- ------- -------- Total revenues............................ 287 1,236 5,346 3,107 2,224 Operating expenses: Research and development (Including charges for stock-based compensation of $0, $0, $964, $403 and $2,597, respectively)......................... 1,922 4,030 8,587 3,838 7,621 General and administrative (Including charges for stock-based compensation of $0, $0, $181, $0 and $708, respectively)......................... 457 991 1,813 812 1,793 ------- ------- ------- ------- -------- Total operating expenses.................. 2,379 5,021 10,400 4,650 9,414 ------- ------- ------- ------- -------- Loss from operations...................... (2,092) (3,785) (5,054) (1,543) (7,190) Interest income........................... 154 598 679 334 678 Interest expense.......................... (56) (80) (196) (71) (167) Other income.............................. -- -- 170 -- -- ------- ------- ------- ------- -------- Net loss.................................. (1,994) (3,267) (4,401) (1,280) (6,679) Deemed dividend upon issuance of Series C convertible preferred stock............... -- -- -- -- (11,267) ------- ------- ------- ------- -------- Net loss attributable to common stockholders.............................. $(1,994) $(3,267) $(4,401) $(1,280) $(17,946) ======= ======= ======= ======= ======== Basic and diluted net loss per share........ $ (0.49) $ (0.77) $ (0.98) $ (0.29) $ (3.57) ======= ======= ======= ======= ======== Shares used in computing basic and diluted net loss per share........................ 4,094 4,270 4,509 4,430 5,029 Pro forma basic and diluted net loss per share (unaudited)......................... $ (0.31) $ (1.12) ======= ======== Shares used in computing pro forma basic and diluted net loss per share (unaudited).... 14,318 16,056
See accompanying notes. F-4 KOSAN BIOSCIENCES INCORPORATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED ---------------------- ------------------------- PAID-IN FROM STOCK-BASED SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION --------- ---------- ------------ ---------- ---------- ------------ ------------- BALANCES AT DECEMBER 31, 1996...... 1,215,988 $ 2 3,468,285 $ 3 $ 3,647 $ -- -- Conversion of Series A convertible preferred stock to common stock............................ (213,722) (1) 641,166 1 -- -- -- Conversion of Series B convertible preferred stock to Series A convertible preferred stock and common stock..................... (122,500) -- 367,500 -- -- -- -- Issuance of Series A convertible preferred stock, net of issuance costs of $15..................... 571,429 -- -- -- 2,384 -- -- Repurchase of common stock......... -- -- (20,400) -- -- -- -- Net loss........................... -- -- -- -- -- -- -- --------- ---------- --------- ---------- ------- ----- -------- BALANCES AT DECEMBER 31, 1997...... 1,451,195 1 4,456,551 4 6,031 -- -- Issuance of common stock upon exercise of options.............. -- -- 12,024 -- 1 -- -- Issuance of common stock upon exercise of options in exchange for promissory note.............. -- -- 750,000 1 274 (275) -- Issuance of Series B convertible preferred stock, net of issuance costs of $77..................... 1,818,182 2 -- -- 14,921 -- -- Repurchase of common stock......... -- -- (30,624) -- -- -- -- Comprehensive income (loss): Net loss......................... -- -- -- -- -- -- -- Unrealized loss on available-for-sale securities..................... -- -- -- -- -- -- -- Comprehensive loss................. -- -- -- -- -- -- -- --------- ---------- --------- ---------- ------- ----- -------- BALANCES AT DECEMBER 31, 1998...... 3,269,377 3 5,187,951 5 21,227 (275) -- Issuance of common stock upon exercise of options.............. -- -- 80,718 -- 25 -- -- Issuance of common stock upon exercise of options in exchange for promissory note.............. -- -- 211,875 -- 74 (74) -- Deferred stock compensation........ -- -- -- -- 2,912 -- (2,912) Amortization of deferred stock compensation..................... -- -- -- -- -- -- 535 Revaluation of stock options issued to non-employees................. -- -- -- -- 610 -- -- Comprehensive income (loss): Net loss......................... -- -- -- -- -- -- -- Unrealized loss on available-for-sale securities..................... -- -- -- -- -- -- -- Comprehensive loss................. -- -- -- -- -- -- -- --------- ---------- --------- ---------- ------- ----- -------- BALANCES AT DECEMBER 31, 1999...... 3,269,377 3 5,480,544 5 24,848 (349) (2,377) Issuance of common stock upon exercise of options (unaudited)...................... -- -- 146,274 1 43 -- -- Issuance of common stock upon exercise of options in exchange for promissory note (unaudited)...................... -- -- 997,002 1 297 (298) -- Issuance of Series C convertible preferred stock, net of issuance costs of $300 (unaudited)........ 804,196 1 -- -- 24,629 -- -- Beneficial conversion feature associated with the issuance of Series C convertible preferred stock (unaudited)................ -- -- -- -- 11,267 -- -- Deemed dividend to preferred stockholders (unaudited)......... -- -- -- -- (11,267) -- -- Deferred stock-based compensation (unaudited)...................... -- -- -- -- 11,082 -- (11,082) Amortization of deferred stock-based compensation (unaudited)...................... -- -- -- -- -- -- 2,553 Other stock-based compensation (unaudited)...................... -- -- -- -- 752 -- -- Comprehensive income (loss): Net loss (unaudited)............. -- -- -- -- -- -- -- Unrealized gain on available-for-sale securities (unaudited).................... -- -- -- -- -- -- -- Comprehensive loss (unaudited)..... -- -- -- -- -- -- -- --------- ---------- --------- ---------- ------- ----- -------- BALANCE AT JUNE 30, 2000 (UNAUDITED)...................... 4,073,573 $ 4 6,623,820 $ 7 $61,651 $(647) $(10,906) ========= ========== ========= ========== ======= ===== ======== ACCUMULATED OTHER TOTAL COMPREHENSIVE ACCUMULATED STOCKHOLDERS' INCOME (LOSS) DEFICIT EQUITY -------------- ------------ ------------- BALANCES AT DECEMBER 31, 1996...... $ -- $ (1,931) $ 1,721 Conversion of Series A convertible preferred stock to common stock............................ -- -- -- Conversion of Series B convertible preferred stock to Series A convertible preferred stock and common stock..................... -- -- -- Issuance of Series A convertible preferred stock, net of issuance costs of $15..................... -- -- 2,384 Repurchase of common stock......... -- -- -- Net loss........................... -- (1,994) (1,994) ---- -------- ------- BALANCES AT DECEMBER 31, 1997...... -- (3,925) 2,111 Issuance of common stock upon exercise of options.............. -- -- 1 Issuance of common stock upon exercise of options in exchange for promissory note.............. -- -- -- Issuance of Series B convertible preferred stock, net of issuance costs of $77..................... -- -- 14,923 Repurchase of common stock......... -- -- -- Comprehensive income (loss): Net loss......................... -- (3,267) (3,267) Unrealized loss on available-for-sale securities..................... (9) -- (9) ------- Comprehensive loss................. -- -- (3,276) ---- -------- ------- BALANCES AT DECEMBER 31, 1998...... (9) (7,192) 13,759 Issuance of common stock upon exercise of options.............. -- -- 25 Issuance of common stock upon exercise of options in exchange for promissory note.............. -- -- -- Deferred stock compensation........ -- -- -- Amortization of deferred stock compensation..................... -- -- 535 Revaluation of stock options issued to non-employees................. -- -- 610 Comprehensive income (loss): Net loss......................... -- (4,401) (4,401) Unrealized loss on available-for-sale securities..................... (57) -- (57) ------- Comprehensive loss................. -- -- (4,458) ---- -------- ------- BALANCES AT DECEMBER 31, 1999...... (66) (11,593) 10,471 Issuance of common stock upon exercise of options (unaudited)...................... -- -- 44 Issuance of common stock upon exercise of options in exchange for promissory note (unaudited)...................... -- -- -- Issuance of Series C convertible preferred stock, net of issuance costs of $300 (unaudited)........ -- -- 24,630 Beneficial conversion feature associated with the issuance of Series C convertible preferred stock (unaudited)................ -- -- 11,267 Deemed dividend to preferred stockholders (unaudited)......... -- -- (11,267) Deferred stock-based compensation (unaudited)...................... -- -- -- Amortization of deferred stock-based compensation (unaudited)...................... -- -- 2,553 Other stock-based compensation (unaudited)...................... -- -- 752 Comprehensive income (loss): Net loss (unaudited)............. -- (6,679) (6,679) Unrealized gain on available-for-sale securities (unaudited).................... 6 -- 6 ------- Comprehensive loss (unaudited)..... -- -- (6,673) ---- -------- ------- BALANCE AT JUNE 30, 2000 (UNAUDITED)...................... $(60) $(18,272) $31,777 ==== ======== =======
See accompanying notes. F-5 KOSAN BIOSCIENCES INCORPORATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------ --------------------- 1997 1998 1999 1999 2000 -------- -------- -------- --------- --------- (UNAUDITED) OPERATING ACTIVITIES Net loss.......................................... $(1,994) $(3,267) $(4,401) $(1,280) $(6,679) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................... 122 246 654 270 484 Amortization of stock-based compensation........ -- -- 535 98 2,553 Other stock-based compensation.................. -- -- 610 304 752 Issuance of convertible preferred stock for license fees.................................. -- -- -- -- 30 Loss on sale of investments..................... -- -- 41 -- -- Loss on disposal of property and equipment...... -- -- 10 -- -- Changes in assets and liabilities: Other receivables............................. (136) (8) (330) (76) 386 Prepaid expenses and other current assets..... (42) (156) (116) (162) 72 Other assets and notes receivable from related parties..................................... 8 28 (267) (215) (1,014) Accounts payable.............................. 8 282 153 (74) 264 Accrued liabilities........................... 46 (17) 528 327 583 Deferred revenue.............................. (8) 1,719 (1,310) (250) (284) ------- ------- ------- -------- -------- Net cash used in operating activities....... (1,996) (1,173) (3,893) $(1,058) $(2,853) ------- ------- ------- -------- -------- INVESTING ACTIVITIES Acquisition of property and equipment............. (111) (1,173) (1,828) (1,071) (808) Proceeds from sale of property and equipment...... 324 -- 2 -- -- Purchase of investments........................... (1,914) (21,419) (11,929) (6,030) (4,591) Proceeds from maturity of investments............. -- 10,972 14,733 7,522 719 ------- ------- ------- -------- -------- Net cash provided by (used in) investing activities................................ (1,701) (11,620) 978 421 (4,680) ------- ------- ------- -------- -------- FINANCING ACTIVITIES Proceeds from issuance of common stock............ -- 1 25 -- 44 Proceeds from issuance of convertible preferred stock, net of issuance costs.................... 2,385 14,923 -- -- 24,600 Proceeds from equipment loans..................... -- 870 1,336 1,336 1,308 Principal payments under capital lease obligations..................................... (48) (34) (128) (57) (67) Principal payments under equipment loans.......... -- (23) (335) (108) (369) ------- ------- ------- -------- -------- Net cash provided by financing activities... 2,337 15,737 898 1,171 25,516 ------- ------- ------- -------- -------- Net decrease in cash and cash equivalents........... (1,360) 2,944 (2,017) 534 17,983 Cash and cash equivalents at beginning of period.... 1,465 105 3,049 3,049 1,032 ------- ------- ------- -------- -------- Cash and cash equivalents at end of period.......... $105 $3,049 $1,032 $3,583 $19,015 ======= ======= ======= ======== ======== SUPPLEMENTAL DISCLOSURES Interest expense paid in cash....................... $56 $80 $196 $43 $161 ======= ======= ======= ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock under note receivable...... $-- $275 $74 $-- $298 Fixed assets acquired under capital lease........... 403 35 -- -- -- Deferred stock-based compensation................... -- -- 2,912 541 11,082
See accompanying notes. F-6 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OVERVIEW Kosan Biosciences Incorporated (the "Company") was incorporated under the laws of the state of California on January 6, 1995. In July 2000, the Company was reincorporated under the laws of the state of Delaware. The Company was considered to be in the development stage through December 31, 1998. The Company uses its technology to develop drug candidates from a class of natural product compounds known as polyketides by manipulating the natural process by which they are made. The Company's product opportunities currently target the areas of infectious disease, gastrointestinal motility disorders, mucus hypersecretion, cancer, immunosuppression and nerve regeneration. The Company has funded its operations primarily through sales of convertible preferred stock, contract payments under our collaboration agreement, equipment financing arrangements and government grants. Prior to achieving profitable operations, the Company intends to fund operations through the additional sale of equity securities, strategic collaborations and debt financing. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. INTERIM FINANCIAL INFORMATION The financial information at June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited but, in the opinion of management, has been prepared on the same basis as the annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for such periods. Results for the six months ended June 30, 2000 are not necessarily indicative of the results to be expected for any subsequent period. INITIAL PUBLIC OFFERING In March, 2000, the Board of Directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission to sell shares of its common stock to the public. If the initial public offering is completed under the terms presently anticipated, all of the convertible preferred stock outstanding will automatically convert into 12,220,719 shares of common stock. Unaudited pro forma stockholders' equity, as adjusted for the assumed conversion of the preferred stock, is set forth on the balance sheet. UNAUDITED PRO FORMA INFORMATION The unaudited pro forma stockholders' equity at June 30, 2000 has been adjusted for the assumed conversion of all outstanding shares of convertible preferred stock upon the completion of the Company's initial public offering. F-7 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. The Company limits its concentration of risk by diversifying its investments among a variety of issuers. The Company classifies all investment securities as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Available-for-sale investments are recorded at fair value determined based on quoted market prices, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term. REVENUE RECOGNITION The Company recognizes license and other upfront fees on a ratable basis over the term on the respective agreement. Milestone payments are recognized upon successful completion of a performance milestone event. Contract revenues related to collaborative research and development agreements and government grants are recognized on a ratable basis as services are performed. Any amounts received in advance of performance are recorded as deferred revenue. RESEARCH AND DEVELOPMENT Research and development expenses consist of costs incurred for Company-sponsored and collaborative research and development activities. These costs consist of direct and indirect internal costs related to specific projects as well as fees paid to other entities which conduct certain research activities on behalf of the Company. Research and development expenses under the government grants and collaborative agreements approximated the revenue recognized, less milestone payments received under such arrangements for the years ended December 31, 1998 and 1999 and for the six months ended June 30, 1999 and 2000. NET LOSS PER SHARE Basic and diluted net loss per common share are presented in conformity with the Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. Following the guidance given by the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock that has been issued or granted for nominal F-8 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of the basic and diluted net loss per common share as if these shares had been outstanding for all periods presented. To date, the Company has not issued or granted shares for nominal consideration. In accordance with SFAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss is not presented separately as the Company is in a net loss position. Pro forma basic and diluted net loss per common share, as presented in the statement of operations, has been computed for the year ended December 31, 1999 and for the six months ended June 30, 2000 as described above, and also gives effect to the conversion of the convertible preferred stock which will automatically convert to common stock immediately prior to the completion of the Company's initial public offering (using the if-converted method) from the original date of issuance. The following table presents the calculation of basic, diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------ --------------------- 1997 1998 1999 1999 2000 -------- -------- -------- --------- --------- (UNAUDITED) Net loss attributable to common stockholders.............................. $(1,994) $(3,267) $(4,401) $(1,280) $(17,946) ======= ======= ======= ======= ======== Weighted-average shares of common stock outstanding............................... 4,373 4,453 5,273 5,188 6,248 Less: weighted-average shares subject to repurchase................................ (279) (183) (764) (758) (1,219) ------- ------- ------- ------- -------- Weighted-average shares used in computing basic and diluted net loss per share............ 4,094 4,270 4,509 4,430 5,029 ======= ======= ======= ======= ======== Basic and diluted net loss per share........ $ (0.49) $ (0.77) $ (0.98) $ (0.29) $ (3.57) ======= ======= ======= ======= ======== Pro forma: Shares used above........................... 4,509 5,029 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock (unaudited)... 9,809 11,027 ------- -------- Shares used in computing pro forma basic and diluted net loss per share (unaudited)............................... 14,318 16,056 ======= ======== Pro forma basic and diluted net loss per share (unaudited)......................... $ (0.31) $ (1.12) ======= ========
The Company has excluded all convertible preferred stock, outstanding stock options and shares subject to repurchase from the calculation of diluted net loss per common share because all such securities are antidilutive for all applicable periods presented. The total number of shares excluded from the calculations of diluted net loss per share, prior to application of the treasury stock method for F-9 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) options was 104,400, 1,414,800 and 1,367,700 for the years ended December 31, 1997, 1998 and 1999, respectively and 1,560,000 and 1,141,800 for the six months ended June 30, 1999 and 2000, respectively. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share. See Note 9 for further information on these securities. STOCK-BASED COMPENSATION The Company accounts for common stock options granted to employees using the intrinsic value method and, thus, recognizes no compensation expense for options granted with exercise prices equal to or greater than the deemed fair value of the Company's common stock on the date of the grant. Stock compensation expense for options granted to non-employees has been determined in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and EITF 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying securities vest. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), at December 31, 1998. Under SFAS 130, the Company is required to display comprehensive income and its components as part of the Company's full set of financial statements. Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in equity of the Company that are excluded from net income. Specifically, SFAS 130 requires unrealized holding gains and losses on the Company's available-for-sale securities, which were reported separately in shareholders' equity, to be included in accumulated other comprehensive income. INCOME TAXES Since inception, the Company has recognized income taxes under the liability method. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. SEGMENT REPORTING The Company has adopted the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 established standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company did not have any separately reportable business segments as of December 31, 1999. F-10 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS DERIVATIVE INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through net income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of asset, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. SFAS 133 is effective for years beginning after June 15, 2000. The Company does not currently hold any derivatives and does not expect this pronouncement to materially impact the results of its operations. REVENUE RECOGNITION In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its current revenue recognition principles comply with SAB 101. SOFTWARE COSTS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. The Company has no capitalized software at December 31, 1999, therefore, the adoption of this statement did not have a significant impact on the Company's results of operations or financial condition. 2. COLLABORATIVE RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE In September 1998, the Company signed a collaborative agreement with The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson companies. Under the terms of the agreement, the Company will use its technologies to produce novel macrolide antibiotics on a "best efforts" basis. The agreement provides for the Company to receive certain payments, including payments for research and development costs for at least two years, and receive payments for reaching certain research and development milestones. The collaborative partner received exclusive worldwide rights to the products developed in the field of use as defined in the agreement. The development, marketing, and sale of drugs resulting from the collaboration will be undertaken by the partner and should the development efforts result in a marketable product, the Company will receive royalty payments based on product sales. Upon the execution of the collaborative agreement the Company received an initial up-front fee of $1.0 million which was deferred and will be recognized on a ratable basis over the term of the agreement. For the years ended December 31, 1998 F-11 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 2. COLLABORATIVE RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS (CONTINUED) and 1999 and the six months ended June 30, 1999 and 2000, the Company recognized $969,000, $5.0 million, $2.9 million and $2.1 million, respectively, of contract revenues pursuant to this agreement which represents 99%, 96%, 96% and 100% of the contract revenues for fiscal year 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively. Included in the six months ended June 30, 1999 and the year ended December 31, 1999 was $1.0 million and $1.2 million, respectively, of milestones earned under this agreement. LICENSE AGREEMENTS The Company entered into exclusive license agreements with The Board of Trustees of The Leland Stanford Junior University and with the President and Fellows of Harvard College in March 1996 and December 1998, respectively. These licenses provide the Company with certain technology and related patent rights and materials for the production of polyketides. Under the terms of the agreements, the Company pays annual license or maintenance fees and will pay milestones and royalties on net sales of products originating from the licensed technology. 3. INVESTMENTS The amortized cost and fair value of securities, with gross unrealized gains and losses, were as follows (in thousands):
1998 1999 ------------------------------------------------ ------------------------------------------------ GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Debt securities: US treasury.......... $ 2,967 $ 2 $ -- $ 2,969 $1,300 $ -- $(10) $1,290 US agency notes...... 3,298 -- (8) 3,290 -- -- -- -- Corporate bonds...... 1,000 1 -- 1,001 1,000 -- (10) 990 Asset-backed securities........... 5,096 -- (4) 5,092 7,198 1 (47) 7,152 ------- ---- ---- ------- ------ ---- ---- ------ $12,361 $ 3 $(12) $12,352 $9,498 $ 1 $(67) $9,432 ======= ==== ==== ======= ====== ==== ==== ======
The fair value of available-for-sale debt securities by contractual maturity at December 31, 1999 were as follows: Within 1 year............................................... $ 990 Greater than 1 year less than 5 years....................... 1,290 Mortgage-backed securities.................................. 7,152 ------ $9,432 ======
F-12 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):
DECEMBER 31, ------------------- JUNE 30, 1998 1999 2000 -------- -------- ----------- (UNAUDITED) Computer equipment and software.................. $ 249 $ 362 $ 403 Office furniture................................. 138 165 191 Lab equipment.................................... 1,400 2,228 2,920 Leasehold improvements........................... 42 825 874 ------ ------ ------- 1,829 3,580 4,388 Less accumulated depreciation and amortization... (422) (993) (1,414) ------ ------ ------- $1,407 $2,587 $ 2,974 ====== ====== =======
Depreciation expense was $246,000 and $636,000 for the years ended December 31, 1998 and 1999, respectively and $262,000 and $421,000 for the six months ended June 30, 1999 and 2000, respectively. Property and equipment financed under capital leases amounted to $562,000 at December 31, 1998 and 1999 and June 30, 2000. Accumulated amortization related to this property and equipment amounted to $264,000, $378,000 and $490,000 at December 31, 1998 and 1999 and June 30, 2000, respectively. 5. CAPITAL LEASES AND EQUIPMENT FINANCING The Company leases certain equipment and facility improvements under noncancelable capital leases and debt obligations. As of December 31, 1999, future minimum lease and loan payments under these obligations are as follows (in thousands):
CAPITAL LEASES EQUIPMENT LOANS -------------- --------------- Year ended December 31,......................... 2000.......................................... $ 162 $ 627 2001.......................................... 168 627 2002.......................................... 9 688 2003.......................................... -- 324 ----- ------ Total minimum lease payments.................... 339 2,266 Less amount representing interest............... (45) (395) ----- ------ Present value of net minimum lease payments..... 294 1,871 Less current portion............................ (127) (447) ----- ------ Long-term portion............................... $ 167 $1,424 ===== ======
In 1997, the Company entered into a capital lease line agreement for up to $1.0 million in aggregate borrowings. Financing under this lease line was available through June 1998, at which time approximately $569,000 had been utilized and $431,000 was allowed to expire. In August 1998, the Company entered into a $2.2 million equipment loan agreement which was fully utilized by June 1999. The terms of the lease and loan obligations are for four years. The equipment loans have a balloon payment at the end of the term. The interest rates of each of the leases and loans are fixed at F-13 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 5. CAPITAL LEASES AND EQUIPMENT FINANCING (CONTINUED) the time of the draw down, with the interest rates range from 10.55% to 10.96%. Obligations under the leases and loans are secured by the assets financed under the leases. In January 2000, the Company secured a $2.0 million line of credit which is available for draw down through December 2000. Each note will have a term of 43 months and have a balloon payment at the end of the term. The Company borrowed on this line of credit to fund equipment purchases totaling $823,000 and $485,000 in January 2000 and May 2000, respectively. 6. FACILITY LEASES In March 1999, the Company moved its facilities from Burlingame, California to Hayward, California. The Company leases its new facility under a noncancelable operating lease with no renewal options, which commenced in February 1999 and expires in 2003. Minimum annual rental commitments under the operating lease at December 31, 1999 are as follows (in thousands): Year ended December 31, 2000...................................................... $1,081 2001...................................................... 1,118 2002...................................................... 1,144 2003...................................................... 682 ------ Total minimum payments...................................... $4,025 ======
In September 1999, the Company terminated its Burlingame facility lease agreement and at the same time, the rights to the Company's sublease agreement under this facility lease was bought out by the former landlord. In connection with this buy-out, the Company received a $170,000 termination fee which was recorded as other income. Rent expense for operating leases was approximately $181,000, $204,000, $1.2 million, $577,000 and $686,000 for the years ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively. The sublease income was approximately $100,000, $14,000, $159,000, $97,000 and $0 for the years ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively. 7. ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands):
DECEMBER 31, ------------------- JUNE 30, 1998 1999 2000 -------- -------- ----------- (UNAUDITED) Facilities related.................................. $ -- $280 $ 430 Compensation........................................ 37 163 409 Professional fees................................... 40 120 87 Other............................................... 21 63 283 ---- ---- ------ $ 98 $626 $1,209 ==== ==== ======
F-14 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 8. RELATED PARTY TRANSACTIONS In December 1998 and September 1999, the Company issued promissory notes to an officer and to a director totaling $346,500 for the exercise of certain stock options. These notes bear interest of 4.47% and 5.89% per annum, compounded semiannually, and the principal and accrued interest is repayable three years from the date of issuance. During the first six months of 2000, the Company received additional promissory notes from three officers and various employees totaling $298,000 for the exercise of stock options for 997,002 shares of common stock. These notes bear interest between 6.46% and 6.60% with terms of 3 years. These are full recourse notes secured in part by a pledge of the Company's common stock owned. The Company issued full recourse loans to certain employees, of which $12,000 and $87,000 were outstanding at December 31, 1998 and 1999, respectively. These loans bear interest at rates ranging from 4.47% to 5.43% with terms ranging from 4 to 5 years. The loans were issued for the purchase of the employees' residence, are secured by deeds of trust and are classified on the balance sheet as other assets. During the first six months of 2000, the Company issued additional full recourse loans to two employees and two officers totaling $190,000 and $453,000, respectively. These notes bear interest between 6.30% and 6.62% with terms ranging from 3 to 5 years. The loans are secured by deeds of trust and are classified on the balance sheet as other assets. One of the notes to an officer totaling $53,000 will be forgiven upon the third anniversary date of the officer's employment. The Company entered into a 14-month evaluation agreement with Savia Corporation and DNA Plant Technologies ("DNAP") effective March 1, 1998. The evaluation program was for the development of intellectual property and technology for use in the field. The Company received revenue of approximately $90,000 upon signing the agreement for work performed to that date. This agreement was subsequently terminated effective December 31, 1999. Under the terms of the termination agreement the Company will receive approximately $160,000 for development services performed through December 31, 1999, which is included in revenue and other receivables in 1999. A board member of the company which controls DNAP is also a board member of the Company. 9. STOCKHOLDERS' EQUITY STOCK SPLIT In September 2000, the Company split its common stock 3-for-1 and increased the authorized shares of common stock to 36,000,000 shares. All common stock and options to purchase common stock and per share amounts in the accompanying financial statements have been adjusted retroactively to reflect the stock split. The conversion ratios of the respective series of convertible preferred stock were automatically adjusted to reflect the stock split. During January 1997, the Company converted each existing share of "Original" Series A convertible preferred stock into 2.28570 shares of common stock and 0.23810 shares of Series A convertible preferred stock. Each existing share of "original" Series B convertible preferred stock was converted into 0.39285 shares of common stock and 0.86905 shares of Series A convertible preferred F-15 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) stock. Outstanding shares of the Company's preferred stock were converted to Series A convertible preferred stock and common stock as follows:
SHARES OF CONVERTIBLE SHARES SERIES A SHARES OF OUTSTANDING SERIES A PREFERRED COMMON STOCK COMMON STOCK BEFORE CONVERSION STOCK AFTER CONVERSION AFTER SERIES CONVERSION RATE CONVERSION RATE CONVERSION - ------ ----------- ---------- ----------- ------------ ------------ "Original" A...................... 280,512 0.23810 66,790 2.28570 641,166 "Original" B...................... 935,476 0.86905 812,976 0.39285 367,500
Convertible preferred stock outstanding was as follows (in thousands, except share data):
DECEMBER 31, 1999 JUNE 30, 2000 -------------------------------------------- -------------------------------------------- SHARES SHARES SHARES ISSUED AND REDEMPTION/ SHARES ISSUED AND REDEMPTION/ DESIGNATED OUTSTANDING LIQUIDATION VALUE DESIGNATED OUTSTANDING LIQUIDATION VALUE ---------- ----------- ----------------- ---------- ----------- ----------------- Convertible preferred stock: Series A................ 1,480,000 1,451,195 $ 6,095 1,480,000 1,451,195 6,095 Series B................ 1,818,182 1,818,182 15,000 1,818,182 1,818,182 15,000 Series C................ -- -- -- 1,050,000 804,196 24,930 --------- --------- ------- --------- --------- ------- Total................. 3,298,182 3,269,377 $21,095 4,348,182 4,073,573 $46,025 ========= ========= ======= ========= ========= =======
Upon the closing of an initial public offering, each of the outstanding 4,073,573 shares of convertible preferred stock will be automatically converted into three shares of common stock. SERIES A CONVERTIBLE PREFERRED STOCK On January 31, 1997, the Company completed a private placement for the sale of 571,429 shares of Series A convertible preferred stock resulting in gross proceeds of $2.4 million. The Series A convertible preferred stock is convertible at any time after the issuance date, at the option of the holder, into a number of shares of common stock equal to the stated value divided by the conversion price. Additionally, the Series A convertible preferred stock shall be automatically converted into common stock upon the closing of an initial public offering where the gross proceeds are at least $15.0 million and the offering price is not less than $7.00 per share. The conversion price of $1.40 will be adjusted for any stock split or combination, consolidation, stock dividend, and recapitalization. The Series A convertible preferred stockholders are entitled to vote together with Series B convertible preferred stockholders, Series C convertible preferred stockholders and common stockholders as a single class on all matters, except as otherwise required by law. The number of votes to which each Series A convertible preferred stockholder will be entitled will equal the maximum number of shares of common stock into which each preferred stock will be converted. In the event of liquidation, dissolution or winding up of the Company, funds available for distribution to stockholders shall be paid to the holders of Series A convertible preferred stock in an amount per share equal to $4.20 (adjusted for any stock dividend, split or combination, recapitalization, consolidation with respect to such shares) prior to any distribution to holders of common stock. If there are inadequate funds available to provide a full payment of the liquidation preference amount to the Series A, B and C convertible preferred F-16 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) stockholders, then the assets available for distribution shall first be paid to the Series C convertible preferred stockholders. Noncumulative annual dividends of $0.25 per share (as adjusted for any stock dividend, combination, or split with respect to these shares), payable quarterly, will be paid if and when declared by the board of directors. SERIES B CONVERTIBLE PREFERRED STOCK On April 3, 1998, the Company completed a private placement for the sale of 1,818,182 shares of Series B convertible preferred stock resulting in gross proceeds of $15.0 million. The Series B convertible preferred stock is convertible into a number of shares of common stock equal to the stated value divided by the conversion price. Additionally, the Series B convertible preferred stock shall be automatically converted into common stock upon the closing of an initial public offering where the gross proceeds are at least $15.0 million and the offering price is not less than $7.00 per share. The conversion price of $2.75 will be adjusted for any stock split or combination, consolidation, stock dividend, and recapitalization. The Series B convertible preferred stockholders are entitled to vote together with the Series A and Series C convertible preferred stockholders and common stockholders as a single class on all matters, except as otherwise required by law. The number of votes to which each Series B convertible preferred stockholder will be entitled will equal the maximum number of shares of common stock into which each preferred stock is convertible. In the event of a liquidation, the holders of Series B convertible preferred stock shall be paid an amount per share equal to $8.25 (adjusted for any stock split or combination, consolidation, stock dividend, and recapitalization respect to such shares) prior to any distribution to holders of common stock. If there are inadequate funds available to provide a full payment of the liquidation preference amount to the Series A, B and C preferred stockholders, then the assets available for distribution shall first be paid to the Series C convertible preferred stockholders. Noncumulative annual dividends of $0.49 per share (as adjusted for any stock dividend, combination, or split with respect to these shares), payable quarterly, will be paid if and when declared by the board of directors. SERIES C CONVERTIBLE PREFERRED STOCK On March 30, 2000, the Company completed a private placement for the sale of 804,196 shares of Series C convertible preferred stock resulting in gross proceeds of $24.9 million. The issuance of the Series C convertible preferred stock resulted in a beneficial conversion feature in accordance with Emerging Issues Task Force Consensus No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features." The beneficial conversion feature was reflected as a deemed dividend in the Statement of Operations of $11.3 million for the six months ended June 30, 2000. The Series C convertible preferred stock is convertible at any time after the issuance date, at the option of the holder, into a number of shares of common stock equal to the stated value divided by the conversion price. Additionally, the Series C convertible preferred stock shall be automatically converted into common stock upon the closing of an initial public offering where the gross proceeds are at least $25.0 million and the offering price is not less than $11.00 per share. The conversion price of $10.33 will be adjusted for any stock split or combination, consolidation, stock dividend, and recapitalization. The Series C convertible preferred stockholders are entitled to vote together with Series A and B convertible preferred stockholders and common stockholders as a single class on all matters, except as otherwise required by law. The number of votes to which each Series C convertible preferred F-17 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) stockholder will be entitled will equal the maximum number of shares of common stock into which each preferred stock will be converted. In the event of liquidation, dissolution or winding up of the Company, funds available for distribution to stockholders shall be paid to the holders of Series C convertible preferred stock in an amount per share equal to $31.00 (adjusted for any stock dividends, split or combination, recapitalization, consolidation with respect to such shares) prior to any distribution to holders of Series A and Series B convertible preferred stock and common stock. If there are inadequate funds available to provide a full payment of the liquidation preference amount to the Series A, B and C convertible preferred stockholders, then the assets available for distribution shall first be paid to the Series C convertible preferred stockholders. Noncumulative annual dividends of $1.86 per share (as adjusted for any stock dividend, combination, or split with respect to these shares), payable quarterly, will be paid if and when declared by the board of directors. COMMON STOCK Under the terms of the 1996 Stock Option Plan (the "1996 Plan"), options are exercisable when granted and such shares are subject to repurchase upon termination of employment or consulting agreement. Repurchase rights lapse over the vesting periods which are generally four years. Should the employment of the holders of common stock subject to repurchase terminate prior to full vesting of the outstanding shares, the Company may repurchase all unvested shares at a price per share equal to the original exercise price. At December 31, 1999, 742,659 shares were subject to such repurchase terms. 1996 STOCK OPTION PLAN In 1996, the board of directors adopted the 1996 Plan that provides for the granting of incentive stock options and nonstatutory stock options to employees, officers, directors and consultants of the Company. Incentive stock options may be granted with exercise prices not less than fair value, and nonstatutory stock options may be granted with an exercise price not less than 85% of the fair value of the common stock on the date of grant. The fair value is determined by the board of directors. Stock options granted to a stockholder owning more than 10% of voting stock of the Company may be granted with an exercise price of not less than 110% of the fair value of the common stock on the date of grant. Options expire no later than ten years from the date of the grant. The number of shares, terms, and exercise period are determined by the board of directors. Options generally vest at 25% per year over a four-year period. 2000 EMPLOYEE STOCK PURCHASE PLAN In March 2000, subject to stockholder approval, the Company adopted its 2000 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 300,000 shares of the Company's common stock have been reserved for issuance under the Purchase Plan. In addition, the Purchase Plan provides for annual increases in the number of shares available for issuance under the Purchase Plan on each anniversary date of the effective date of the offering. The number of shares reserved automatically is equal to the lesser of 150,000 shares, 0.75% of the outstanding shares on the date of the annual increase or such amount as may be determined by the board. The Purchase plan permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common F-18 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) stock on the first day of the offering or 85% of the fair market value of the Company's common stock on the purchase date. The initial offering period will commence on the effective date of the offering. 2000 NON-EMPLOYEE DIRECTORS PLAN In March 2000, subject to stockholder approval, the Company adopted the 2000 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") and reserved 300,000 shares of common stock for issuance thereunder. Each non-employee director who becomes a director of the Company will be automatically granted a non-statutory stock option to purchase 7,500 shares of common stock on the date on which such person first becomes a director and will vest over four years. Beginning with the 2001 Annual Stockholders Meeting and each year thereafter, each non-employee director will automatically be granted a non-statutory option to purchase 3,750 shares of common stock which will vest in one year from the date of grant. The exercise price of options under the Directors' Plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the Directors' Plan is ten years. The Directors' Plan will terminate in March 2010, unless terminated in accordance with the provisions of the Directors' Plan. F-19 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) A summary of stock option activity is as follows:
OPTIONS OUTSTANDING ------------------------------------------------------- WEIGHTED SHARES AVAILABLE NUMBER OF EXERCISE AGGREGATE AVERAGE FOR GRANT SHARES PRICE PRICE EXERCISE PRICE ---------------- ---------- ------------ ---------- -------------- Reserved at inception......... 750,000 -- -- $ -- $ -- Granted..................... (198,000) 198,000 $0.08 16,500 $0.08 ---------- ---------- ---------- Balances at December 31, 1996........................ 552,000 198,000 16,500 $0.08 Granted..................... (86,400) 86,400 $0.08-$0.15 11,960 $0.14 Canceled.................... 180,000 (180,000) $0.08 (15,000) $0.08 ---------- ---------- ---------- Balances at December 31, 1997........................ 645,600 104,400 13,460 $0.13 Additional reserved......... 1,770,000 -- -- -- -- Granted..................... (2,085,000) 2,085,000 $0.15-$0.37 671,775 $0.32 Canceled.................... 12,576 (12,576) $0.08-$0.33 (1,978) $0.16 Exercised................... -- (762,024) $0.08-$0.37 (276,262) $0.36 ---------- ---------- ---------- Balances at December 31, 1998........................ 343,176 1,414,800 406,995 $0.29 Additional reserved......... 180,000 -- -- -- -- Granted..................... (464,100) 464,100 $0.33 154,700 $0.33 Canceled.................... 218,607 (218,607) $0.15-$0.33 (66,023) $0.30 Exercised................... -- (292,593) $0.08-$0.37 (99,127) $0.34 ---------- ---------- ---------- Balances at December 31, 1999........................ 277,683 1,367,700 396,545 $0.29 Additional reserved (unaudited)............... 2,400,000 -- -- -- -- Granted (unaudited)......... (953,700) 953,700 $0.42-$4.00 1,501,775 $1.57 Canceled (unaudited)........ 36,324 (36,324) $0.15-$2.00 (14,812) $0.41 Exercised (unaudited)....... -- (1,143,276) $0.15-$1.00 (342,008) $0.30 ---------- ---------- ---------- Balances at June 30, 2000 (unaudited)................. 1,760,307 1,141,800 $1,541,500 $1.35 ========== ========== ==========
Options vested at December 31, 1998 and 1999 and June 30, 2000 were 119,034, 392,163 and 106,950, respectively. F-20 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) The options outstanding and currently exercisable by exercise price at December 31, 1999 are as follows:
OPTIONS OUTSTANDING AND EXERCISABLE - ------------------------------------------------- NUMBER OPTIONS VESTED OUTSTANDING WEIGHTED-AVERAGE --------------------------------- WEIGHTED-AVERAGE AND REMAINING NUMBER OF WEIGHTED-AVERAGE EXERCISE PRICE EXERCISABLE CONTRACTUAL LIFE OPTIONS VESTED EXERCISE PRICE - ---------------- ----------- ---------------- -------------- ---------------- (IN YEARS) $0.08 15,000 7.02 10,938 $0.08 $0.15 303,300 7.97 163,995 $0.15 $0.33 1,049,400 9.05 217,230 $0.33 --------- ------- 1,367,700 8.79 392,163 $0.25 ========= =======
STOCK-BASED COMPENSATION The Company has elected to follow the provision of APB Opinion No. 25 and related interpretations in the accounting for the stock-based awards because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock-based awards. During the year ended December 31, 1999, in connection with the grant of stock options to employees, the Company recorded deferred stock-based compensation totaling $2.9 million, representing the difference between the deemed fair market value of the common stock on the date such options were granted and the applicable exercise prices. Such amount is included as a reduction of stockholders' equity and is being amortized using the graded vesting method over the vesting period of the individual options, which is generally four years. The Company recognized amortization of deferred stock-based compensation of $535,000 for the year ended December 31, 1999 and $2.6 million for the six months ended June 30, 2000. As of June 30, 2000, the Company has issued non-employee stock options totaling 423,750 shares with exercise prices ranging from $0.15 to $2.00 and terms of 2 to 5 years. Additionally, the Company had issued 210,000 shares of restricted stock to non-employees at a price of $0.001 per share. The restricted shares vest over 5 years. The Company records compensation related to the grants of stock options and restricted stock to non-employees in accordance with SFAS 123 and EITF 96-18 using the Black-Scholes Model with the following assumptions: risk-free interest rate of 5%; volatility of 70%, expected lives of 2 to 3 years; and a dividend yield of zero. The Company recognized other stock-based compensation for grants to non-employees of $610,000 and $752,000 for the year ended December 31, 1999 and the six months ended June 30, 2000. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying awards vest. Pro forma net loss and net loss per share information is required by SFAS 123 which also requires that the information be determined as if the Company had accounted for its employee stock options granted since inception under the fair value method of that statement. The fair value of these options was estimated at the date of grant using a minimum value option pricing model with the following assumptions: risk-free interest rate of 5.0%; a weighted-average expected life of the option of four years from the grant date for grants under the 1996 Plan; and a dividend yield of zero. F-21 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) The Company's pro forma information follows (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- Net loss: As reported..................................... $(1,994) $(3,267) $(4,401) Pro forma....................................... (1,994) (3,454) (4,772) Basic and diluted net loss per share: As reported..................................... $ (0.49) $ (0.77) $ (0.98) Pro forma....................................... (0.49) (0.81) (1.06)
10. INCOME TAXES As of December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $9.6 million and $4.1 million, respectively. The Company also had federal and California research and development tax credit carryforwards of approximately $300,000 and $200,000. The federal and state net operating loss and credit carryforwards will expire at various dates beginning in the year 2002 through 2019, if not utilized. Utilization of the federal and state net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting and the amount used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes as of December 31, are as follows (in thousands):
1998 1999 -------- -------- Deferred tax assets Net operating loss carryforwards........................ $ 2,100 $ 3,500 Research and development credits........................ 300 500 Capitalized research and development expenses........... 200 300 ------- ------- Total deferred tax assets................................. 2,600 4,300 Valuation allowance....................................... (2,600) (4,300) ------- ------- Net deferred taxes........................................ $ -- $ -- ======= =======
Due to the Company's lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $900,000 and $1.7 million during the years ended December 31, 1998 and 1999, respectively. F-22 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 11. SUBSEQUENT EVENTS (UNAUDITED) SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH In August 2000, the Company signed a collaboration and license agreement with the Sloan-Kettering Institute for Cancer Research relating to epothilones. Under the agreement, the Company will use its technologies to produce a specific epothilone compound to be tested in clinical trials and work collaboratively with Sloan-Kettering to develop new compounds and production methods and to conduct clinical trials. Additionally, the Company is required to pay to Sloan-Kettering an initial license fee and annual maintenance fees as well as payments for research and development costs, including costs of clinical trials, over a term of at least 24 months. If development efforts result in a marketable product, the Company will make royalty payments based on product sales as well as payments for reaching clinical development milestones. Estimated non-cancelable commitments under this agreement are approximately $700,000 in addition to internal development efforts under this agreement. EXTENSION OF COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT In August 2000, the Company amended its collaborative Research and Development Agreement with the R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson Companies. Under the terms of the agreement, subject to termination provisions, the research program and funding have been extended until at least December 28, 2001. F-23 [GRAPHIC -- BACKGROUND MAP] 5,000,000 SHARES [LOGO] COMMON STOCK -------------- PROSPECTUS , 2000 --------------------- LEHMAN BROTHERS CIBC WORLD MARKETS SG COWEN FIDELITY CAPITAL MARKETS a division of National Financial Services LLC Until , 2000 (25 days after commencement of the offering), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID ---------- SEC Registration Fee........................................ $ 24,288 NASD Fee.................................................... 11,200 Nasdaq Listing Fee.......................................... 9,500 Legal Fees and Expenses..................................... 350,000 Accounting Fees and Expenses................................ 350,000 Blue Sky Fees and Expenses.................................. 5,000 Transfer Agent Fees......................................... 10,000 Printing Fees and Expenses.................................. 450,000 Miscellaneous............................................... 40,012 Total..................................................... $1,250,000
- ------------------------ * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 145 of the Delaware General Corporation Law, the registrant's certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach or alleged breach of their duty of care. In addition, as permitted by Section 145 of the Delaware General Corporation Law, the bylaws of the registrant provide that: (1) the registrant is required to indemnify its directors and executive officers and persons serving in such capacities in other business enterprises (including, for example, subsidiaries of the registrant) at the registrant's request, to the fullest extent permitted by Delaware law, including in those circumstances in which indemnification would otherwise be discretionary; (2) the registrant may, in its discretion, indemnify employees and agents in those circumstances where indemnification is not required by law; (3) the registrant is required to advance expenses, as incurred, to its directors and executive officers in connection with defending a proceeding (except that it is not required to advance expenses to a person against whom the registrant brings a claim for breach of the duty of loyalty, failure to act in good faith, intentional misconduct, knowing violation of law or deriving an improper personal benefit; (4) the rights conferred in the bylaws are not exclusive, and the registrant is authorized to enter into indemnification agreements with its directors, executive officers and employees; and (5) the registrant may not retroactively amend the bylaw provisions in a way that it adverse to such directors, executive officers and employees. The registrant's policy is to enter into indemnification agreements with each of its directors and executive officers that provide the maximum indemnity allowed to directors and executive officers by Section 145 of the Delaware General Corporation Law and the bylaws, as well as certain additional procedural protections. In addition, such indemnity agreements provide that directors and executive officers will be indemnified to the fullest possible extent not prohibited by law against all expenses (including attorney's fees) and settlement amounts paid or incurred by them in any action or proceeding, including any derivative action by or in the right of the registrant, on account of their services as directors or executive officers of the registrant or as directors or officers of any other II-1 company or enterprise when they are serving in such capacities at the request of the registrant. The registrant will not be obligated pursuant to the indemnity agreements to indemnify or advance expenses to an indemnified party with respect to proceedings or claims initiated by the indemnified party and not by way of defense, except with respect to proceedings specifically authorized by the registrant's board of directors or brought to enforce a right to indemnification under the indemnity agreement, the registrant's bylaws or any statute or law. Under the agreements, the registrant is not obligated to indemnify the indemnified party (1) for any expenses incurred by the indemnified party with respect to any proceeding instituted by the indemnified party to enforce or interpret the agreement, if a court of competent jurisdiction determines that each of the material assertions made by the indemnified party in such proceeding was not made in good faith or was frivolous; (2) for any amounts paid in settlement of a proceeding unless the registrant consents to such settlement; (3) with respect to any proceeding brought by the registrant against the indemnified party for willful misconduct, unless a court determines that each of such claims was not made in good faith or was frivolous; (4) on account of any suit in which judgment is rendered against the indemnified party for an accounting of profits made from the purchase or sale by the indemnified party of securities of the registrant pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and related laws; (5) on account of the indemnified party's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct or a knowing violation of the law; (6) an account of any conduct from which the indemnified party derived an improper personal benefit; (7) on account of conduct the indemnified party believed to be contrary to the best interests of the registrant or its stockholders; (8) on account of conduct that constituted a breach of the indemnified party's duty of loyalty to the registrant or its stockholders; or (9) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. The indemnification provision in the bylaws and the indemnification agreements entered into between the registrant and its directors and executive officers, may be sufficiently broad to permit indemnification of the registrant's officers and directors for liabilities arising under the 1933 Act. Reference is made to the following documents filed as exhibits to this registration statement regarding relevant indemnification provisions described above and elsewhere herein:
EXHIBIT DOCUMENT NUMBER - -------- -------- Form of Underwriting Agreement.............................. 1.1 Certificate of Incorporation of Registrant.................. 3.1 Form of Amended and Restated Certificate of Incorporation of Registrant, to be effective upon closing of the offering.................................................. 3.2 Bylaws of Registrant, to be effective upon closing of the offering.................................................. 3.3 Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers.................................................. 4.1
II-2 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the Registrant sold an aggregate of 2,197,893 shares of unregistered common stock pursuant to the exercise of options granted by the registrant's board of directors as follows:
AGGREGATE NUMBER OF NUMBER OF RELATIONSHIP TO PURCHASE DATE SHARES SOLD INDIVIDUALS COMPANY PRICE - ---------------------------------- ----------- ----------- ----------------- --------- March 20, 1998 900 1 Employee $ 135 August 28, 1998 3,000 1 Consultant 450 December 10, 1998 8,124 1 Former employee 1,219 December 23, 1998 750,000 1 Director 275,000 July 20, 1999 16,875 1 Former employee 2,531 August 1999 57,375 3 Former employees 18,300 September 19, 1999 1,281 1 Former employee 192 September 22, 1999 195,000 1 Director 71,500 October 1, 1999 3,000 1 Former employee 250 November 12, 1999 4,062 1 Former employee 1,354 December 19, 1999 15,000 1 Former employee 5,000 January 26, 2000 15,000 1 Employee 2,250 February 21, 2000 697,500 3 Officers 196,750 February 2000 93,300 2 Employees 29,100 March 17, 2000 15,000 1 Consultant 5,000 March 2000 227,100 24 Employees 65,900 April 25, 2000 15,000 1 Officer 15,000 April 2000 63,000 2 Employees 21,000 May 2000 14,502 1 Employee 4,123 June 2000 2,874 2 Former employees 614
As to each director, officer, employee, former employee and consultant of Kosan who was issued such securities, Kosan relied upon Rule 701 of the Securities Act of 1933, as amended (the "Securities Act"). Each such person purchased securities of Kosan pursuant to a written contract between such person and Kosan; in addition, Kosan met the conditions imposed under Rule 701(b). On April 3, 1998 and April 16, 1998, the registrant sold 1,727,273 shares and 90,909 shares, respectively, of unregistered Series B convertible preferred stock at a price per share of $8.25 to certain investors for aggregate cash consideration of approximately $15 million. The registrant relied upon Section 4(2) of the Securities Act in connection with the sale of these shares. Each investor who was not an accredited investor represented to the registrant that he or she had such knowledge and experience in financial and business matters that he or she was capable of evaluating the merits and risks of the investment. On March 30, 2000, the registrant sold in the aggregate 804,196 shares of unregistered Series C convertible preferred stock at a price per share of $31.00 to certain investors for aggregate cash consideration of approximately $24.9 million. The registrant relied upon Regulation D, Rule 506, of the Securities Act in connection with the sale of these shares. The sale of the Series C preferred stock was made in compliance with all the terms of Rules 501 and 502 of Regulation D, there were no more than 35 investors (as calculated pursuant to Rule 501(e) of Regulation D), and each investor who was not an accredited investor represented to the registrant that he or she had such knowledge and experience in financial and business matters that he or she was capable of evaluating the merits and risks of the investment. II-3 From inception through June 30, 2000, we granted stock options and stock purchase rights to acquire 1,272,400 shares of Common Stock at prices ranging from $0.25 to $12.00 per share to employees, consultants and directors pursuant to our 1996 stock option plan, for aggregate consideration of $2,325,310. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of Registrant, as amended. 3.2** Form of Amended and Restated Certificate of Incorporation of Registrant to be filed upon the closing of the offering made under the Registration Statement. 3.3** Bylaws of Registrant 3.4** Bylaws of Registrant to be effective upon the closing of the offering made under the Registration Statement. 4.1 Form of Registrant's Common Stock Certificate. 4.2** Third Amended and Restated Registration Rights Agreement, dated March 30, 2000 between Registrant and certain shareholders. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 9.1** Third Amended and Restated Voting Agreement between the Registrant and certain shareholders, dated March 30, 2000. 10.1** Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers. 10.2** 1996 Stock Option Plan, as amended. 10.3 2000 Employee Stock Purchase Plan and related agreements. 10.4** 2000 Non-Employee Director Stock Option Plan and related agreements. 10.5** Amended and Restated Consulting Agreement between Registrant and Chaitan Khosla, Ph.D., dated December 7, 1998. 10.6** Consulting Agreement between Registrant and Christopher Walsh, Ph.D., dated December 14, 1995. 10.7+** Research and License Agreement between Registrant and The Sloan-Kettering Institute for Cancer Research, dated August 25, 2000. 10.8+ License Agreement between the Registrant and The Board of Trustees of The Leland Stanford Junior University, dated March 11, 1996. 10.9+ Amendment No. 1 to License Agreement with the Board of Trustees of The Leland Stanford Junior University, dated March 1996; Letter to Mona Wan to confirm the agreement between Registrant and the Board of Trustrees of The Leland Stanford Junior University, dated September 21, 1998; and Amendment No. 3 to License Agreement, dated March 10, 2000. 10.10+ License Agreement between Registrant and President and Fellows of Harvard College, dated December 2, 1998.
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EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.11+ Research and License Agreement between Registrant and Ortho-McNeil Pharmaceutical Corporation, and The R.W. Johnson Pharmaceutical Research Institute, dated September 28, 1998. 10.12+ Amendment No. 1 to the Research and License Agreement between the Registrant and Ortho-McNeil Pharmaceutical Corporation and The R.W. Johnson Pharmaceutical Research Institute, dated March 17, 2000. 10.13** Sublease Agreement between Registrant and Lynx Therapeutics, Inc., dated January 6, 1999. 10.14** Consent to Sublease Agreement between Spieker Properties L.P. and Lynx Therapeutics, Inc., dated September 17, 1999. 10.15** Master Equipment Lease between Registrant and Phoenix Leasing Incorporated, dated September 3, 1996. 10.16** Master Loan and Security Agreement between Registrant and Finova Technology Finance, Inc., dated August 25, 1998. 10.17** Commitment Letter between Registrant and Finova Technology Finance, Inc., dated August 24, 1998. 10.18** Commitment Letter between Registrant and Finova Capital Corporation, dated January 6, 2000 10.19** Restated Promissory Note from Shareholder by and between Registrant and Daniel V. Santi, M.D., Ph.D., dated December 23, 1998. 10.20** Promissory Note from Shareholder by and between Registrant and Chaitan Khosla, Ph.D., dated September 22, 1999. 10.21** Promissory Note from Shareholder by and between Registrant and Michael S. Ostrach, dated February 21, 2000. 10.22** Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated February 21, 2000. 10.23** Promissory Note from Shareholder by and between Registrant and Kevin Kaster, dated February 21, 2000. 10.24** Employment Agreement between Registrant and Daniel V. Santi, M.D., Ph.D., dated November 1, 1998. 10.25** Employment Agreement between Registrant and Kevin Kaster, dated July 20, 1998. 10.26** Employment Agreement between Registrant and Susan M. Kanaya, dated October 11, 1999. 10.27** Employment Agreement between Registrant and Brian W. Metcalf, Ph.D., dated March 15, 2000. 10.28** Form of Series C Stock Purchase Agreement between the Registrant and certain investors, dated March 30, 2000. 10.29** Evaluation Agreement among the Registrant, Savia Corporation and DNA Plant Technology Corporation, dated March 1, 1998. 10.30** Termination Agreement among Registrant, Savia Corporation and DNA Plant Technology Corporation, dated December 31, 1999. 10.31** Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated April 25, 2000. 10.32** Loan Agreement and Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated March 3, 2000 and March 31, 2000, respectively.
II-5
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.33** Promissory Note from Shareholder by and between Registrant and Brian Metcalf, dated May 30, 2000. 10.34+** Amendment No. 2 to the Research and License Agreement between Registrant and The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., dated August 31, 2000. 10.35 Employment Agreement between Registrant and Robert G. Johnson, Jr., dated September 5, 2000. 16.1** Letter from PricewaterhouseCoopers LLC, dated April 5, 2000 regarding a change in certified public accountants. 23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, Independent Auditors. 24.1** Power of Attorney. 27.1** Financial Data Schedule.
- ------------------------ * To be filed by amendment ** Previously filed + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment No. 3 to the registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hayward, State of California, on this 28th day of September 2000. KOSAN BIOSCIENCES INCORPORATED By: /s/ DANIEL V. SANTI -------------------------------------------- Daniel V. Santi CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints, jointly and severally, Daniel V. Santi and Michael S. Ostrach and each one of them, his true and lawful attorney-in-fact and agents, each with full power of substitution, for his and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and any registration statement related to the offering contemplated by this registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ PETER DAVIS ---------------------------------------- Director September 28, 2000 Peter Davis
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURES TITLE DATE ---------- ----- ---- Chief Executive Officer and * Chairman of the Board of ---------------------------------------- Directors (Principal September 28, 2000 Daniel V. Santi Executive Officer) Vice President, Finance and * Chief Financial Officer ---------------------------------------- (Principal Financial and September 28, 2000 Susan M. Kanaya Accounting Officer)
II-7
SIGNATURES TITLE DATE ---------- ----- ---- * ---------------------------------------- Director September 28, 2000 Peter Davis * ---------------------------------------- Director September 28, 2000 Jean Deleage * ---------------------------------------- Director September 28, 2000 Chaitan Khosla * ---------------------------------------- Director September 28, 2000 Christopher Walsh * ---------------------------------------- Director September 28, 2000 Raymond Whitaker
*By: /s/ DANIEL V. SANTI ----------------------------------- Daniel V. Santi ATTORNEY-IN-FACT
II-8 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of Registrant, as amended. 3.2** Form of Amended and Restated Certificate of Incorporation of Registrant to be filed upon the closing of the offering made under the Registration Statement. 3.3** Bylaws of Registrant 3.4** Bylaws of Registrant to be effective upon the closing of the offering made under the Registration Statement. 4.1 Form of Registrant's Common Stock Certificate. 4.2** Third Amended and Restated Registration Rights Agreement, dated March 30, 2000 between Registrant and certain shareholders. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 9.1** Third Amended and Restated Voting Agreement between the Registrant and certain shareholders, dated March 30, 2000. 10.1** Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers. 10.2** 1996 Stock Option Plan, as amended. 10.3 2000 Employee Stock Purchase Plan and related agreements. 10.4** 2000 Non-Employee Director Stock Option Plan and related agreements. 10.5** Amended and Restated Consulting Agreement between Registrant and Chaitan Khosla, Ph.D., dated December 7, 1998. 10.6** Consulting Agreement between Registrant and Christopher Walsh, Ph.D., dated December 14, 1995. 10.7+** Research and License Agreement between Registrant and The Sloan-Kettering Institute for Cancer Research, dated August 25, 2000. 10.8+ License Agreement between the Registrant and The Board of Trustees of The Leland Stanford Junior University, dated March 11, 1996. 10.9+ Amendment No. 1 to License Agreement with the Board of Trustees of The Leland Stanford Junior University, dated March 1996; Letter to Mona Wan to confirm the agreement between Registrant and the Board of Trustrees of The Leland Stanford Junior University, dated September 21, 1998; and Amendment No. 3 to License Agreement, dated March 10, 2000. 10.10+ License Agreement between Registrant and President and Fellows of Harvard College, dated December 2, 1998. 10.11+ Research and License Agreement between Registrant and Ortho-McNeil Pharmaceutical Corporation, and The R.W. Johnson Pharmaceutical Research Institute, dated September 28, 1998. 10.12+ Amendment No. 1 to the Research and License Agreement between the Registrant and Ortho-McNeil Pharmaceutical Corporation and The R.W. Johnson Pharmaceutical Research Institute, dated March 17, 2000. 10.13** Sublease Agreement between Registrant and Lynx Therapeutics, Inc., dated January 6, 1999. 10.14** Consent to Sublease Agreement between Spieker Properties L.P. and Lynx Therapeutics, Inc., dated September 17, 1999. 10.15** Master Equipment Lease between Registrant and Phoenix Leasing Incorporated, dated September 3, 1996. 10.16** Master Loan and Security Agreement between Registrant and Finova Technology Finance, Inc., dated August 25, 1998. 10.17** Commitment Letter between Registrant and Finova Technology Finance, Inc., dated August 24, 1998. 10.18** Commitment Letter between Registrant and Finova Capital Corporation, dated January 6, 2000 10.19** Restated Promissory Note from Shareholder by and between Registrant and Daniel V. Santi, M.D., Ph.D., dated December 23, 1998.
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.20** Promissory Note from Shareholder by and between Registrant and Chaitan Khosla, Ph.D., dated September 22, 1999. 10.21** Promissory Note from Shareholder by and between Registrant and Michael S. Ostrach, dated February 21, 2000. 10.22** Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated February 21, 2000. 10.23** Promissory Note from Shareholder by and between Registrant and Kevin Kaster, dated February 21, 2000. 10.24** Employment Agreement between Registrant and Daniel V. Santi, M.D., Ph.D., dated November 1, 1998. 10.25** Employment Agreement between Registrant and Kevin Kaster, dated July 20, 1998. 10.26** Employment Agreement between Registrant and Susan M. Kanaya, dated October 11, 1999. 10.27** Employment Agreement between Registrant and Brian W. Metcalf, Ph.D., dated March 15, 2000. 10.28** Form of Series C Stock Purchase Agreement between the Registrant and certain investors, dated March 30, 2000. 10.29** Evaluation Agreement among the Registrant, Savia Corporation and DNA Plant Technology Corporation, dated March 1, 1998. 10.30** Termination Agreement among Registrant, Savia Corporation and DNA Plant Technology Corporation, dated December 31, 1999. 10.31** Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated April 25, 2000. 10.32** Loan Agreement and Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated March 3, 2000 and March 31, 2000, respectively. 10.33** Promissory Note from Shareholder by and between Registrant and Brian Metcalf, dated May 30, 2000. 10.34+** Amendment No. 2 to the Research and License Agreement between Registrant and The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., dated August 31, 2000. 10.35 Employment Agreement between Registrant and Robert G. Johnson, Jr., dated September 5, 2000. 16.1** Letter from PricewaterhouseCoopers LLC, dated April 5, 2000 regarding a change in certified public accountants. 23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, Independent Auditors. 24.1** Power of Attorney. 27.1** Financial Data Schedule.
- ------------------------ * To be filed by amendment ** Previously filed + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. EX-3.1 2 a2026613zex-3_1.txt EXHIBIT 3.1 Exhibit 3.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF KOSAN BIOSCIENCES INCORPORATED SUSAN M. KANAYA and BLAIR W. STEWART certify that: 1. They are the Chief Financial Officer and Secretary, respectively, of Kosan Biosciences Incorporated, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware. 2. The date of filing this corporation's original Certificate of Incorporation with the Secretary of State of Delaware is April 6, 2000. 3. The following amendment of the Certificate of Incorporation has been duly approved by the board of directors of this corporation. 4. The first paragraph of Article IV of the corporation's Certificate of Incorporation is hereby amended and restated to read in its entirety as follows: "AUTHORIZATION TO ISSUE TWO CLASSES. The total number of shares of all classes of stock which the Corporation is authorized to issue is 40,348,182, consisting of 36,000,000 shares of Common Stock, par value of $0.001 per share (the "Common Stock") and 4,348,182 shares of Preferred Stock, par value of $0.001, 1,480,000 shares of which are designated "Series A Preferred Stock" (the "Series A Preferred"), 1,818,182 shares of which are designated "Series B Preferred Stock" (the "Series B Preferred"), and 1,050,000 shares of which are designated "Series C Preferred Stock" (the "Series C Preferred", and together with the Series A Preferred and the Series B Preferred, the "Preferred Stock"). Effective upon the date of the filing of this Certificate of Amendment with the Secretary of State of the State of Delaware, every one (1) share of the Corporation's Common Stock outstanding immediately prior to such time shall, without any action on the part of the respective holders thereof, be reclassified and constituted into three (3) shares of Common Stock." 5. The foregoing amendment of the Certificate of Incorporation has been duly approved by the board of directors of the corporation in accordance with the provisions of Section 242 of the Delaware General Corporation Law. 6. The foregoing amendment of the Certificate of Incorporation has been duly approved by the written consent of the stockholders in accordance with Sections 228 and 242 of the Delaware General Corporation Law. The total number of outstanding shares of Common Stock of the corporation is 2,295,098, and the total number of outstanding shares of Preferred Stock of the corporation is 4,073,573. The number of shares held by stockholders who consented to this amendment in writing equaled or exceeded the required percentage. The percentage required was more than 50% of the outstanding capital stock of the corporation, at least 70% of the outstanding Preferred Stock voting as a single class, at least 50% of the Series A Preferred voting as a separate class, at least 70% of the Series B Preferred voting as a separate class and at least 50% of the Series C Preferred voting as a separate class. Pursuant to Section 228 of the General Corporation Law, prompt written notice of this amendment has been or will be given to all stockholders who did not consent to this amendment. IN WITNESS WHEREOF, the corporation has caused this Certificate of Amendment to the Certificate of Incorporation to be duly executed by its Chief Financial Officer and Secretary, this 27th day of September, 2000. By: /s/ Susan M. Kanaya ------------------------------------- Susan M. Kanaya, Chief Financial Officer ATTEST: By: /s/ Blair W. Stewart ----------------------------- Blair W. Stewart, Secretary -2- AMENDED AND RESTATED ARTICLES OF INCORPORATION OF KOSAN BIOSCIENCES INCORPORATED Daniel V. Santi and Blair W. Stewart certify that: A. They are the Chief Executive Officer and Secretary, respectively, of Kosan Biosciences Incorporated, a California corporation (the "Corporation"). B. The Amended and Restated Articles of Incorporation of the Company are hereby amended and restated in their entirety to read as set forth below: * * * I. The name of this corporation is Kosan Biosciences Incorporated. II. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. 1. AUTHORIZATION TO ISSUE TWO CLASSES. This Corporation is authorized to issue two classes of shares designated, respectively, Preferred Stock and Common Stock. The Corporation is authorized to issue 4,348,182 shares of Preferred Stock, $0.001 par value, 1,480,000 shares of which are designated "Series A Preferred Stock" (the "Series A Preferred"), 1,818,182 shares of which are designated "Series B Preferred Stock" (the "Series B Preferred") and 1,050,000 shares of which are designated "Series C Preferred Stock" (the "Series C Preferred", and together with the Series A Preferred and the Series B Preferred, the "Preferred Stock"), and 12,000,000 shares of Common Stock, $0.001 par value (the "Common Stock"). 2. PREFERRED STOCK. The rights, preferences, privileges and restrictions granted to and imposed upon the Preferred Stock are as follows: (a) DIVIDENDS. (i) PREFERRED STOCK. The holders of the Series A Preferred shall be entitled to receive, when and as declared by the Board of Directors, noncumulative dividends at the rate of $0.25 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series A Preferred) per annum, payable quarterly as the Board of Directors may from time to time determine out of funds legally available therefor. The holders of the Series B Preferred shall be entitled to receive, when and as declared by the Board of Directors, noncumulative dividends at the rate of $0.49 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) per annum, payable quarterly as the Board of Directors may from time to time determine out of funds legally available therefor. The holders of the Series C Preferred shall be entitled to receive, when and as declared by the Board of Directors, noncumulative dividends at the rate of $1.86 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series C Preferred) per annum, payable quarterly as the Board of Directors may from time to time determine out of funds legally available therefor. No dividend shall be declared or paid with respect to Common Stock, the Series A Preferred or the Series B Preferred until the full dividend for the applicable period has been declared and paid on the Series C Preferred. After the payment of such preferential amounts to the holders of the Preferred Stock with respect to any year, any additional dividend which the Board of Directors may declare with respect to such year shall be declared simultaneously with respect to the Preferred Stock and the Common Stock, as if the Preferred Stock were converted to Common Stock. The right to any dividends under this subsection (i) shall not be cumulative and no right shall accrue to holders of Preferred Stock by reason of the fact that dividends on said shares are not declared. If less than full dividends are paid or declared and set apart for payment to the holders of the Series A or Series B Preferred Stock, then the amount to be paid or declared and set aside for payment shall be divided as between the holders of the Series A Preferred and the holders of the Series B Preferred in the same proportion as the aggregate preferential dividend payable to the holders of the Series A Preferred bears to the aggregate preferential dividend payable to the holders of the Series B Preferred. (ii) COMMON STOCK. No dividends (other than those payable solely in the Common Stock of the Corporation) shall be paid on any Common Stock of the Corporation during any fiscal year of the Corporation until dividends in the full preferential amounts set forth in Section 2(a)(i) hereof shall have been paid to the holders of Preferred Stock or declared and set apart for payment to the holders of Preferred Stock during such fiscal year. (b) LIQUIDATION PREFERENCE. (i) SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C PREFERRED LIQUIDATION PREFERENCE AMOUNT. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the outstanding shares of Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock or the holders of any other capital stock of the Corporation by reason of their ownership thereof, (x) a per share amount equal to $4.20 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series A Preferred) for each share of Series A Preferred then held by them plus an amount equal to all declared but unpaid dividends on the Series A Preferred (the "Series A Preferred Liquidation Preference Amount"), (y) a per share amount equal to $8.25 per -2- share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) for each share of Series B Preferred then held by them plus an amount equal to all declared but unpaid dividends on the Series B Preferred (the "Series B Preferred Liquidation Preference Amount") and (z) a per share amount equal to $31.00 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series C Preferred) for each share of Series C Preferred then held by them plus an amount equal to all declared but unpaid dividends on the Series C Preferred (the "Series C Preferred Liquidation Preference Amount"). If upon the occurrence of such event, the assets and funds to be distributed among the holders of the Preferred Stock shall be insufficient to permit the full payment of the Series A Preferred Liquidation Preference Amount, the Series B Preferred Liquidation Preference Amount and the Series C Preferred Liquidation Preference Amount, then the holders of each share of Series C Preferred shall be entitled to be paid first out of the assets and funds of the Corporation legally available for distribution up to an amount equal to the Series C Preferred Liquidation Preference Amount and then all remaining assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred and the Series B Preferred (both of which shall be junior to the Series C Preferred in liquidation) in proportion to the full preferential amount each such holder is entitled to receive. (ii) ADDITIONAL DISTRIBUTIONS. After the full liquidation preference has been paid to the holders of the Preferred Stock pursuant to subsection (b)(i) above, all remaining assets shall be distributed to the holders of the Preferred Stock and Common Stock on a pro rata basis, as if such Preferred Stock was converted to Common Stock; provided, that the holders of the Series A Preferred, the Series B Preferred and the Series C Preferred shall not be entitled to receive more than two times the Series A Preferred Liquidation Preference Amount, the Series B Preferred Liquidation Preference Amount or the Series C Preferred Liquidation Preference Amount, respectively, by reason of their ownership of Preferred Stock (which includes amounts paid pursuant to subsection (i) of subparagraph (b) above). (iii) MERGER OR SALE SHALL BE A LIQUIDATION. A consolidation or merger of the Corporation with or into any other entity, an acquisition by any other entity, or a sale of all or substantially all of the assets or voting control of the Corporation, in which the prior shareholders of the Corporation do not own a majority of the outstanding shares of the surviving entity after the transaction shall be deemed to be a liquidation, dissolution or winding up within the meaning of Sections 2(b)(i) and, (ii) above. (c) VOTING RIGHTS. (i) GENERALLY. Except as otherwise required by law or by subsection (iii) of this subparagraph (c) hereof, the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted pursuant to subparagraph (d) hereof, and shall have full voting rights and powers equal to the voting rights and powers of the Common Stock (voting together with the Common Stock as a single class) and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the Corporation and applicable law. In the event the Preferred Stock -3- is convertible into a non-integral number of shares of Common Stock, the aggregate number of votes to which such shareholder is entitled shall be rounded to the nearest whole vote. (ii) BOARD OF DIRECTORS. So long as at least 435,000 shares of Series A Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series A Preferred) remain outstanding, the holders of the Series A Preferred voting as a separate class shall be entitled to elect two directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. So long as at least 545,454 shares of Series B Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) remain outstanding, the holders of the Series B Preferred voting as a separate class shall be entitled to elect two directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. So long as at least 272,727 shares of Series B Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) but not more than 545,453 shares of Series B Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) remain outstanding, the holders of the Series B Preferred voting as a separate class shall be entitled to elect one director and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director. So long as at least 157,258 shares of Series C Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series C Preferred) remain outstanding, the holders of the Series C Preferred voting as a separate class shall be entitled to elect one director and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director. The holders of the Common Stock voting together as a single class shall be entitled to elect two directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. If the holders of the Series A Preferred are no longer entitled to elect two directors voting separately as a series, the holders of the Common Stock, together with the holders of any series of Preferred Stock that are not otherwise then entitled to elect a director voting as a series pursuant to this Section, voting together as a single class on an as-if-converted to Common Stock basis, shall be entitled to elect such directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. If the holders of the Series B Preferred are no longer entitled to elect two directors voting separately as a series but are entitled to elect one director voting separately as a series, the holders of the Common Stock, together with the holders of the Series B Preferred, the holders of the Series A Preferred if they are not otherwise then entitled to elect two directors as a series pursuant to this Section and the holders of the Series C Preferred, if they are not otherwise then entitled to elect one director as a series pursuant to this Section, voting together as a single class on an as-if-converted to Common Stock basis, shall be entitled to elect the director previously reserved for election by the holders of the Series B Preferred as a series, and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director. If the holders of the Series B Preferred are no longer entitled to elect two directors as a series, the holders of the Common Stock, together with the holders of the Series B Preferred, the holders of the Series A Preferred, if they are not otherwise then entitled to -4- elect two directors as a series pursuant to this Section, and the holders of the Series C Preferred, if they are not otherwise then entitled to elect one director as a series pursuant to this Section, voting together as a single class on an as-if-converted to Common Stock basis, shall be entitled to elect both directors previously reserved for election by the holders of the Series B Preferred, and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. If the holders of the Series C Preferred are no longer entitled to elect one director voting separately as a series, the holders of the Common Stock, together with the holders of any series of Preferred Stock that are not otherwise then entitled to elect a director voting as a series pursuant to this Section, voting together as a single class on an as-if-converted to Common Stock basis, shall be entitled to elect such directors and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director. (iii) CERTAIN RESTRICTIONS AND LIMITATIONS. In addition to any other rights provided by law or herein: (1) So long as at least 800,000 shares of Preferred Stock (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Preferred Stock) remain outstanding, consent of the holders of at least seventy five percent (75%) of the Preferred Stock voting as a single class shall be required for any action that: (A) alters or changes the rights, preferences or privileges of the Preferred Stock; (B) creates (by reclassification or otherwise) any new class or series of shares or any other securities convertible into equity securities of the Corporation having rights, preferences or privileges senior to or on a parity with the Preferred Stock; or (C) amends, waives or repeals any provision of, or adds any provision to, the Articles of Incorporation or Bylaws of the Corporation in a manner which adversely affects the Preferred Stock. (2) Consent of the holders of at least seventy percent (70%) of the Preferred Stock voting as a single class shall be required for any action that: (A) increases or decreases the total number of authorized shares of the Common Stock or the Preferred Stock; (B) results in the redemption of any shares of Common Stock (other than pursuant to equity incentive agreements with employees, consultants, officers, directors and other service providers that give the Corporation the right to repurchase shares of Common Stock upon the termination of services); (C) results in any merger, other corporate reorganization, sale of control, or sale or other conveyance of all or substantially all of the assets of the Corporation, as a result of which the shareholders of the Corporation immediately prior to the consummation of such transaction do not hold a majority of the voting power of the resulting entity; provided, that if a -5- holder of any equity security of the Corporation or an affiliate of such holder is a party to such transaction (other than as a shareholder of the Corporation or as an advisor to any party thereto), then the shares held by such holder shall not be deemed to be outstanding for the purposes of such approval; (D) results in the declaration or payment of any dividend on any shares of the Common Stock or the Preferred Stock of the Corporation (other than dividends on Common Stock payable in shares of Common Stock); or (E) increases or decreases the size of the Company's Board of Directors. (3) Consent of the holders of at least seventy percent (70%) of the Series B Preferred shall be required for any action that: (A) increases or decreases the total number of authorized shares of the Series B Preferred; or (B) changes the rights, preferences, privileges or restrictions of the Series B Preferred in a way that adversely affects the Series B Preferred in a different manner than the Series A Preferred. (4) Consent of the holders of at least fifty percent (50%) of the Series C Preferred shall be required for any action that: (A) increases or decreases the total number of authorized shares of the Series C Preferred; or (B) changes the rights, preferences, privileges or restrictions of the Series C Preferred in a way that adversely affects the Series C Preferred. (d) CONVERSION. The holders of the Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (i) RIGHT TO CONVERT. (1) VOLUNTARY CONVERSION. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock at a rate (the "Conversion Rate") as is determined by dividing (A) $4.20 in the case of the Series A Preferred, (B) $8.25 in the case of the Series B Preferred and (C) $31.00 in the case of the Series C Preferred, in each case by the then applicable Conversion Price for such series of Preferred Stock, determined as hereinafter provided, in effect at the time of the conversion. The Conversion Price of the Series A Preferred shall initially be $4.20. The Conversion Price of the Series B Preferred shall initially be $8.25. The Conversion Price of the -6- Series C Preferred shall be $31.00. Such initial Conversion Prices shall be subject to adjustment as hereinafter provided. (2) AUTOMATIC CONVERSION. Each share of Series A Preferred shall be automatically converted into shares of Common Stock at the then effective applicable Conversion Rate (A) upon the consent of the holders of at least seventy percent (70%) of the outstanding shares of the Series A Preferred, or (B) upon the closing of the sale of the Corporation's Common Stock in a firmly underwritten initial public offering registered under the Securities Act of 1933, as amended (the "Act"), at a public offering price equal to not less than $21.00 per share of Common Stock (as appropriately adjusted for any stock dividend, stock split or combination, recapitalization, consolidation or the like of the Common Stock) with expected aggregate proceeds to the Corporation of not less than $15,000,000 before deduction of any underwriters' commissions and expenses (a "Qualified IPO"). Each share of Series B Preferred shall be automatically converted into shares of Common Stock at the then effective applicable Conversion Rate (A) upon the consent of the holders of at least seventy percent (70%) of the outstanding shares of the Series B Preferred, or (B) upon the closing of a Qualified IPO. Each share of Series C Preferred shall be automatically converted into shares of Common Stock at the then effective applicable Conversion Rate (A) upon the consent of the holders of at least a majority of the outstanding shares of the Series C Preferred, or (B) upon the closing of an initial public offering at a Common Stock per share public offering price equal to not less than $40.30 per share of Common Stock (appropriately adjusted for any stock dividend, stock split or combination, recapitalization, consolidation or the like of the Common Stock) with expected aggregate proceeds to the Corporation of not less than $25,000,000 before deduction of any underwriters' commissions and expenses. (ii) MECHANICS OF CONVERSION. (1) EFFECTING CONVERSION. In order to effect a voluntary conversion of Preferred Stock, such holder shall provide written notice to the Corporation that he or she elects to convert the same into Common Stock and deliver such notice to the office of the Corporation or of any transfer agent for such shares. Such voluntary conversion shall be deemed to have been made immediately prior to the close of business on the date of surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. In the case of an automatic conversion in connection with an underwritten offering of securities under the Act, the conversion may, at the option of any holder tendering shares of Preferred Stock for conversion, be conditioned upon the closing with the underwriter(s) of the sale of securities pursuant to such offering, in which case the person or persons entitled to receive the Common Stock issuable upon such conversion shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (2) EXCHANGE OF CERTIFICATES. Before delivery to any person of certificates representing shares of Common Stock issued upon voluntary or automatic conversion of shares of the Preferred Stock, the holder of such Preferred Stock shall surrender the certificate or certificates for such Preferred Stock, duly endorsed, at the office of the Corporation or of any -7- transfer agent for such shares and shall provide a written declaration of the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he or she shall be entitled as aforesaid and a check payable to the holder for any cash amounts payable as the result of a conversion into fractional shares of Common Stock pursuant to subparagraph 2(d)(xii), and pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of Preferred Stock being converted. (iii) ADJUSTMENT FOR SUBDIVISIONS AND CERTAIN DISTRIBUTIONS; ADJUSTMENTS FOR COMBINATIONS OR CONSOLIDATIONS OF COMMON STOCK AND STOCK DIVIDENDS. (1) In the event the outstanding shares of Common Stock shall be subdivided (by stock split or otherwise) into a greater number of shares of Common Stock, or a dividend or distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents" ) without payment of any consideration by such holder of the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), the Conversion Price of the Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase in the aggregate numbers of shares issuable with respect to Common Stock Equivalents, with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subparagraph 2(d)(vi)(1)(E). (2) In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price of the Preferred Stock shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (iv) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. In the event the Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subparagraph 2(d)(iii)(1) hereof, then in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation which they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as -8- aforesaid during such period, subject to all other adjustments called for during such period under this subparagraph 2(d) with respect to the rights of the holders of the Preferred Stock. (v) ADJUSTMENTS FOR REORGANIZATION, RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Common Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock or other securities or property, whether by reorganization (unless such reorganization is deemed a liquidation under subparagraph 2(b)(iii) hereof), reclassification or otherwise (other than a subdivision or combination of shares provided for above), the Conversion Price of the Preferred Stock then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock or other securities or property equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Preferred Stock immediately before such event; and, in any such case, appropriate adjustment (as determined by the Board) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the holders of the Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to change in and other adjustments of the Conversion Price of the Preferred Stock) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Preferred Stock. (vi) CONVERSION PRICE ADJUSTMENTS WITH RESPECT TO CERTAIN DILUTING ISSUANCES. The Conversion Price of each series of Preferred Stock shall be subject to adjustment from time to time as follows: (1) (A) If the Corporation shall issue or be deemed to issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price of a series of Preferred Stock in effect immediately prior to the issuance of such Additional Stock, then the Conversion Price of such series of Preferred Stock in effect immediately prior to each such issuance shall (except as otherwise provided in this clause (1)) be adjusted to: a new Conversion Price determined by dividing (X) an amount equal to the sum of (a) the product derived by multiplying the Conversion Price of such series in effect immediately prior to such issuance times the number of shares of Common Stock (including shares of Common Stock issued or issuable upon conversion of the outstanding Preferred Stock or otherwise under Section 2(d)(vi)(1)(E)) outstanding immediately prior to such issue, plus (b) the consideration, if any, received by or deemed to have been received by the Corporation upon such issuance, by (Y) an amount equal to the sum of (c) the number of shares of Common Stock (including shares of Common Stock issued or issuable upon conversion of the outstanding Preferred Stock or otherwise under Section 2(d)(vi)(1)(E)) outstanding immediately prior to such issuance, plus (d) the number of shares of Common Stock issued or deemed to have been issued in such issuance; provided, however, that if in the -9- > Corporation's next financing transaction (i) consisting of a private placement of $7,500,000 or more of equity securities led and negotiated (including the negotiation of the terms, conditions and pricing) by a financial or venture capital investor, Additional Stock is issued without consideration or for consideration per share less than the then-applicable Series C Preferred Conversion Price, the Series C Conversion Price shall be adjusted to the consideration per share received by the Corporation with respect to such Additional Stock, or (ii) consisting of a public offering, Additional Stock is issued without consideration or for consideration per share less than the then-applicable Series C Preferred Conversion Price, the Series C Conversion Price shall be adjusted to eighty percent (80%) of the consideration per share paid by the public with respect to such Additional Stock, all to be calculated as though the securities issued in the public offering were issued immediately prior to the closing of the public offering and conversion of the Series C Preferred. (B) No adjustment of the Conversion Price for any series of Preferred Stock shall be made in an amount less than one cent ($0.01) per share, provided that any adjustment that is not required to be made by reason of this sentence shall be carried forward and taken into account in any subsequent adjustment to the Conversion Price for such series of Preferred Stock. Except to the limited extent provided for in Sections 2(d)(vi)(1)(E)(z) and 2(d)(vi)(1)(E)(aa), no adjustment of such Conversion Price shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of securities of the Corporation for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of securities of the Corporation for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined by the Board of Directors. (E) In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (where the shares of Common Stock issuable upon exercise of such options or rights or upon conversion or exchange of such securities are not excluded from the definition of Additional Stock), the following provisions shall apply: (x) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 2(d)(vi)(1)(C) and 2(d)(vi)(1)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; -10- (y) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 2(d)(vi)(1)(C) and 2(d)(vi)(1)(D)); (z) In the event of any change in the number of shares of Common Stock deliverable upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price in effect at the time for each series of Preferred Stock shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment that was made upon the issuance of such options, rights or securities not converted prior to such change or the options or rights related to such securities not converted prior to such change been made upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise of any such options or rights or the conversion or exchange of such securities; (aa) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price for each series of Preferred Stock shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment which was made upon the issuance of such options, rights or securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (2) "Effective Date" with respect to each series of Preferred Stock means the first date on which shares of such series of Preferred Stock were issued. (3) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 2(d)(vi)(1)(E)) by the Corporation after the Effective Date other than: (A) Common Stock issued pursuant to a transaction described in Section 2(d)(iii). -11- (B) Shares of Common Stock issued or issuable to employees, officers, or directors of, or consultants to, the Corporation, approved by at least sixty-five percent (65%) of the members of the Board of Directors. (C) Common Stock issued or issuable upon conversion of the shares of Preferred Stock. (vii) NO IMPAIRMENT. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this subparagraph 2(d) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (viii) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price of any series of Preferred Stock pursuant to this subparagraph 2(d), the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (1) such applicable adjustments and readjustments, (2) the applicable Conversion Price at the time in effect, and (3) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of Preferred Stock. Any certificate sent to the holders of Preferred Stock pursuant to this subparagraph shall be signed by an officer of the Corporation. (ix) NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any security or right convertible into or entitling the holder thereof to receive Common Stock, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of record of Preferred Stock at least fifteen (15) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right, and the amount and character of such dividend, distribution, security or right. In addition, the Corporation shall mail to each holder of record of Preferred Stock a notice specifying that a liquidation, dissolution or winding up, or a merger, sale of assets or change of control transaction involving the Corporation is to occur (or so deemed pursuant to Section 2(b)(iii) hereof), such notice to be mailed at least fifteen (15) days prior to the date on which any such action is expected to be consummated. (x) ISSUE TAXES. The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on -12- conversion of shares of Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (xi) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock then, in addition to such other remedies as shall be available to the holders of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (xii) FRACTIONAL SHARES. No fractional share shall be issued upon the conversion of any share or shares of Preferred Stock. If the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors of the Corporation). (e) NOTICES. The Corporation shall give each holder of Preferred Stock at least fifteen (15) days prior written notice of any date (i) for the determination of the distribution of assets in connection with any liquidation, dissolution or winding up of the Corporation, or (ii) on which automatic conversion is expected to occur. Any notice required by the provisions of these Articles to be given to the holders of shares of Preferred Stock shall be deemed given if delivered personally or deposited in the United States mail, first class postage prepaid (or, if to an international addressee, sent by express messenger specifying not more than three days' delivery), and addressed to each holder of record at his or her address appearing on the books of the Corporation. (f) CERTAIN REPURCHASES. Each holder of an outstanding share of Preferred Stock shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of the General Corporation Law, to distributions made by the Corporation in connection with the repurchase, at the initial purchase price thereof, or at such other price as may be approved by the Board of Directors, of shares of Common Stock issued to or held by officers, directors, employees or consultants upon termination of their employment or services pursuant to agreements providing for the right of said repurchase between the Corporation and such persons. IV. 1. LIMITATION OF DIRECTORS' LIABILITY. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. -13- 2. INDEMNIFICATION OF CORPORATE AGENTS. This corporation is authorized to provide indemnification of its agents (as defined in Section 317 of the California General Corporations Law) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by such Section 317, subject only to the limits set forth in Section 204 of the California General Corporations Law with respect to actions for breach of duty to the corporation and its shareholders. 3. REPEAL OR MODIFICATION. Any repeal or modification of the foregoing provisions of this Article IV shall not adversely affect any right of indemnification or limitation of liability of an agent of this corporation relating to acts or omissions occurring prior to such repeal or modification." * * * C. The foregoing amendment and restatement has been duly approved by the Board of Directors of the Company. D. The foregoing amendment has been duly approved by the required vote of shareholders in accordance with Sections 902 and 903 of the California General Corporations Law. The total number of outstanding shares is 2,159,148 shares of Common Stock, 1,451,195 shares of Series A Preferred Stock and 1,818,182 shares of Series B Preferred Stock. The number of shares voting in favor of the amendment equaled or exceeded the votes required. The percentage vote was more than 50% of the outstanding Common Stock and more than 75% of the outstanding Series A Preferred Stock and Series B Preferred Stock voting together as a single class. We further declare under penalty of perjury under the laws of California that the matters set forth in this amendment and restatement are true of our own knowledge. Executed at Palo Alto, California on March 17, 2000. /s/ Daniel V. Santi ----------------------------------------- Daniel V. Santi, Chief Executive Officer /s/ Blair W. Stewart ----------------------------------------- Blair W. Stewart, Jr., Secretary -14- EX-4.1 3 a2026613zex-4_1.txt EXHIBIT 4.1 EX 4-1 COMMON STOCK COMMON STOCK NUMBER KBI KOSAN BIOSCIENCES INCORPORATED SHARES INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 50064W 10 7 This Certifies that Is the record holder of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF - -----------------------------KOSAN BIOSCIENCES INCORPORATED------------------- transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. IN WITNESS WHEREOF the Corporation has caused this certificate to be signed in facsimile by its duly authorized officers and a facsimile of its corporate seal. Dated: /s/ MICHAEL S. OSTRACH [SEAL] /s/ DANIEL V. SANTI - ---------------------------- --------------------------- CHIEF OPERATING OFFICER AND CHAIRMAN AND CHIEF EXECUTIVE ASSISTANT SECRETARY OFFICER KOSAN BIOSCIENCES INCORPORATED THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS, A FULL STATEMENT OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF EACH CLASS OF STOCK OR SERIES THEREOF AUTHORIZED TO BE ISSUED AND THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE CORPORATION TO DESIGNATE AND FIX THE RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF CLASSES OF PREFERRED STOCK IN SERIES. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT WROS - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - _________________ Custodian ________________ (Cust) (Minor) under Uniform Gifts to Minors Act _____________ (State) Additional abbreviations may also be used though not in the above list. For value received, hereby sell, assign and transfer unto -------------------- PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------- / / - ------------------------- - ------------------------------------------------------------------------------- (Please print or typewrite name and address including postal zip code of assignee) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------ Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint -------------------------------------------- - ---------------------------------------------------------------------- Attorney to transfer the said Shares on the Books of the within-named Corporation with full power of substitution in the premises. Dated: ----------------------------------------- ---------------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration or enlargement, or any change whatever. SIGNATURE(S) GUARANTEED: ---------------------------------------------------- THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.3 4 a2026613zex-10_3.txt EXHIBIT 10.3 EXHIBIT 10.3 KOSAN BIOSCIENCES, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "BOARD" shall mean the Board of Directors of the Company. (b) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" shall mean the Common Stock of the Company. (d) "COMPANY" shall mean Kosan Biosciences, Inc., a Delaware corporation, and any Designated Subsidiary of the Company. (e) "COMPENSATION" shall mean all base straight time gross earnings and commissions, exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "DESIGNATED SUBSIDIARY" shall mean any Subsidiary that has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "EMPLOYEE" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "ENROLLMENT DATE" shall mean the first day of each Offering Period. (i) "EXERCISE DATE" shall mean the last day of each Offering Period. (j) "FAIR MARKET VALUE" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "OFFERING PERIOD" shall mean a period of approximately six (6) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after October 1 and terminating on the last Trading Day in the period ending the following March 31, or commencing on the first Trading Day on or after April 1 and terminating on the last Trading Day in the period ending the following September 30; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before March 31. The duration of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "PLAN" shall mean this Employee Stock Purchase Plan. (m) "PURCHASE PRICE" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower; provided, however, that the Purchase Price may be adjusted by the Board pursuant to Section 20. (n) "RESERVES" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (o) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (p) "TRADING DAY" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. -2- 3. ELIGIBILITY. (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS. The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on the first Trading Day on or after October 1 and April 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before March 31, 2001. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. PAYROLL DEDUCTIONS. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. -3- (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during an Offering Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on the Exercise Date of such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Offering Period more than 5,000 shares (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The Option shall expire on the last day of the Offering Period. 8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her -4- account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. DELIVERY. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, the shares purchased upon exercise of his or her option. 10. WITHDRAWAL. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. TERMINATION OF EMPLOYMENT. Upon a participant's ceasing to be an Employee for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. INTEREST. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. STOCK. (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 100,000 shares, plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2001 equal to the -5- lesser of (i) 50,000 shares, (ii) .75% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. ADMINISTRATION. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. TRANSFERABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. -6- 17. USE OF FUNDS. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. REPORTS. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION, MERGER OR ASSET SALE. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the Reserves, the maximum number of shares each participant may purchase per Offering Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) MERGER OR ASSET SALE. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"). The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the -7- participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. AMENDMENT OR TERMINATION. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Offering Period or the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 19 and Section 20 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. (c) In the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (1) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; (2) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (3) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. 21. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form -8- specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. TERM OF PLAN. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. -9- EXHIBIT A KOSAN BIOSCIENCES, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT Original Application Enrollment Date: - ---------- --------- Change in Payroll Deduction Rate - ---------- Change of Beneficiary(ies) - ---------- 1. hereby elects to participate in the Kosan Biosciences, Inc. 2000 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of % of my Compensation on each payday (from 0 to %) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to stockholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only): . 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares), I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY DISPOSITION OF SHARES AND I WILL MAKE ADEQUATE PROVISION FOR FEDERAL, STATE OR OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON THE DISPOSITION OF THE COMMON STOCK. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year holding period, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print) -------------------------------------- (First) (Middle) (Last) --------------------------- -------------------------------------- Relationship -------------------------------------- (Address) Employee's Social Security Number: -------------------------------------- Employee's Address: -------------------------------------- -------------------------------------- -2- I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated: ----------------------------- ------------------------------------- Signature of Employee ------------------------------------- Spouse's Signature (If beneficiary other than spouse) -3- EXHIBIT B KOSAN BIOSCIENCES, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Kosan Biosciences, Inc. 2000 Employee Stock Purchase Plan which began on , (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ------------------------------------- ------------------------------------- ------------------------------------- Signature: ------------------------------------- Date: -------------------------------- EX-10.8 5 a2026613zex-10_8.txt EXHIBIT 10.8 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 10.8 LICENSE AGREEMENT Effective as of March 11, 1996 (the "Effective Date"), THE BOARD OF TRUSTEES OF THE LELAND STANFORD JUNIOR UNIVERSITY, a body having corporate powers under the laws of the State of California ("STANFORD"), and KOSAN Biosciences, Inc., a California corporation having a principal place of business at 211 Belgrave Avenue, San Francisco, California 94117 ("LICENSEE"), agree as follows: 1 BACKGROUND 1.1 STANFORD has an assignment of "Recombinant Production of Novel Polyketides" from the laboratory of Dr. Chaitan Khosla ("Invention(s)"), as described in STANFORD Docket S93-098 and any Licensed Patent(s), as hereinafter defined, which may issue on such Invention(s). 1.2 STANFORD desires to have the Invention(s) perfected and marketed at the earliest possible time in order that products resulting therefrom may be available for public use and benefit. 1.3 LICENSEE desires a license under said Invention(s), Licensed Patent(s) and Licensed Materials to develop, manufacture, have made, use, and sell Licensed Product(s) in the Licensed Field of Use. 1.4 The Invention(s) were made in the course of research supported by the National Institutes of Health. 1.5 STANFORD has entered into agreements with John Innes Institute and Brown University Research Foundation ("BURF") which provide STANFORD the exclusive right to act on behalf of such parties in connection with the licensing of their entire right, title and interest with respect to the Inventions and Licensed Patents. 1.6 LICENSEE and STANFORD have entered into an Option Agreement effective as of April 1, 1995 pursuant to which STANFORD granted KOSAN an exclusive option to acquire an exclusive license to the Inventions and Licensed Patents. 2 DEFINITIONS 2.1 "Affiliate" means any corporation or other entity that is directly or indirectly controlling, controlled by or under common control with LICENSEE. For the purpose of this definition, "control" shall mean the direct or indirect beneficial ownership of at least forty-nine percent (49%) in the income or stock of such corporation or business. 2.2 "Exclusive" means that, subject to Article 4, STANFORD shall not grant further licenses to the Invention(s), Licensed Materials, and Licensed Patent(s) in the Licensed Territory. 2.3 "Licensed Materials" shall mean the biological materials listed on Exhibit A hereto, and such other agreed materials as STANFORD may provide to LICENSEE during the term of this Agreement, which shall be added to Exhibit A. 2.4 "Licensed Patent(s)" means (i) the U.S. and foreign patent applications listed on Exhibit B hereto, (ii) all U.S. or foreign patent applications filed after the Effective Date which name Chaitan Khosla as an inventor and which claim one or more inventions which would be dominated by any patent issuing on a patent application within the Licensed Patents pending as of the Effective Date (or a division, substitution or continuation of such a pending application), (iii) all divisions, substitutions and continuations of any of the preceding, (iv) all foreign patent applications corresponding to or claiming priority from any of the preceding, and (v) all U.S. and foreign patents issuing on any of the preceding, including patents of addition, reexaminations, reissues and extensions. 2.5 "Licensed Product" will mean any product (i) the manufacture or sale of which is within a Valid Claim within the Licensed Patents in the country which the product is made or sold; or (ii) containing a composition of matter that was first invented using a method within the scope of a Valid Claim within the Licensed Patents in the country in which such use occurred. 2.6 "Licensed Territory" means worldwide. 2.7 "LICENSEE" shall mean KOSAN Biosciences, Inc. and its Affiliates. 2.8 "Net Sales" means the gross revenue received by LICENSEE and/or sublicensee(s) from sales of Licensed Product(s), less the following items but only insofar as they are included in such gross revenue and are separately stated on the invoice: (a) Import, export, value added, excise and sales taxes, tariffs, and custom duties; (b) Credit for returns, damaged goods, allowances, or trades; (c) Charges for packaging, shipping and insurance; and (d) Customary rebates, cash and trade discounts, actually taken. 2.9 "Valid Claim" means a claim of (i) an issued, unexpired patent which has not been held unenforceable of invalid by a court or other governmental entity of competent jurisdiction, and which has not been disclaimed, or rejected or found invalid or unenforceable in a reissue application or re-examination proceeding; or (ii) a patent application, provided that not more than five (5) years have elapsed from the date the claim takes priority for filing purposes. -2- 3 GRANT 3.1 STANFORD hereby grants and LICENSEE hereby accepts an Exclusive license under the Inventions, Licensed Patents and Licensed Materials to make, have made, import, use, lease, sell and offer for sale and otherwise commercialize and exploit Licensed Products and Licensed Materials, and practice any method, process or procedure within the Licensed Patents in the Licensed Territory. 3.2 The license granted in Section 3.1 shall be Exclusive, and include the right to grant sublicenses pursuant to Article 14 during the period that LICENSEE holds an Exclusive license, for a term commencing as of the Effective Date, and ending upon the expiration of the last to expire of the issued Licensed Patent(s), on a country-by-country basis, or if no patent within the Licensed Patent(s) issues in a country, shall terminate on the tenth anniversary of the first sale of a Licensed Product in such country. Notwithstanding the above, (i) the parties may with written agreement convert the exclusive license to a non-exclusive license, on a country-by-country basis, or (ii) at any time prior to two (2) years before the expiration of the last to expire of the Licensed Patents in a particular country, on a country-by-country basis, LICENSEE may elect to convert the exclusive license granted herein to a non-exclusive license in such country with notice to STANFORD. 3.3 Notwithstanding Sections 3.1 and 3.2 above, STANFORD shall retain the nontransferable right to practice the Licensed Patents and use the Licensed Materials for its internal, academic, non-commercial research. STANFORD agrees not to provide or grant any third party any of the Licensed Materials or any rights to any compound developed in Dr. Chaitan Khosla's laboratory with the use of the Licensed Materials. 3.4 Upon execution of this Agreement, STANFORD shall transfer to LICENSEE a sufficient quantity of the Licensed Materials as is necessary for LICENSEE to establish a viable culture of such Licensed Materials. LICENSEE agrees to reimburse Stanford for its out-of-pocket costs of preparing such Licensed Materials for LICENSEE, up to a maximum of [**] ($[**]). LICENSEE agrees to make such Licensed Materials available for academic not-for-profit research to researchers at academic and not-for-profit institutions which enter into a Material Transfer Agreement with LICENSEE in substantially the form attached hereto as Exhibit C. 4 GOVERNMENT RIGHTS This Agreement is subject to all of the terms and conditions of Title 35 United States Code Sections 200 through 204, including an obligation that products within the scope of a claim of an issued U.S. Licensed Patent sold in the United States be "manufactured substantially in the United States," and LICENSEE agrees to take all reasonable action necessary on its part as licensee to enable STANFORD to satisfy its obligation thereunder, relating to Invention(s), provided that STANFORD has provided LICENSEE with written notice of each such obligation STANFORD must meet and a description of each act LICENSEE must take to comply with such obligation at least 90 days in advance of any required act. STANFORD acknowledges that Licensed Products are -3- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. anticipated to be comprised of multiple technologies and agrees that only those components within the scope of the Licensed Patent(s) need be manufactured substantially in the United States. 5 DILIGENCE 5.1 LICENSEE agrees to use reasonable efforts and diligence to proceed with the development, manufacture, or sale of Licensed Product(s) and shall endeavor to achieve the following: (a) receive financing of at least [**] dollars ($[**]) within [**] following the Effective Date; (b) establish a facility at which it will practice the Licensed Patents within [**] following the Effective Date; (c) sequence at least [**] base pairs of DNA from one or more [**] within [**] from the Effective Date; (d) generate a polyketide library of at least [**] polyketide compounds within [**] of the Effective Date; (e) generate a polyketide library of at least [**] polyketide compounds within [**] of the Effective Date; and (f) file an IND for a Licensed Product within [**] from the Effective Date. For purposes of determining whether LICENSEE has met its diligence obligations, Sections 5.1 (c)-(f) above may be satisfied by LICENSEE or its sublicensees. In the event that LICENSEE has not achieved any one or more of the foregoing milestones but has exercised reasonable efforts to accomplish the same, STANFORD and LICENSEE shall negotiate in good faith an extension of time in which LICENSEE may accomplish such milestone and all subsequent milestones. 5.2 STANFORD may terminate LICENSEE's rights under this Agreement with respect to a particular Licensed Product if, after final FDA approval of a NDA for such Licensed Product, LICENSEE has not sold the Licensed Product for a continuous period of [**] after such final approval. 5.3 On or before [**] of each year during the term of this Agreement until LICENSEE markets a Licensed Product, LICENSEE shall make a written annual report to STANFORD covering the preceding year ending [**], regarding the progress of LICENSEE toward commercialization of Licensed Product(s). Such report shall include, as a minimum, -4- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. information sufficient to enable STANFORD to satisfy reporting requirements of the U.S. Government and for STANFORD to ascertain progress by LICENSEE toward meeting the diligence requirements of this Article 5. 6 PAYMENTS 6.1 LICENSEE agrees to pay to STANFORD a nonrefundable, license issue fee of [**] Dollars ($[**]) within [**] days of the Effective Date. [**] ($[**]) of the option fee paid by KOSAN to STANFORD pursuant to the Option Agreement shall be credited against such license issue fee. 6.2 Within thirty (30) days of the Effective Date, LICENSEE shall reimburse STANFORD for legal fees in the amount of [**]Dollars ($[**]), and for patent-related expenses in the amount of [**] Dollars ($[**]) incurred by STANFORD prior to the Effective Date with respect to the Licensed Patents. The amount paid by LICENSEE for legal fees shall be fully creditable against the first annual maintenance fee due pursuant to Section 6.3, and the amount paid by LICENSEE for patent-related expenses shall be fully creditable against royalties due pursuant to Section 6.5. 6.3 During the term of the Agreement, LICENSEE shall pay to STANFORD an annual maintenance fee on the anniversary of the Effective Date, in accordance with the following schedule: $[**] $[**] $[**] Such annual maintenance fees shall be fully creditable against earned royalties up to [**] percent ([**]%) of such royalties due STANFORD in any year. 6.4 Unless the Agreement is terminated earlier, within thirty (30) days following the first achievement by LICENSEE or a sublicensee of the following milestones, LICENSEE shall pay STANFORD one-time milestone payments according to the following schedule:
EVENT PAYMENT ----- ------- [**] $ [**] [**] $ [**] -5- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] $[**] [**] $[**] $[**] [**] [**] $[**] [**] $[**]
All such payments shall be fully creditable against royalties due STANFORD hereunder. 6.5 In addition to the payments of Sections 6.2 and 6.3, LICENSEE shall pay STANFORD royalties on annual Net Sales as follows: (a) on Net Sales by LICENSEE: (i) a royalty of [**] percent ([**]%) of Net Sales of a Licensed Product containing a polyketide compound [**], which compound has not been modified further; (ii) a royalty of [**] percent ([**]%) of Net Sales of a Licensed Product containing a polyketide compound [**], but not structurally characterized in such laboratory, which compound has not been modified further; (iii) a royalty of [**] percent ([**]%) of Net Sales of a Licensed Product containing a compound derived from a polyketide compound [**], which polyketide compound has been modified through medicinal chemistry or otherwise; (iv) a royalty of [**] percent ([**]%) of Net Sales of a Licensed Product containing a compound derived from a polyketide compound [expressed, but not structurally characterized in Dr. Khosla's laboratory at STANFORD], which polyketide compound has been modified through medicinal chemistry; and (v) a royalty of [**] percent ([**]%) of Net Sales of all other Licensed Products sold by LICENSEE. -6- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (b) on Net Sales by sublicensees: (i) a royalty of [**] percent ([**]%) of Net Sales of a Licensed Product containing a polyketide compound first expressed and structurally characterized in Dr. Khosla's laboratory at STANFORD, which compound has not been modified further; (ii) a royalty of [**] percent ([**]%) of Net Sales of a Licensed Product containing a polyketide compound first expressed in Dr. Khosla's laboratory at STANFORD, but not structurally characterized in such laboratory, which compound has not been modified further; (iii) a royalty of [**] percent ([**]%) of Net Sales of a Licensed Product containing a compound derived from a polyketide compound first expressed and structurally characterized in Dr. Khosla's laboratory at STANFORD, which polyketide compound is modified through medicinal chemistry or otherwise; and (iv) a royalty of [**] percent ([**]%) of Net Sales of all other Licensed Products sold by a sublicensee. (c) The royalties due STANFORD pursuant to Subsections 6.5(a) (i)-(iii) and (b) (i)-(iii) above shall be reduced by [**] percent ([**]%) in the event that the pertinent polyketide compound was first expressed or structurally characterized in Dr. Khosla's laboratory at STANFORD in the course of sponsored research conducted with funds provided by LICENSEE or a sublicensee. (d) As used in this Section 6.5, "structurally characterized" means the determination of the complete structure of the compound (e.g., by nuclear magnetic resonance and mass spectroscopy), such that sufficient information has been obtained that a patent disclosure can be made which would fully enable a patent claim with respect to the pertinent composition of matter. 6.6 The above royalty rates will be reduced by [**] percent ([**]%) if the Licensed Product is not within the scope of an issued Valid Claim but is within the scope of a pending Valid Claim. 6.7 The royalty rates set forth in Sections 6.5 and 6.6 above take into account that LICENSEE may become obligated to pay royalties to third parties on sales of Licensed Products. Consequently, no reduction shall be made to the royalties due to STANFORD, except if the royalty or other amount is paid in respect of a valid claim of a patent that would dominate the practice of the Licensed Patents, such royalty or other amount may be offset against the royalties due to STANFORD hereunder. However, in such event the royalty paid to STANFORD be reduced to less than [**] percent ([**]%) of the amount that would otherwise be due to STANFORD; provided, in no event shall the royalty due STANFORD pursuant to this Section be less than [**] percent ([**]%). 6.8 In the event that a Licensed Product under this Agreement is sold in a combination product containing other active components, then subject to Sections 6.5 and 6.6, Net Sales on the combination product shall be calculated using one of the following methods: -7- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (a) By multiplying the net selling price of the combination product by the fraction A/A+B, where A is the gross selling price, during the royalty-paying period being considered, of the Licensed Product sold separately, and B is the gross selling price, during the royalty period in question, of the other active components sold separately; or (b) In the event that no such separate sales are made of the Licensed Product, Net Sales on the combination product for royalty determination shall be as reasonably allocated between such Licensed Product and the other active components, based on their relative importance and proprietary protection, as agreed by the parties. If the parties fail to reach agreement such allocation shall be submitted to binding arbitration. 6.9 In the event that in any country all the Valid Claims within the Licensed Patent(s) which cover a particular Licensed Product are held invalid or unenforceable, then LICENSEE's obligation to pay royalties on Net Sales with respect to such Licensed Product shall terminate in such country. LICENSEE's obligation to pay royalties on Net Sales shall terminate on a country-by-country basis upon the expiration of the last to expire of any issued Licensed Patent(s) in each country; provided, in the event that LICENSEE elects to maintain exclusivity for the life of the issued patents within the Licensed Patents in any country, then until [**] ([**]) years following the expiration of the Licensed Patents in such country, LICENSEE shall pay to STANFORD royalties equivalent to the amount of royalties due on Net Sales of Licensed Products in such country at the royalty rate set forth in Section 6.6, subject to the other provisions of this Article 6. The parties agree that for the convenience of the parties such royalty shall be paid in consideration for the use of the Licensed Materials. 6.10 The royalty on Net Sales made in currencies other than U.S. Dollars shall be calculated using the appropriate foreign exchange rate for such currency quoted by the Bank of America (San Francisco) foreign exchange desk, on the close of business on the last banking day of each calendar quarter. Royalties and payments to STANFORD shall be made in U.S. Dollars. All non-U.S. taxes related to royalty payments shall be paid by LICENSEE and are not deductible from the payments due STANFORD. 6.11 In addition to the foregoing, LICENSEE shall pay to STANFORD: (a) [**] percent ([**]%) of any amounts (excluding royalties) received by LICENSEE from sublicensees with respect to a sublicense to make polyketide compounds using methods claimed in the Licensed Patents; and (b) the lesser of (i) [**] dollars ($[**]), or (ii) [**] percent ([**]%) of any amounts (excluding royalties) received by LICENSEE from sublicensees with respect to a sublicense to screen polyketide compound libraries made by LICENSEE using methods claimed in the Licensed Patents. -8- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. It is understood and agreed that LICENSEE shall have no obligation to pay STANFORD any amount with respect to payments received by LICENSEE from a sublicensee for the purchase of equity, debt financing, research and development, library generation and preparation, the license of intellectual property or technology other than the Licensed Patents, or reimbursement for patent or other expenses. LICENSEE's obligation under subsection (b) above shall only apply to amounts received in excess of the reasonably fully burdened (direct and indirect) costs incurred by LICENSEE in developing such polyketide compound libraries, and shall not apply to any payments received by LICENSEE with respect to the first sublicenses granted by LICENSEE of rights to screen polyketide compound libraries made by LICENSEE and the second such sublicense if it is entered within [**] of the Effective Date of the first such sublicense. 6.12 In the event that LICENSEE's rights under this Agreement become non-exclusive in any country, the amounts due STANFORD pursuant to the provisions of this Article 6 shall be reduced by [**]. 6.13 In the event that LICENSEE sells any Licensed Material which has not been materially altered or modified by or on behalf of LICENSEE to any third party, LICENSEE shall pay to STANFORD [**] percent ([**]%) of all amounts received from such third party therefore, excluding any amounts paid for the preparation, packaging and shipping of such Licensed Material. 7 ROYALTY REPORTS, PAYMENTS AND ACCOUNTING 7.1 Beginning with the first sale of a Licensed Product, LICENSEE shall make written reports (even if there are no further sales) of royalty payments due, if any, to STANFORD within [**] ([**]) days after the end of each [**]. This report shall state the number, description, and aggregate Net Sales of Licensed Product(s) during such completed [**], and resulting calculations of earned royalty payments due STANFORD pursuant to Sections 6.5 through 6.8 for such completed [**]. Concurrent with the submission of each such report, LICENSEE shall pay STANFORD any royalties due for the [**] covered by such report. 7.2 LICENSEE agrees to keep and maintain records for a period of [**] ([**]) years showing the manufacture, sale, use and other disposition of products sold or otherwise disposed of under the license herein granted. Such records will include sufficient detail to enable the royalties payable hereunder by LICENSEE to be determined. LICENSEE further agrees to permit its books and records to be examined by an independent certified public accountant selected by STANFORD and acceptable to LICENSEE once per [**] during the term of this Agreement, for the sole purpose of verifying the reports and royalty payments made by LICENSEE. Such examination shall be made at LICENSEE'S place of business during ordinary business hours with at least thirty (30) days prior written notice. The accountant shall report to STANFORD only whether there has been a royalty underpayment and, if so, the amount thereof. Such examination is to be at the expense of STANFORD except in the event that the results of the audit reveal an under reporting of royalties -9- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. due STANFORD of [**] percent ([**]%) or more, then the audit costs shall be paid by LICENSEE within [**] ([**]) days of notice by STANFORD to LICENSEE. 8 NEGATION OF WARRANTIES 8.1 Nothing in this Agreement is or shall be construed as: (a) A warranty or representation by STANFORD as to the validity or scope of any Licensed Patent(s); (b) A warranty or representation that anything made, used, sold, or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents, copyrights, and other rights of third parties; (c) An obligation to bring or prosecute actions or suits against third parties for infringement, except to the external and in the circumstances described in Article 13; (d) Granting by implication, estoppel, or otherwise any licenses or rights under patents or other rights of STANFORD or other persons other than to the Invention(s) and Licensed Patent(s), regardless of whether such patents or other rights are dominant or subordinate to any Licensed Patent(s); or (e) An obligation to furnish any technology or technological information, except as expressly set forth in this Agreement. 8.2 Except as expressly set forth in this Agreement, STANFORD AND BURF MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF THE LICENSED PRODUCT(S) WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR ANY OTHER EXPRESS OR IMPLIED WARRANTIES. 8.3 LICENSEE agrees that nothing in this Agreement grants LICENSEE any express or implied license or right under or to: (a) U.S. Patent No. 4,237,224, "Process for Producing Biologically Functional Molecular Chimeras"; U.S. Patent No. 4,468,464 and U.S. Patent No. 4,740,470, both entitled, "Biologically Functional Molecular Chimeras" (collectively known as the Cohen/Boyer patents), or reissues thereof; or -10- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (b) U.S. Patent No. 4,656,134 "Amplification of Eukaryotic Genes" or any patent application corresponding thereto. 9 REPRESENTATIONS AND WARRANTIES 9.1 STANFORD represents and warrants that it has the power to enter into this Agreement and to the best of its knowledge has the right to grant the rights granted herein to LICENSEE. 9.2 LICENSEE represents and warrants that it has the power to enter into this Agreement and meet its obligations under this Agreement. 10 INDEMNITY 10.1 LICENSEE agrees to indemnify, hold harmless, and defend STANDFORD, STANFORD Health Services, Brown University and BURF and their respective trustees, officers, employees, students, and agents (the "Indemnitees") against any and all liability, damage, loss or expense incurred by or imposed on the Indemnittees or any one of them, arising out of third party claims for death, illness, personal injury, property damage, and fraudulent business practices arising out of the manufacture, use, sale, or other disposition of Invention(s), Licensed Patent(s), Licensed Materials or Licensed Product(s) by LICENSEE or its sublicensee(s), or the exercise of the license granted herein. 10.2 STANFORD, STANFORD Health Services and Brown University and BURF shall not be liable for any indirect, special, consequential, or other damages whatsoever, whether grounded in tort (including negligence), strict liability, contract or otherwise. STANFORD, STANFORD Health Services, Brown University and BURF shall not have any responsibilities or liabilities whatsoever with respect to Licensed Product(s). 10.3 In addition to the foregoing, LICENSEE (or its sublicensee) shall maintain, during the term of this Agreement after the commencement of clinical trials, Comprehensive General Liability Insurance, including if appropriate, Products Liability Insurance, to cover the activities of LICENSEE and its sublicensee(s). Such insurance shall provide minimum limits of liability of: (a) Three Million Dollars ($3,000,000) per occurrence during Phase I clinical trials; (b) Five Million Dollars ($5,000,000) per occurrence during Phase II clinical trials; (c) Five Million Dollars ($5,000,000) per occurrence during Phase III clinical trials; and -11- (d) Five Million Dollars ($5,000,000) per occurrence during marketing of Licensed Product(s) to the public 10.4 In order to meet the obligations of Section 10.3, insurance shall be procured and maintained with a reputable and financially secure insurance carrier. Such insurance shall include STANFORD, STANFORD Health Services, Brown University, BURF and their respective trustees, directors, officers, employees, students, and agents as additional insureds. Such insurance shall be written to cover claims incurred, discovered, manifested, or made during the term of this Agreement. At STANFORD's request, LICENSEE shall furnish a Certificate of Insurance evidencing primary coverage and requiring thirty (30) days prior written notice of cancellation or material change to STANFORD. All such insurance of LICENSEE shall be primary coverage; insurance of STANFORD or STANFORD Health Services shall be excess and noncontributory. 11 MARKING Prior to the issuance of patents on the Invention(s), LICENSEE agrees to mark Licensed Product(s) (or their containers or labels) made, sold, or otherwise disposed of by it under the license granted in this Agreement with the words "Patent Pending," and following the issuance of one or more patents, with the numbers of any applicable Licensed Patent(s). 12 STANFORD NAMES AND MARKS 12.1 LICENSEE agrees not to identify STANFORD in any promotional advertising or other promotional materials to be disseminated to the public to use the name of any STANFORD faculty member, employee, or student or any trademark, service mark, trade name, or symbol of STANFORD or the STANFORD Health Services, or that is associated with either of them, without STANFORD's prior written consent, which consent shall not be unreasonably withheld. 12.2 Notwithstanding Section 12.1, LICENSEE may issue a press release containing mention of STANFORD, subject to STANFORD's prior written consent, which consent shall not be unreasonably withheld. LICENSEE may also later issue press releases containing information previously approved for release by STANFORD. 12.3 STANFORD and LICENSEE agree that reports in scientific literature and presentations of research and development work are not considered promotional materials. Promotional materials shall also not include disclosures required under any laws or government regulations or by the rules of any stock exchange of any country. -12- 13 PATENT PROSECUTION AND INFRINGEMENT 13.1 LICENSEE shall have the primary responsibility for the prosecution, filing and maintenance of all Licensed Patents, including the conduct of all interference, opposition, nullity and revocation proceedings, using counsel of its choice; provided, however, that STANFORD shall have reasonable opportunity to advise and consult with LICENSEE on such matters and may instruct LICENSEE to take such action as STANFORD reasonably believes necessary to protect the Licensed Patent(s). Counsel shall concurrently provide STANFORD and LICENSEE with copies of all material correspondence related to the prosecution of the patent applications within the Licensed Patent(s). Invoices for legal services incurred in connection with the prosecution, filing and maintenance of all Licensed Patents shall be sent directly to STANFORD with a copy directed to LICENSEE. Should LICENSEE elect to abandon any patent or patent application in any country, it shall give timely notice to STANFORD, who may continue prosecution or maintenance, at its sole expense and LICENSEE shall have no further rights with respect to such patent application or patent in such country. In the event that a conflict arises with respect to patent counsel selected by LICENSEE, STANFORD may, with just cause and after consulting with LICENSEE, select new patent counsel reasonably acceptable to LICENSEE. 13.2 Payment of all reasonable fees and costs relating to the filing, prosecution and maintenance of all patent applications and patents with the Licensed Patent(s), including interference and/or opposition, nullity and revocation proceedings, shall be the responsibility of LICENSEE. STANFORD shall direct the patent counsel to send invoices for such fees and costs directly to LICENSEE, with a copy to STANFORD, and LICENSEE shall pay such patent counsel directly amounts due. All patent-related expenses paid by LICENSEE pursuant to this Agreement shall be fully creditable against earned royalties due under Section 6.5. 13.3 STANFORD shall promptly inform LICENSEE of any suspected infringement of any Licensed Patent by a third party and any declaratory judgment filed with respect to any Licensed Patent. LICENSEE shall have the initial right but not the obligation, at its expense, to initiate and control any proceeding relating to any infringement by a third parry of any Licensed Patents, any declaratory action alleging invalidity or noninfringement of any Licensed Patents, or any interference, opposition, nullity or revocation proceeding relating to any Licensed Patents ("a Protective Action"). In pursuing any such Protective Action, LICENSEE shall provide STANFORD with material information related to the Protective Action and shall have the right, but not the obligation, to join STANFORD as a party to the Protective Action, at LICENSEE'S expense. STANFORD shall have the right to participate in the Protective Action with its own counsel at its own expense. If LICENSEE brings a Protective Action it may enter into a settlement, consent judgment or other voluntary final disposition of such Protective Action, at its sole option, and any damages recovered by a Protective Action shall be used first to reimburse LICENSEE for the costs (including attorney's and expert fees) of such Protective Action actually paid by LICENSEE, and the remainder, if any, shall be retained by LICENSEE, except LICENSEE shall pay STANFORD [**] percent ([**]%) of said remainder; provided, if STANFORD joins in any Protective Action at its inception and shares equally in the costs (including attorneys and expert fees) incurred in its conduct, in the event of any recovery -13- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. each party shall be reimbursed for its expenses incurred in such Protective Action and STANFORD and LICENSEE shall equally share any remainder. 13.4 If LICENSEE, or its sublicensee pursuant to Section 14.4, decides not to bring a Protective Action after LICENSEE receives notice from STANFORD pursuant to Section 13.3, LICENSEE shall inform STANFORD and STANFORD may institute a Protective Action. In such event, STANFORD shall control such Protective Action, including any settlement, consent judgment or other voluntary final disposition thereof at its sole option, and shall bear the entire cost of such Protective Action and shall be entitled to retain the entire amount of any recovery or settlement. STANFORD may, at its expense, join LICENSEE as a party to such a Protective Action and LICENSEE shall cooperate reasonably with STANFORD in any such Protective Action, at STANFORD'S expense. 13.5 Should either party commence a Protective Action under this Section 13 and thereafter elect to abandon the same, it shall give timely notice to the other party who may continue prosecution of such Protective Action; provided, however, that the sharing of past and future expenses and any recovery in such Protective Action shall be as mutually agreed by the parties. 13.6 In any Protective Action under this Section 13, the other party hereto shall, at the request and expense of the party initiating such Protective Action, cooperate in all respects and, to the extent possible, have its employees testify when requested and make available relevant records, papers, information, samples and the like. 14 SUBLICENSES 14.1 LICENSEE may grant sublicenses under the Invention(s) and Licensed Patent(s) to make, have made, use, and sell Licensed Product(s) in the Licensed Territory. 14.2 If LICENSEE is unable or unwilling to serve or develop a potential market or market territory, STANFORD may notify LICENSEE of potential sublicensee(s) of the Invention(s) and Licensed Patent(s), and LICENSEE, at STANFORD's request, will in good faith discuss granting a sublicense(s) to such a third party on reasonable terms acceptable to LICENSEE. 14.3 Any sublicense(s) granted by LICENSEE under this Agreement shall be subject and subordinate to the terms and conditions of this Agreement, except: (a) Sublicense terms and conditions shall reflect that any sublicensee(s) shall not further sublicense without the written consent of STANFORD, which consent shall not be unreasonably withheld; (b) The earned royalty rate specified in the sublicense(s) may be at higher rates than the rates in this Agreement; and -14- (c) All reports required by sublicensee(s) shall be made to LICENSEE. Any such sublicense(s) also shall expressly include the provisions of Articles 8 and 10 for the benefit of STANFORD. Such sublicenses shall remain in effect in the event of any termination of this Agreement and provide for the assignment of such sublicenses to STANFORD or its designee, in the event that this Agreement is terminated. 14.4 With the prior consent of LICENSEE, and the prior consent of STANFORD, which consent shall not be unreasonably withheld, a sublicensee may bring a Protective Action, subject to the provisions of Section 13.3. 14.5 LICENSEE agrees to provide to STANFORD copies of the portions of any sublicenses granted under this Agreement which relate to royalty reporting, confidentiality, diligence obligations and indemnification obligations. 15 TERMINATION 15.1 LICENSEE may terminate this Agreement with respect to any country or any Licensed Patent by giving STANFORD notice in writing at least sixty (60) days in advance of the effective date of termination selected by LICENSEE. 15.2 STANFORD may terminate this Agreement if LICENSEE: (a) Is in default in payment of royalty or providing of reports; (b) Is in material breach of any provision hereof; or (c) Provides any materially incorrect report; and LICENSEE fails to remedy any such default, breach, or materially incorrect report, or fails to act reasonably to remedy any default, breach, or materially incorrect report within sixty (60) days after receipt of written notice thereof by STANFORD. 15.3 Surviving any termination are: (a) LICENSEE'S obligation to pay royalties accrued; (b) Any cause of action or claim of LICENSEE or STANFORD, accrued, because of any breach or default by the other party; and (c) The provisions of Articles 7, 8, 9, 17 and 19. -15- 16 ASSIGNMENT Neither party may assign this Agreement or any part hereof without the express written consent of the other, which consent shall not be unreasonably withheld; provided, however, LICENSEE may assign this Agreement or any portion hereof to an Affiliate or to a successor of all or substantially all its business relating to the Licensed Patent(s) without the written consent of STANFORD and shall provide STANFORD notice of any such assignment. Assignees of this Agreement may also assign this Agreement or any portion hereof to an Affiliate or to a successor of all or substantially all its business relating to the Licensed Patent(s) without the written consent of STANFORD, and shall provide STANFORD notice of any such assignment. 17 ARBITRATION 17.1 Any controversy arising under or related to this Agreement, and any disputed claim by either party against the other under this Agreement excluding any dispute relating to patent validity or infringement arising under this Agreement, shall be settled by arbitration in accordance with the Rules of Commercial Arbitration of the American Arbitration Association. 17.2 Upon request by either party, arbitration will be initiated by a third party arbitrator mutually agreed upon in writing by LICENSEE and STANFORD within thirty (30) days of such arbitration request. Judgment upon the award rendered by the arbitrator shall be final and nonappealable and may be entered in a court having jurisdiction thereof. The parties agree that any provision of applicable law notwithstanding, they will not request and the arbitrators shall have no authority to award punitive or exemplary damages against any party. The costs of the arbitration, including administrative fees and fees of the arbitrators shall be shared equally by the parties. Each party shall bear the cost of its own attorneys' fees and expert fees. 17.3 The parties shall be entitled to discovery in like manner as if the arbitration were a civil suit in the California Superior Court; provided, however, the arbitrator may limit the scope, time and/or issues involved in discovery. 17.4 Any arbitration shall be held at STANFORD, California, unless the parties hereto mutually agree in writing to another place. 18 NOTICES All notices under this Agreement shall be deemed to have been fully given when done in writing and deposited in the United States mail, registered or certified, or overnight deliver service (e.g., DHL, Federal Express) and addressed as follows: -16- To STANFORD: Office of Technology Licensing Stanford University 900 Welch Road, Suite 350 Palo Alto, California 94304-1850 Attention: Director To LICENSEE: KOSAN Biosciences, Inc. 211 Belgrave Avenue San Francisco, California 94117 Attention: President Either party may change its address upon written notice to the other party. 19 CONFIDENTIALITY STANFORD shall maintain this Agreement and the reports and any information provided by LICENSEE to STANFORD pursuant to Sections 5.3, 7 and 14.5 in confidence and not disclose such information or reports to any third party, except as required by law and disclosed after notice to LICENSEE and after requesting confidential treatment and a protective order, if available. STANFORD may, however, disclose to third parties total annual royalty payments and general statistical information regarding payments made hereunder in the context of disclosing statistical information pertaining to the performance of the STANFORD Office of Technology Licensing. 20 WAIVER None of the terms of this Agreement can be waived except by the written consent of the party waiving compliance. 21 APPLICABLE LAW This Agreement shall be governed by the laws of the State of California, without reference to principles of conflicts of laws. 22 ENTIRE AGREEMENT This Agreement constitutes the entire agreement between LICENSEE and STANFORD and supersedes all prior communications, understandings and agreements with respect to the subject -17- matter of this Agreement. This Agreement may not be amended except with a written agreement signed by LICENSEE and STANFORD. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the Effective Date set forth above. BOARD OF TRUSTEES OF THE LELAND KOSAN BIOSCIENCES, INC. STANFORD JUNIOR UNIVERSITY ("LICENSEE") ("STANFORD") By: /s/ KATHARINE KU By: /s/ DANIEL V. SANTI -------------------------------------- ------------------------------- Katharine Ku, Director of Technology Daniel V. Santi, President Licensing 3/12/96 -18- EXHIBIT A LICENSED MATERIALS -19- [**] [**] [**]
[**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] [**] [**]
[**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] [**]
[**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT B LICENSED PATENTS U.S. Patent Application Serial No. 8/238,811 08/486,645 60/003,338 PCT/US94/10643 -20- EXHIBIT C MATERIAL TRANSFER AGREEMENT -21- MATERIAL TRANSFER AGREEMENT This Material Transfer Agreement (the "Agreement") effective as of _____________ , 199_ (the "Effective Date") is made by and between KOSAN Biosciences, Inc., with an address at 211 Belgrave Avenue, San Francisco, California 94117 (the "Company") and ___________________, with an address at ___________________ (the "Recipient") and sets forth the terms and conditions on which the Company will transfer biological materials to Recipient and Scientist and Recipient's and Scientist's use thereof. 1. MATERIALS. The Company is willing to transfer to Recipient and Scientist the biological materials specified on Exhibit A hereto ("Materials"), for the sole purpose of conducting the research described on Exhibit B hereto ("Research") in the laboratory of ___________________ (the "Scientist") at ____________________. Materials include the original biological materials transferred to Recipient, as well as any derivatives, progeny, or improvements developed by Recipient or Scientist therefrom. 2. LIMITATION OF USE. The Materials may be used only for Research solely by the Scientist in Scientist's laboratory, at Recipient under suitable containment conditions. The Materials shall not be used for commercial or other purposes. 3. CONFIDENTIALITY. All oral or written communications received by Recipient and Scientist relating to the Materials are, and shall remain, proprietary and confidential information of the Company. The Recipient and Scientist agree to hold all such information in confidence and not to disclose such information to any third party or use it for any, purpose except the conduct of the Research, except that the Recipient and Scientist shall not be required to keep confidential information that (i) is already known to the Recipient or Scientist at time of disclosure by the Company, as evidenced by written records of the Recipient and Scientist, (ii) has become publicly known and generally available through no wrongful act of Recipient or Scientist or (iii) has been received by the Recipient or Scientist from a third party authorized to make such disclosure. 4. CONTROL OF MATERIALS. Recipient and Scientist agree to retain control over the Materials and not to transfer the Materials to any person or entity without the prior written approval of the Company. The Company reserves the right to distribute similar Materials to others and to use such Materials for its own purposes. Recipient and Scientist agree to return any remaining Materials and products or materials derived from such Materials, to the Company upon completion of the Research or at any earlier time that the Company may request. 5. NO WARRANTY. The Materials are being made available in order to further research concerning it. THE MATERIALS ARE BEING SUPPLIED TO RECIPIENT "AS IS" WITH NO WARRANTIES, EXPRESS OR IMPLIED, AND THE COMPANY EXPRESSLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. The Company makes no representations that the use of the Materials will not infringe any patent or other proprietary right of any third party. Recipient and Scientist agree that the Materials will not be used in humans under any circumstances. 6. REPORTS. Recipient and Scientist will supply to the Company a written report detailing the results obtained in its study within thirty (30) days after the Research is concluded. The final report may be in the form of a manuscript, abstract, or other publication submission. Recipient and Scientist agree to not disclose these results, their underlying data and/or any conclusions drawn from the study, orally or in writing (e.g., by submission of a manuscript, abstract, patent application, etc.), unless the Company has had thirty (30) days in which to review the intended disclosure and make recommendations or comments. The Company will treat information disclosed by Recipient and Scientist as confidential, upon request, by entering into a Confidentiality Agreement to be negotiated by the parties. 7. OPTION. In consideration for the rights granted herein, the Recipient and Scientists hereby grant to the Company an exclusive option to acquire an exclusive worldwide license, with the right to grant and authorize sublicenses, under all intellectual property conceived, reduced to practice or otherwise developed by the Recipient or Scientist with the use of the Materials, on reasonable and customary terms to be negotiated in good faith by the parties. 8. NO CONFLICT. The Materials will not be used in any research that is subject to consulting, licensing or similar obligations to any third party, unless written permission is first obtained from the Company. The rights and obligations provided by Recipient herein do not, and during the term of the Agreement, will not conflict with any other right or obligation provided under any other agreement that Recipient or Scientist has with any third party, including any sponsor or government entity. 9. CARE IN USE OF MATERIALS. Recipient and Scientist acknowledge that the Materials are experimental in nature and may have unknown characteristics and therefore agrees to use prudence and reasonable care in the use, handling, storage, transportation and disposition and containment of the Materials and all derivatives thereof. 10. HOLD HARMLESS. Recipient shall indemnify the Company and hold the Company harmless from any claims, liabilities and/or expenses which arise out of or in connection with a result of Scientist's or Recipient's use of the Materials. 11. COMPLIANCE WITH LAWS. Recipient and Scientists shall use the Materials in compliance with all applicable national, state and local laws and regulations, including all applicable National Institutes of Health guideline. 12. MISCELLANEOUS. This Agreement including its Exhibits sets forth the entire agreement between the parties with respect to the subject matter contained herein and supersedes any previous understandings, commitments or agreements, oral or written. This Agreement may only be amended with a writing signed by authorized representatives of the parties hereto. This Agreement shall be governed by and construed under California law as applied to agreements entered into and performed in California by California residents. RECIPIENT KOSAN BIOSCIENCES, INC. By: By: ------------------------------- ------------------------------- Title: Title: ---------------------------- ---------------------------- Acknowledged and Agreed to: - ---------------------------------- [Scientist's Signature] - ---------------------------------- [Print Name] -2- EX-10.9 6 a2026613zex-10_9.txt EXHIBIT 10.9 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 10.9 AMENDMENT NO. 1 TO LICENSE AGREEMENT This Amendment No. 1 to License Agreement (the "Amendment") is effective as of March ___, 1996 between KOSAN Biosciences, Inc. ("Licensee") and THE BOARD OF TRUSTEES OF THE LELAND STANFORD JUNIOR UNIVERSITY ("STANFORD") concerning the License Agreement between Licensee and STANFORD effective March 11, 1996 (the "Agreement"). 1. Section 1.3 is hereby amended to provide in its entirety as follows: LICENSEE desires a license under said Invention(s), Licensed Patent(s)and Licensed Materials to develop, manufacture, have made, use, and sell Licensed Product(s). 2. Section 14.l is hereby amended to provide in its entirety as follows: Licensee may grant sublicenses under the Invention(s), Licensed Materials and Licensed Patent(s) to make, have made, import, use, lease, sell and offer for sale and otherwise commercialize and exploit Licensed Products and Licensed Materials, and practice any method, process or procedure within the Licensed Patents in the Licensed Territory. 3. Section 14.3 (a) is hereby amended to provide in its entirety as follows: (a) Sublicense terms and conditions shall reflect that any sublicensee(s) shall not further sublicense without the written consent of STANFORD, which consent shall not be unreasonably withheld; provided, however, sublicensees may grant further sublicenses with respect to any Licensed Product within the scope of Section 2.5 (ii) without the consent of STANFORD; 4. The last sentence of Section 14.3 is amended to provide in its entirety as follows: Such sublicenses (including, without limitation, any non-exclusive sublicenses) shall remain in effect in the event of any conversion of the exclusive license granted herein to a non-exclusive license pursuant to Section 3.2 or any termination of this Agreement and shall provide for the assignment of such sublicenses to STANFORD or its designee, in the event that the Agreement is terminated; provided, the financial obligations of each sublicensee to STANFORD shall be limited to the amounts Licensee shall be obligated to pay to STANFORD for the activities of such sublicensee pursuant to this Agreement. 5. Except as specifically modified or amended hereby, the License Agreement shall remain in full force and effect and, as so modified or amended, is hereby ratified, confirmed and approved. No provision of this Amendment may be modified or amended except expressly in a writing signed by both parties nor shall any terms be waived except expressly in a writing signed by the party charged therewith. This Amendment shall be governed in accordance with the laws of the State of California, without reference to principles of conflicts of laws. IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the date shown above. THIE BOARD OF TRUSTEES OF THE KOSAN BIOSCIENCES, INC. THE LELAND STANFORD JUNIOR UNIVERSITY By: /s/ Katharine Ku By: /s/ Daniel V. Santi ---------------------------------- ------------------------- Print Name: Katharine Ku Print Name: Daniel V. Santi --------------------------- ----------------- Title: DIRECTOR, TECHNOLOGY LICENSING Title: PRESIDENTE ------------------------------- ---------------------- KOSAN BIOSCIENCES, INC. 1450 Rollins Road Burlingame, CA 94010 Tel: 650-343-8673, ext. 207 Fax: 650-343-2931 E-Mail: ostrach@kosan.com - -------------------------------------------------------------------------------- September 21, 1998 Ms. Mona Wan Stanford University Office of Technology Licensing 900 Welch Road, Suite 3500 Palo Alto, CA 94304 Dear Mona: This letter will confirm the agreement of Kosan Biosciences, Inc. ("Kosan") and the Board of Trustees of the Leland Stanford Jr. University ("Stanford") that Article 11 of the License Agreement entered by Kosan and Stanford effective March 11, 1996, shall be amended to read in its entirety as follows: Prior to the issuance of patents on the Invention(s), LICENSEE agrees to use reasonable efforts to mark Licensed Product(s) (or their containers or labels) made, sold, or otherwise disposed of by it under the license granted in this Agreement with the words "Patent Pending" and following the issuance of one or more patents, with the numbers of any applicable Licensed Patent(s). Except as expressly provided above, the Agreement, as amended, shall remain in full force and effect. MS. MONA WAN SEPTEMBER 21, 1998 PAGE 2 Please indicate Stanford's agreement to the foregoing by having this letter countersigned below. Yours sincerely, /s/ Michael S. Ostrach Michael S. Ostrach Vice President, Corporate Development UNDERSTOOD AND AGREED: TRUSTEES OF THE LELAND STANFORD UNIVERSITY By: /s/ Katharine Ku ---------------------------------------- Name: KATHARINE KU --------------------------------------- Title: DIRECTOR TECHNOLOGY LICENSING -------------------------------------- Date: Sept. 24, 1998 -------------------------------------- AMENDMENT NO. 3 TO LICENSE AGREEMENT This Amendment No. 3 to License Agreement (the "Amendment") is effective as of March 10, 2000 (the "Effective Date"), between Kosan Biosciences, Inc. ("Licensee") and The Board of Trustees of the Leland Stanford Junior University ("Stanford") and amends the license agreement between Licensee and Stanford effective March 11,1996, as amended pursuant to that certain Amendment No. 1 effective March 11, 1996, and that certain Amendment No. 2 effective September 21, 1998 (together the "Agreement") for "Recombinant Production of Novel Polyketides" as described in Stanford Docket S93-098. WHEREAS, Licensee has acquired an Exclusive license to the Licensed Patents listed in Appendix A pursuant to the Agreement; Stanford owns patent applications claiming technology related to Licensed Patents, listed in Appendix B; Both parties anticipate that there may be future inventions from the laboratory of Dr. Chaitan Khosla that Stanford may offer to add to Appendix B and that Licensee may wish to license; Both parties desire to determine the conditions under which the future inventions may be added to Appendix B and subsequently licensed; and Stanford and Licensee believe that both parties and the public will benefit by licensing patent applications listed in Appendix B to Licensee and entering into this Amendment; NOW, THEREFORE, Stanford and Licensee agree as follows: SECTION 1 DEFINITIONS A. "Proposed Invention" means a patent application or invention disclosure that Stanford offers to Licensee for inclusion in Appendix B. B. "Optioned Patent" means a Proposed Invention that Licensee agrees to include in Appendix B, any patent application filed on an invention disclosure that is a Proposed Invention, and any divisions, continuations, reissues and foreign counterparts claiming priority to the Proposed Invention. C. "New Licensed Patent" means an Optioned Patent for which Licensee chooses to take an Exclusive license. D. "New Non-Exclusive Patent" means an Optioned Patent for which Licensee chooses to take a non-exclusive license. Page 1 of 5 SECTION 2. GRANT OF OPTION FOR EXCLUSIVE OR NON-EXCLUSIVE LICENSE Stanford hereby grants Licensee and Licensee hereby accepts an Exclusive option to acquire an Exclusive or non-exclusive license to Optioned Patents on the terms and conditions set forth herein If a future patent application or an invention disclosure: a) names Dr. Chaitan Khosla as an inventor; and b) describes technology relating to polyketides or the production thereof by recombinant DNA technology or technology disclosed in Licensed Patents, Stanford will determine if that patent application or invention disclosure will become a Proposed Invention. If Stanford decides that a patent application or invention disclosure will be a Proposed Invention, then Stanford shall provide notice thereto to Licensee. The Proposed Invention shall be subject to this Amendment SECTION 3 OPTION TERM The "Option Term" shall begin when Stanford provides notice in writing to Licensee of the Proposed Invention and shall end EARLIER of: a) [**] years after the date Stanford offers the Proposed Invention to Licensee in writing; or b) [**] after Stanford notifies Licensee in writing that either: i) it has received a Notice of Allowance from the US. Patent and Trademark Office for an Optioned Patent; or ii) a third party has offered or requested licensing terms for the Optioned Patent. SECTION 4 EXERCISE OF OPTION Licensee may exercise its option at any time during the Option Term by providing Stanford Written notice of its determination to acquire an Exclusive or non-exclusive license to the Optioned Patent set forth in such notice. Upon such notification, the Optioned Patent will become either a New Licensed Patent or a New Non-Exclusive Patent as appropriate. A New Licensed Patent will be subject to the terms and conditions of this Amendment and those of any Licensed Patent in the Agreement. A New Non-Exclusive Patent will be subject to the terms and conditions of this Amendment and those of any Licensed Patent in the Agreement, except that: a.) the grant is not Exclusive; and b.) New Non-Exclusive Patent may not be sublicensed. SECTION 5 PAYMENTS A. AMENDMENT OF ISSUE FEE. Within [**] of the Effective Date of this Amendment No. 3, Licensee shall issue to Stanford shares of Licensee's Series C preferred stock equivalent to thirty thousand dollars ($30,000). B. OPTION FEE. within [**] of the Effective Date of this Amendment No. 3, Licensee shall pay Stanford [**] dollars ($[**]) as an option fee for the patent applications listed in Appendix B. To include future Page 2 of 5 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Proposed Inventions in Appendix B, Licensee shall pay Stanford [**] dollars ($[**]) as the option fee for each Proposed Invention. If a patent application is filed on a Proposed Invention the option fee shah be paid by the LATER of: (i) [**] from Stanford's notifying Licensee of a Proposed Invention; and (ii) [**] from the date a provisional patent application is filed on a Proposed Invention. If no patent application is filed on a Proposed Invention the option fee shall be paid by [**] from Stanford's notifying Licensee of a Proposed Invention. After the option fee is received a Proposed Invention will become an Optioned Patent. If Licensee does not pay the option fee, it relinquishes all rights to such Proposed Invention under the Agreement. Only one such option fee is due for each Proposed Invention. C. NON-EXCLUSIVE LICENSE FEE. If Licensee exercises its option by acquiring a non-exclusive license to an Optioned Patent, then Licensee shall pay Stanford a non-exclusive license fee of [**] dollars ($[**]) within [**] of the issuance of the first patent claiming priority to an Optioned Patent. The non-exclusive license fee is due only one time for each New Non-Exclusive Patent. D. EXCLUSIVE LICENSE FEE. If Licensee decides to exercise its option to acquire an Exclusive license to an Optioned Patent, then Licensee shall pay Stanford an Exclusive license fee of [**]dollars ($[**]) within [**] of the issuance of the first patent claiming priority to such New Licensed Patent. The amount of the Exclusive license fee shall be determined by Stanford. Stanford agrees that reductions in the Exclusive license fee (to not less than [**] dollars ($[**])) may be appropriate when (i) third party technology licensed to Licensee is used in conjunction with the invention claimed in the patent; or (ii) the claims of the patent are method claims or are composition of matter claims that do not encompass the product to be sold or its method of manufacture. The Exclusive license fee is due only once for each New Licensed Patent. Licensee may convert a New Licensed Patent to a New Non-Exclusive Patent upon written notice to Stanford at any time. E. ANNUAL FEE FOR PATENTS SUBJECT TO DILIGENCE PLAN. For each New Licensed Patent subject to a Diligence Plan, as defined in Ss.6, Licensee shall pay an annual fee of [**] dollars ($[**]). The annual fee is due beginning on the first [**] after such Diligence Plan is accepted in writing and every [**] thereafter, for so long as such Diligence Plan is effective. The amount of the annual fee shall be determined by Stanford. Stanford agrees that reductions in the fee (to not less than [**] dollars ($[**]) per New Licensed Patent) may be appropriate when (i) third party technology licensed to Licensee is used in conjunction with the invention claimed in the patent; or (ii) the claims of the patent are method claims or are composition of matter claims that do not encompass the product to be sold or its method of manufacture. In no event shall the cumulative amount of annual fees due under this Amendment and annual maintenance fees due under paragraph 6.3 of the Agreement exceed: [**]. F. ROYALTIES. For all Optioned Patents, New Non-Exclusive Patents, and New Licensed Patents, royalties shall be due and payable as set forth in paragraphs 6.5 Page 3 of 5 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. through 6.13 of the Agreement. If a Licensed Product is encompassed by claims from multiple Licensed Patents, Optioned Patents, New Licensed Patents or New Non-Exclusive patents, as mended hereby, then Licensee shall pay only one royalty. G. PATENT EXPENSES. Licensee shall pay all patent costs for Optioned Patents, New Licensed Patents and New Non-Exclusive Patents. Patent costs paid by Licensee for New Non-Exclusive Patents shall be reimbursable as follows: i) If Stanford licenses the patent to a third party and Licensee submits a written request to Stanford, then Stanford shall reimburse Licensee for [**]% of the past patent costs paid by Licensee. ii) Patent expenses that are not reimbursed are creditable against royalties due under paragraph 6.5 of the Agreement. iii) If Licensee chooses to convert a New Licensed Patent to a New Non-Exclusive Patent, then patent expenses incurred prior to conversion are not reimbursable or creditable. SECTION 6 DILIGENCE PLAN Licensee shall submit to Stanford a plan (the "Diligence Plan"), acceptable to Stanford, for developing a New Licensed Patent; such Diligence Plan will be submitted within [**] of the date Stanford offers a Proposed Invention to the Licensee in writing. If Licensee does not submit a Diligence Plan or notifies Stanford in writing that it will no longer adhere to a Diligence Plan accepted by Stanford, then the New Licensed Patent will be converted to a New Non-Exclusive Patent. SECTION 7 MISCELLANEOUS A. GOOD-STANDING. Stanford and Licensee agree that neither party is known to be in breach of the Agreement and that both parties are in good-standing with one another. Both parties agree that prior to this Amendment, the patents and patent applications licensed to Licensee pursuant to the Agreement are listed on Appendix A. B. LICENSES TO THIRD PARTIES. In the event Stanford licenses a New Non-Exclusive Patent to a third party, then Stanford shall make good faith efforts to notify Licensee and to include in such license a statement that the license does not include rights to Licensed Patents or New Licensed Patents. C. RELEASE OF OPTION OR LICENSE. Licensee may release its option or license rights to a Proposed Invention, Optioned Patent, New Licensed Patent or New Non-Exclusive Patent at any time by giving Stanford 30 days written notice of the release. Upon such release, Licensee shall have neither further payment obligations pursuant to such license other than those previously incurred nor any rights in such Proposed Invention, Optioned Patent, New Licensed Patent, or New Non-Exclusive Patent. Page 4 of 5 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. D. AGREEMENT IN FULL FORCE AND EFFECT. Except as specifically amended hereby, the Agreement shall remain in full force and effect and as so amended is hereby ratified, confirmed, and approved. No provision of this Amendment may be amended except expressly in writing signed by both parties nor shall any terms be waived except expressly in writing signed by the party charged therewith. This Amendment shall be governed in accordance with the laws of the State of California without reference to principles of conflicts of laws. IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the Effective Date shown above. By: /s/ Katherine Ku By: /s/ DANIEL V. SANTI ------------------------------------ ----------------------------------------- Name: KATHERINE KU Daniel V. Santi ---------------------------------- President & CEO Title: DIRECTOR TECHNOLOGY LICENSING Date: 15 MAR 00 --------------------------------- -------------------------------------- Date: Mar 10, 2000 ----------------------------------
Page 5 of 5 APPENDIX A PATENTS LICENSED
[**] [**] [**]
Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] [**] [**] [**]
Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. APPENDIX B PATENTS OPTIONED [**] [**] [**]
Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.10 7 a2026613zex-10_10.txt EXHIBIT 10.10 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 10.10 LICENSE AGREEMENT BETWEEN PRESIDENT AND FELLOWS OF HARVARD COLLEGE AND KOSAN BIOSCIENCES, INC. Effective as of December, 1998 Re: Harvard Case No 1185-95 In consideration of the mutual promises and covenants set forth below, the parties hereto agrees as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: 1.1 AFFILIATE: any company, corporation, or business in which LICENSEE owns or controls at least fifty percent (50%) of the voting stock or other ownership. Unless otherwise specified, the term LICENSEE includes AFFILIATES. 1.2 FIELD: polyketide production, drug discovery and screening of polyketides and [**], manufacture of compounds developed as a result of such activities, and commercialization of such compounds for any and all purposes. 1.3 HARVARD: President and Fellows of Harvard College, a nonprofit Massachusetts educational corporation having offices at the Office for Technology and Trademark Licensing, 124 Mt. Auburn Street, Suite 410 South, Cambridge, Massachusetts 02138. 1.4 LICENSED PROCESSES: the processes covered by a VALID CLAIM in the country where such process is used, or in the country where the resulting product is manufactured or sold. 1.5 LICENSED PRODUCTS: products covered by a VALID CLAIM in the country of manufacture, use or sale, or products made or services provided in accordance with or by the practice of LICENSED PROCESSES. 1.6 LICENSEE: Kosan Biosciences, Inc. (Kosan) a corporation organized under the laws of California having its principal offices at 1450 Rollins Road, Burlingame, CA 94010. 1.7 NET SALES: the amount billed, invoiced, or received (whichever occurs first) by LICENSEE or its sublicensees, for sales, leases, or other transfers of LICENSED PRODUCTS, less: (a) customary trade, quantity or cash discounts and non-affiliated brokers' or agents' commissions actually allowed and taken; (b) amounts repaid or credited by reason of rejection or return; and [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (c) to the extent separately stated on purchase orders, invoices, or other documents of sale, duties, taxes levied on and/or other governmental charges made as to production, sale, transportation, delivery or use and paid by or on behalf of LICENSEE or sublicensees. (d) reasonable charges for delivery or transportation provided by third parties, if separately stated. NET SALES also includes the fair market value of any non-cash consideration received by LICENSEE or sublicensees for the sale, lease, or transfer of LICENSED PRODUCTS. In the event LICENSEE negotiates in good faith a sublicense with a definition of NET SALES which differs from the above, and provided the negotiated definition does not cause material changes in the royalties due HARVARD, such negotiated definition shall control royalties due HARVARD hereunder for such sublicense, provided that HARVARD shall have thirty (30) days to review and approve the proposed negotiated definition, which approval shall not be unreasonably withheld. 1.8 ACADEMIC RESEARCH PURPOSES: use of PATENT RIGHTS for academic research or other not-for-profit scholarly purposes which are undertaken at a non-profit or governmental institution, that does not use the PATENT RIGHTS in the production or manufacture of products for sale or the performance of services for a fee, or in the performance of research sponsored by another for-profit entity. LICENSEE acknowledges that HARVARD is currently receiving research support from a foundation entity for cloning the biosynthetic genes for a particular natural product and for the expression of genes once cloned to test for activity, and such research shall be deemed to be for ACADEMIC RESEARCH PURPOSES hereunder, and HARVARD represents that the foundation sponsor has no right to manufacture or commercialize products under the PATENT RIGHTS. 1.9 NON-ROYALTY SUBLICENSE INCOME: Sublicense issue fees, sublicense maintenance fees, sublicense milestone payments, and similar non-royalty payments made by sublicensees to LICENSEE on account of sublicenses pursuant to this Agreement, including any initial option or license fees for any sublicense which includes the PATENT RIGHTS, and rights to the LICENSED PROCESSES or LICENSED PRODUCTS. Notwithstanding the above, it is understood and agreed that NON-ROYALTY SUBLICENSEE INCOME shall not include any amounts received by LICENSEE from sublicensees for: the purchase of equity in LICENSEE, debt financing, research and development, the license or sublicense of any intellectual property other than the PATENT RIGHTS, products other than LICENSED PRODUCTS, reimbursement for patent or other expenses, or sublicense milestone payments and other payments for milestones achieved or other events that did not result from the use of LICENSED PROCESSES or are not for LICENSED PRODUCTS. 1.10 PATENT RIGHTS: United States patent application [**], the inventions described and claimed therein, and any divisions, substitutions, continuations thereof, and continuations-in-part thereof to the extent the claims are directed to subject matter specifically described in [**], patents issuing on any of the preceding, and reexaminations, reissues and extensions thereof, and any and all foreign patent applications and patents corresponding thereto, or corresponding to PCT patent application No. US96/16202, all to the extent owned or controlled by HARVARD. 1.11 TERRITORY: Worldwide. [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 1.12 VALID CLAIM: means an issued claim of any unexpired patent or a claim of any pending patent application within the PATENT RIGHTS which has not been held unenforceable, unpatentable or invalid by a decision of a court or governmental body of competent jurisdiction, in a ruling that is unappealable or unappealed within the time allowed for appeal, which has not been rendered unenforceable through disclaimer or otherwise, and which has not been lost through an interference proceeding. Notwithstanding the foregoing, a claim of a pending patent application shall cease to be a VALID CLAIM if no patent has issued on such claim on or prior to the seventh anniversary of the date of filing of the corresponding parent patent application, provided that such claim shall once again become a VALID CLAIM on the issue date of a patent that subsequently issues and covers such claim. 1.13 The terms 'Public Law 96-517" and 'Public Law 98-620" include all amendments to those statutes. 1.14 The terms 'sold' and 'sell' include, without limitation, leases and other transfers and similar transactions. ARTICLE II REPRESENTATIONS 2.1 HARVARD and the Regents of the University of California ('The Regents') are joint owners by assignment from Ralph H. Lambalot, Amy M. Gehring and Christopher T. Walsh (to HARVARD) and Ralph Reid (to The Regents)of certain rights, title and interest in United States Patent Application [**] entitled 'Acyl Carrier Protein Synthases and Uses Thereof' (H.U. Case $$1185-95), in the foreign patent applications corresponding thereto, and in the inventions described and claimed therein. The Regents have authorized HARVARD to act as their sole patent and licensing agent for said patent applications under a letter of Agreement dated April 10, 1997, a copy of which is included in Appendix A. 2.2 HARVARD represents and warrants that: (i) the execution, delivery and performance of this Agreement have been duly authorized by all necessary institutional action on the part of HARVARD and The Regents; (ii)the PATENT RIGHTS are free and clear of any lien, encumbrance, security interest or restriction on license, other than those specified in Article III of this Agreement; (iii) it has not previously granted, and will not grant during the term of this Agreement, any right, license or interest in or to the PATENT RIGHTS, or any portion thereof, inconsistent with the license granted to LICENSEE herein; and (iv)there are no threatened or pending actions, suits, investigations, claims or proceedings in any way relating to the PATENT RIGHTS. 2.3 HARVARD has the authority to issue licenses under PATENT RIGHTS with respect to the entire interest of The Regents and HARVARD therein. 2.4 HARVARD is committed to the policy that ideas or creative works produced at HARVARD should be used for the greatest possible public benefit, and believes that every reasonable incentive should be provided for the prompt introduction of such ideas into public use, all in a manner consistent with the public interest. [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2.5 LICENSEE intends to diligently develop the invention and to bring LICENSED PRODUCTS to market which are subject to this Agreement. 2.6 LICENSEE is desirous of obtaining an exclusive license in the TERRITORY in order to practice the above-referenced invention covered by PATENT RIGHTS in the United States and in certain foreign countries, and to manufacture, use and sell in the commercial market the LICENSED PRODUCTS made in accordance therewith, and HARVARD is desirous of granting such a license to LICENSEE in accordance with the terms of this Agreement. ARTICLE III GRANT OF RIGHTS 3.1 HARVARD hereby grants to LICENSEE and LICENSEE accepts, subject to the terms and conditions hereof, in the TERRITORY and in the FIELD: an exclusive commercial license under PATENT RIGHTS to make and have made, to import, have imported, to use and have used, to offer for sale, to sell and have sold the LICENSED PRODUCTS, and to practice the LICENSED PROCESSES, for the life of the PATENT RIGHTS. Such licenses shall include the right to grant sublicenses under the terms outlined in this Agreement. In order to provide LICENSEE with commercial exclusivity for so long as the license under PATENT RIGHTS remains exclusive, HARVARD agrees that it will not grant licenses under PATENT RIGHTS to others except as required by HARVARD's obligations in paragraph 3.2(a) or as permitted in paragraph 3.2(b). 3.2 The granting and exercise of this license is subject to the following conditions: (a) HARVARD's "Statement of Policy in Regard to Inventions, Patents and Copyrights," dated August 10, 1998, Public Law 96-517, Public Law 98-620, and HARVARD's obligations under agreements with other non-profit sponsors of research. Any right granted in this Agreement greater than that permitted under Public Law 96-517, or Public Law 98-620, shall be subject to modification as may be required to conform to the provisions of those statutes. (b) HARVARD reserves the right to make and use, and grant to others researchers at non-profit or governmental institutions non-exclusive licenses to make and use for ACADEMIC RESEARCH PURPOSES only the subject matter described and claimed in PATENT RIGHTS. (c) LICENSEE shall use diligent efforts to effect introduction of the LICENSED PRODUCTS into the commercial market as soon as practicable, consistent with sound and reasonable business practice and judgment; thereafter, until the expiration of this Agreement, LICENSEE shall endeavor to keep LICENSED PRODUCTS reasonably available to the public. (d) At any time after three (3) years from the effective date of this Agreement, HARVARD may terminate or render this license non-exclusive if, in HARVARD's reasonable judgment, the Progress Reports furnished by LICENSEE do not demonstrate that LICENSEE: (i) has put the PATENT RIGHTS into commercial use in the country or countries hereby licensed, directly or through a sublicense, and is keeping products resulting from the use of the PATENT RIGHTS reasonably available to the public, or (ii) is engaged in research, development, manufacturing, marketing or sublicensing activity reasonably appropriate to achieving the objectives of 3.2(d)(i). Such activity shall include, but not necessarily be limited to, achievement of the following milestones by LICENSEE: (i) within twelve (12) months from the effective date of this Agreement, initiate or sponsor experiments designed to demonstrate heterologous expression of an [**] polyketide, using a LICENSED PROCESS or LICENSED PRODUCT; (ii) within eighteen (18) months from the effective date of this Agreement, initiate or sponsor experiments designed to demonstrate heterologous expression of a [**] polyketide, using a LICENSED PROCESS or LICENSED PRODUCT; (iii) within eight (8) years from the effective date of this Agreement, file or have a sublicensee file an IND or other regulatory permit for a LICENSED PROCESS or LICENSED PRODUCT; (e) In all sublicenses granted by LICENSEE hereunder, LICENSEE shall include a requirement that the sublicensee use reasonable efforts to bring the subject matter of the sublicense into commercial use in a timely manner. LICENSEE shall further provide in such sublicenses that such sublicenses are subject and subordinate to the terms and conditions of this Agreement, except (i): the sublicensee may not further sublicense, except to its agents, AFFILIATES, and distributors; and (ii) the rate of royalty on NET SALES paid by the sublicensee to the LICENSEE. Copies of all sublicense agreements shall be provided promptly to HARVARD; such copies shall be treated as confidential consistent with the provisions of Article 5.4(d). (f) If LICENSEE is unable or unreasonably unwilling to grant sublicenses, either as suggested by HARVARD or by a potential sublicensee or otherwise, and LICENSEE has not previously granted an exclusive license to a third party, then HARVARD may directly license such potential sublicensee unless, in HARVARD's reasonable judgment, such license would be contrary to sound and reasonable business practice, and the granting of such license would not materially increase the availability to the public of LICENSED PRODUCTS. In making any such determination, HARVARD agrees to take into serious consideration LICENSEE's reasons for being unwilling to grant the sublicense, including LICENSEE's belief that the sublicense would have a material adverse impact on LICENSEE's business. In any such event LICENSEE shall have the right of last refusal, to be exercised within sixty (60) days after notice in writing from Harvard, to sublicense such rights to such sublicensee(s) on terms no less favorable to such sublicensee(s) than those negotiated by Harvard. (g) A license in any other territory or field of use in addition to the TERRITORY and/or FIELD shall be the subject of a separate agreement and shall require LICENSEE's submission of evidence, satisfactory to HARVARD, demonstrating LICENSEE's willingness and ability to develop and commercialize in such other territory and/or field [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. of use the kinds of products or processes likely to be encompassed in such other territory and/or field. (h) During the period of exclusivity of this license in the United States, LICENSEE shall cause any LICENSED PRODUCT produced for sale by LICENSEE in the United States to be manufactured substantially in the United States. In the event that LICENSEE cannot obtain this guarantee from a sublicensee, HARVARD agrees to cooperate with LICENSEE in requesting the appropriate exemption from the United States Government. 3.3 All rights reserved to the United States Government and others under Public Law 96-517, and Public Law 98-620, shall remain and shall in no way be affected by this Agreement. ARTICLE IV ROYALTIES 4.1 LICENSEE shall pay to HARVARD a non-refundable license issue fee of [**] dollars ($[**]). [**] of this sum ($[**]) shall be payable upon execution of this Agreement and the balance of the sum ($[**]) on the first anniversary of the date of execution. 4.2 (a) LICENSEE shall pay to HARVARD during the term of this Agreement with respect to LICENSED PRODUCTS within the scope of an issued VALID CLAIM in the country of manufacture, use or sale, a royalty of [**] percent ([**]%) of NET SALES made by LICENSEE. In the case of sublicenses, LICENSEE shall pay to HARVARD a royalty of [**] percent ([**]%) of NET SALES made by sublicensees with respect to LICENSED PRODUCTS within the scope of an issued VALID CLAIM in the country of manufacture use or sale. In the case of sublicenses, LICENSEE shall also pay to HARVARD a royalty of [**] percent ([**]%)of NON-ROYALTY SUBLICENSE INCOME, provided however, that this sum shall not exceed [**] dollars ($[**]) for any given sublicense. (b) The royalty rates set forth in Paragraph 4.2(a) above shall be reduced by [**] percent ([**]%) if the applicable LICENSED PRODUCTS are not within the scope of an issued VALID CLAIM of a patent within the PATENT RIGHTS in the country such LICENSED PRODUCTS are manufactured, used or sold, but are within the scope of a pending VALID CLAIM of a patent application within the PATENT RIGHTS in the country such LICENSED PRODUCTS are manufactured used or sold. However, this provision shall not apply to NON-ROYALTY SUBLICENSE INCOME payable under Paragraph 4.2 (a) above. (c) on sales between LICENSEE and its AFFILIATES or sublicensees for resale, the royalty shall be paid on the NET SALES of the AFFILIATE or sublicensee. (d) In the event that a LICENSED PRODUCT is sold in combination as a single product with another product, active component or service whose sale and use are not covered by a VALID CLAIM of the LICENSED PRODUCT in the country for which the combination product is sold, NET SALES from such sales for purposes of calculating the amounts due under Paragraph 4.2(a) and (b) above shall be calculated by [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. multiplying the NET SALES of that combination by the fraction A/(A + B), where A is the gross selling price of the LICENSED PRODUCT sold separately and B is the gross selling price of the other product, active component or service sold separately; provided that pursuant to this adjustment provision the applicable percentage royalty (based on NET SALES or NON-ROYALTY SUBLICENSE INCOME) shall not be reduced to below [**] ([**]%) of the original rate specified. In the event that no such separate sales are made by LICENSEE or its sublicensee, NET SALES for royalty determination shall be as reasonably allocated by agreement of HARVARD and LICENSEE between such LICENSED PRODUCT and such other product, active component or service, based upon their relative importance and proprietary protection. (e) No more than one royalty payment shall be due with respect to a sale of a particular LICENSED PRODUCT. No multiple royalties shall be payable because any LICENSED PRODUCT, or its manufacture, sale or use is covered by more than one VALID CLAIM. No royalty shall be payable under this Paragraph 4.2 with respect to LICENSED PRODUCTS distributed for use in research and/or development, or in clinical trials. (f) Royalties due under this Paragraph 4.2 shall be payable on a country-by-country and LICENSED PRODUCT-by-LICENSED PRODUCT basis until the expiration of the last-to-expire issued VALID CLAIM covering such LICENSED PRODUCT in such country. 4.3 No later than January 1 of each calendar year after the first commercial sale of a LICENSED PRODUCT, LICENSEE shall pay to HARVARD a minimum annual royalty of [**] dollars ($[**]). This minimum royalty payment shall be included in the Royalty Reports under Paragraph 5.4 and credited against earned royalties for that calendar year only. 4.4 No later than January 1 of each calendar year after the effective date of this Agreement, and until the first commercial sale of a LICENSED PRODUCT, LICENSEE shall pay to HARVARD the following non-refundable license maintenance royalty and/or advance on royalties. [**] percent ([**]%) Of such payments may be credited against royalties on sales due for that calendar year or any subsequent calendar year and Royalty Reports shall reflect such a credit. However, such credits shall not reduce the amount of minimum royalties, royalties on sales or other payments due in any calendar year by more than [**] percent ([**]%) in any one year. [**] [**] dollars ($[**]) [**] [**] dollars ($[**]) [**] [**] dollars ($[**]) [**] [**] dollars ($[**])
4.5 No later than January 1 of the calendar year following achievement of the following milestones LICENSEE shall pay to HARVARD the following non-refundable milestone payments: [**] $[**] No second milestone payment for an IND filing shall be made if the LICENSED PRODUCT for which the second IND filing is made contains an active ingredient that was a component of [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. another LICENSED PRODUCT for which a previous IND filing was made and the milestone payment therefor paid. [**] $[**] Such payments shall be fully credited against royalties on sales due for any subsequent calendar year or running royalties due for that calendar year and Royalty Reports shall reflect such a credit. However, such credits shall not reduce the amount of minimum royalties, royalties on sales or other payments due in any calendar year by more than [**] percent ([**]%) in any one year. 4.6 LICENSEE shall be responsible for the payment of any amounts due to third parties to obtain and practice any rights necessary to exploit the PATENT RIGHTS. Up to [**] percent ([**]%) of any such payments by LICENSEE may be credited against any amounts due to HARVARD, except that such credits shall not reduce the amount of minimum royalties, royalties on sales or other payments due in any calendar year by more than [**] percent ([**]%) in any one year. 4.7 The total of all credits against minimum royalties, royalties on sales or other payments under Article IV shall not reduce the total amount of minimum royalties, royalties on sales or other payments due to HARVARD in any calendar year by more than [**] percent ([**]%) in any one year. Any credit which is unexpended may be carried forward until applied. ARTICLE V REPORTING 5.1 Prior to signing this Agreement, LICENSEE has provided to HARVARD a written research and development plan under which LICENSEE intends to bring the subject matter of the licenses granted hereunder into commercial use upon execution of this Agreement. Such plan includes projections of sales and proposed marketing efforts. 5.2 No later than [**] after June 30 of each calendar year, LICENSEE shall provide to HARVARD a written annual Progress Report describing progress on research and development, regulatory approvals, manufacturing, sublicensing, marketing and sales during the most recent twelve (12) month period ending June 30 and plans for the forthcoming year. This Progress Report may be combined with the Royalty Report due under Paragraph 5.4 (a). If progress differs from that anticipated in the plan required under Paragraph 5.1, LICENSEE shall explain the reasons for the difference and propose a modified research and development plan for HARVARD's review. LICENSEE shall also provide any reasonable additional data HARVARD requires to evaluate LICENSEE's performance. 5.3 LICENSEE shall report to HARVARD the date of first sale of LICENSED PRODUCTS (or results of LICENSED PROCESSES) in each country within [**] of occurrence. 5.4 (a) LICENSEE shall submit to HARVARD within [**] after each [**], a Royalty Report setting forth for such [**] at least the following information: [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (i) the number of LICENSED PRODUCTS sold by LICENSEE, its AFFILIATES and sublicensees in each country, as reported to LICENSEE, and any subsequent corrections to the initial report to LICENSEE; (ii) total billings for such LICENSED PRODUCTS; (iii) an accounting for all LICENSED PROCESSES used or sold; (iv) deductions applicable to determine the NET SALES thereof; (v) the amount of NON-ROYALTY SUBLICENSE INCOME received by LICENSEE, until the amount due under Paragraph 4.2 (a) has been paid; and (vi) the amount of royalty due thereon, or the amount of license maintenance or milestone payments due. If no royalties or other payments are due to HARVARD for any reporting period, the Royalty Report shall include the statement that no royalties are due. Such report shall be certified as correct by an officer of LICENSEE and shall include a detailed listing of all deductions from royalties. (b) LICENSEE shall pay to HARVARD with each such Royalty Report the amount of royalty due with respect to such half year. If multiple technologies are covered by the license granted hereunder, LICENSEE shall specify which PATENT RIGHTS are utilized for each LICENSED PRODUCT and LICENSED PROCESS included in the Royalty Report. (c) All payments due hereunder shall be deemed received when funds are credited to HARVARD's bank account and shall be payable by check or wire transfer in United States dollars. Conversion of foreign currency to U.S. dollars shall be made at the conversion rate existing in the United States (as reported in the New York Times or the Wall Street Journal) on the last working day of each royalty period. No transfer, exchange, collection or other charges shall be deducted from such payments. (d) All such royalty reports and other reports containing LICENSEE'S business terms and information shall be maintained in confidence by HARVARD except as required by law, or by specific reporting requirements to the Federal Government; however, HARVARD may include in its usual reports annual amounts of royalties paid. (e) Late payments shall be subject to a charge of [**] percent ([**]) per month, or [**] dollars ($[**]), whichever is greater. ARTICLE VI RECORD KEEPING 6.1 LICENSEE shall keep, and shall require its AFFILIATES and sublicensees to keep, accurate records (together with supporting documentation) of LICENSED PRODUCTS made, used or sold under this Agreement, appropriate to determine the amount of royalties due to HARVARD [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. hereunder. Such records shall be retained for at least [**] following the end of the reporting period to which they relate. They shall be available during normal business hours for examination by an accountant selected by HARVARD, reasonably acceptable to LICENSEE for the sole purpose of verifying reports and payments hereunder. In conducting examinations pursuant to this paragraph, HARVARD's accountant shall have access to all records which HARVARD reasonably believes to be relevant to the calculation of royalties under Article IV. 6.2 HARVARD's accountant shall not disclose to HARVARD any information other than information relating to the accuracy of reports and payments made hereunder. 6.3 Such examination by HARVARD's accountant shall be at HARVARD's expense, except that if such examination shows an underreporting or underpayment in excess of [**] percent ([**]%) for any [**] period, then LICENSEE shall pay the cost of such examination as well as any additional sum that would have been payable to HARVARD had the LICENSEE reported correctly, plus interest on said sum at the rate of [**] percent ([**] %) per month. ARTICLE VII DOMESTIC AND FOREIGN PATENT FILING AND MAINTENANCE 7.1 Upon execution of this Agreement, LICENSEE shall reimburse HARVARD for all reasonable expenses HARVARD has incurred for the preparation, filing, prosecution and maintenance of PATENT RIGHTS. Thereafter, subject to Paragraph 7.4, LICENSEE shall reimburse HARVARD, within forty five (45) days from receipt of an invoice, for all reasonable amounts for such future expenses agreed upon by the parties under this Article VII, which invoice shall not precede the accrual of such future expenses by more than sixty (60) days. Late payment of these invoices shall be subject to interest charges of [**] percent ([**]%) per month. HARVARD shall, in its sole discretion, using patent counsel reasonably acceptable to LICENSEE, be responsible for the preparation, filing, prosecution and maintenance of any and all patent applications and patents included in PATENT RIGHTS. HARVARD shall consult with LICENSEE as to the preparation, filing, prosecution and maintenance of such patent applications and patents and any interference or opposition relating thereto and shall furnish to LICENSEE copies of documents relevant to any such preparation, filing, prosecution or maintenance. 7.2 HARVARD shall promptly provide to LICENSEE copies of any and all patent applications within the PATENT RIGHTS filed by HARVARD during the term of this Agreement and all material documents received from or sent to any patent office relating thereto which relate to the scope, term, maintenance, validity, or enforceability of any of the PATENT RIGHTS, or any challenge to or change to any of the preceding. 7.3 HARVARD and LICENSEE shall cooperate fully in the preparation, filing, prosecution and maintenance of PATENT RIGHTS and of all patents and patent applications licensed to LICENSEE hereunder, executing all papers and instruments or requiring members of HARVARD to execute such papers and instruments so as to enable HARVARD to apply for, to prosecute and to maintain patent applications and patents in HARVARD's name in any country. Each party shall provide to the other prompt notice as to all matters which come to its attention and which may affect the preparation, filing, prosecution or maintenance of any such patent applications or patents. [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 7.4 LICENSEE may elect to surrender its PATENT RIGHTS in any country upon sixty (60) days' written notice to HARVARD. Such notice shall not relieve LICENSEE from responsibility to reimburse HARVARD for patent-related expenses incurred prior to the expiration of the sixty (60)-day notice. However, LICENSEE shall not have responsibility to reimburse HARVARD for patent-related expenses incurred subsequent to expiration of the notice, and HARVARD shall make an effort to minimize patent-related expenses during the sixty (60)-day notice period. ARTICLE VIII INFRINGEMENT 8.1 With respect to any PATENT RIGHTS that are exclusively licensed to LICENSEE pursuant to this Agreement, LICENSEE shall have the right but not the obligation to prosecute in its own name and at its own expense any suit relating to the infringement of such patent, so long as such license is exclusive at the time of the commencement of such action. LICENSEE shall have the right to authorize sublicensees to conduct such actions. HARVARD agrees to notify LICENSEE promptly of each infringement of such patents of which HARVARD is or becomes aware, providing all available details relating thereto. Before LICENSEE commences an action with respect to any infringement of such patents, LICENSEE shall give careful consideration to the views of HARVARD and to potential effects on the public interest in making its decision whether or not to sue. 8.2 (a) If LICENSEE elects to commence an action as described above, HARVARD may, to the extent permitted by law, elect to join as a party in that action. Regardless of whether HARVARD elects to join as a party, HARVARD shall cooperate fully with LICENSEE in connection with any such action. (b) If HARVARD elects to join as a party pursuant to subparagraph (a), HARVARD shall jointly control the action with LICENSEE. (c) If HARVARD is required to join LICENSEE as a party pursuant to subparagraph (a) for LICENSEE to maintain such activity, HARVARD shall join and LICENSEE shall reimburse HARVARD for any costs HARVARD incurs, including reasonable attorneys' fees, as part of an action brought by LICENSEE, irrespective of whether HARVARD becomes a co-plaintiff. 8.3 No settlement, consent judgment or other voluntary final disposition of the suit which imposes any obligations or costs on HARVARD may be entered into without the prior written consent of HARVARD, which consent shall not be unreasonably withheld. 8.4 Recoveries or reimbursements from actions commenced pursuant to this Article shall first be applied to reimburse LICENSEE and HARVARD for any costs of the action not previously reimbursed under Paragraph 8.2(c) above. Any remaining recoveries or reimbursements which are paid in replacement of lost or forfeited sales by LICENSEE or a sublicensee shall be retained by LICENSEE and treated as NET SALES of LICENSED PRODUCTS, subject to the royalty obligations to HARVARD outlined in Paragraph 4.2 above. Any additional recoveries or reimbursements which are payments for wilful infringement or punitive damages shall be shared by LICENSEE and HARVARD in proportion to the expenses each, without reimbursement from the other, incurred in conducting the suit. 8.5 If LICENSEE elects not to exercise its right to prosecute an infringement of the PATENT RIGHTS pursuant to this Article, HARVARD may do so at its own expense, controlling such action and retaining all recoveries therefrom. LICENSEE shall cooperate fully with HARVARD in connection with any such action, and subsequent to determination of recoveries or reimbursements, costs incurred by LICENSEE shall be reimbursed by HARVARD. 8.6 In the event the recoveries or reimbursements are not sufficient to cover the parties' costs, reimbursements shall be allocated in proportion to the expenses LICENSEE and HARVARD incurred in conducting the suit. 8.7 Without limiting the generality of Paragraph 8.5, HARVARD may, at its election and by notice to LICENSEE, establish a time limit of one hundred and twenty (120) days for LICENSEE to decide whether to prosecute any infringement of which HARVARD is or becomes aware. If, by the end of such period, LICENSEE has not commenced such an action, HARVARD may prosecute such an infringement at its own expense, controlling such action and retaining all recoveries therefrom. With respect to any such infringement action prosecuted by HARVARD in good faith, LICENSEE shall pay over to HARVARD any payments (whether or not designated as 'royalties') made by the alleged infringer to LICENSEE under any existing sublicense, where sublicensee has been notified that they are in default under the terms of the sublicense, or future sublicense entered into as a result of such infringement action authorizing LICENSED PRODUCTS, up to the amount of HARVARD's unreimbursed litigation expenses (including, but not limited to, reasonable attorneys' fees). 8.8 If a declaratory judgment action is brought naming LICENSEE as a defendant and alleging invalidity of any of the PATENT RIGHTS, and requiring LICENSEE to respond within twenty (20) days, HARVARD may, with notice to LICENSEE within ten (10) days of the commencement of such an action, elect to take over the sole defense of the action at its own expense. LICENSEE shall cooperate fully with HARVARD in connection with any such action. Otherwise, LICENSEE shall have the right to conduct such action, subject to Paragraph 8.1 above. ARTICLE IX TERMINATION OF AGREEMENT 9.1 This Agreement, unless terminated as provided herein, shall remain in effect until the last patent or patent application in PATENT RIGHTS has expired or been abandoned. 9.2 HARVARD may terminate this Agreement with thirty (30) days notice and without cure by LICENSEE or within such other period expressly provided in this Paragraph 9.2, as follows: (a) If LICENSEE does not make a payment due hereunder and fails to cure such non-payment (including the payment of interest in accordance with Paragraph 5.4(e)) within forty-five (45) days after the date of notice in writing of such non-payment by HARVARD. (b) If LICENSEE defaults in its obligations under Paragraph 10.4(c) and (d) to procure and maintain insurance. (c) If, at any time after three (3) years from the date of this Agreement, HARVARD determines that the Agreement should be terminated pursuant to Paragraph 3.2(d). (d) If LICENSEE shall become insolvent, shall make an assignment for the benefit of creditors, or shall have a petition in bankruptcy filed for or against it. Such termination shall be effective immediately upon HARVARD giving written notice to LICENSEE. (e) If an examination by HARVARD's accountant pursuant to Article VI shows an underreporting or underpayment by LICENSEE in excess of twenty percent (20%) for any twelve (12) month period, and LICENSEE fails to cure such non-payment within forty-five (45) days after the date of notice in writing of such non-payment by HARVARD. (f) If LICENSEE is convicted of a felony relating to the manufacture, use, or sale of LICENSED PRODUCTS. (g) Except as provided in subparagraphs (a), (b), (c), (d), (e) and (f) above, if LICENSEE defaults in the performance of any obligations under this Agreement and the default has not been remedied within ninety (90) days after the date of notice in writing of such default by HARVARD. 9.3 Notwithstanding Paragraph 9.2 above, if either party materially breaches this Agreement, the other party may elect to give the breaching party written notice describing the alleged breach. If the breaching party has not cured such breach after receipt of such notice within the applicable period specific above, the notifying party will be entitled, in addition to any other rights it may have under this Agreement, to terminate this Agreement effective immediately; provided, however, if either party receives notification from the other of a material breach and if the party alleged to be in default notifies the other party in writing within thirty (30) days of receipt of such default notice that it disputes the asserted default, the matter will be submitted to binding arbitration as provided in Paragraph 11.15 of this Agreement. In such event, the nonbreaching party shall not have the right to terminate this Agreement until it has been determined in such arbitration proceeding that the other party materially breached this Agreement, and the breaching party fails to cure such breach within ninety (90) days after the conclusion of such arbitration proceeding. 9.4 (a) Termination of this Agreement for any reason shall not release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination, nor preclude either party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination. (b) In the event this Agreement is terminated for any reason, LICENSEE and sublicensees, shall for a period not to exceed six (6) months or one hundred and eighty (180), have the right to sell or otherwise dispose of the stock of any LICENSED PRODUCTS then on hand, subject to Article III. (c) LICENSEE may terminate this Agreement by giving ninety (90) days' advance written notice of termination to HARVARD, and paying a termination fee of five thousand dollars ($5,000). Upon termination, LICENSEE shall submit a final Royalty Report to HARVARD and any royalty payments and unreimbursed patent expenses invoiced by HARVARD shall become immediately payable. (d) In the event of any termination of this Agreement any sublicenses granted by LICENSEE shall remain in force and effect and shall be assigned by LICENSEE to HARVARD, provided, that such sublicensee is currently in good standing with regard to its obligations under the sublicense or has cured any default or breach within the period provided in such sublicense, and further provided, that the financial obligations of each such sublicensee shall be limited to those due HARVARD hereunder for the practice of such a sublicense, and further provided that no added obligations are imposed on HARVARD as a result of this assignment. 9.5 Article X and Paragraphs 6.1, 6.2, 6.3, 8.4, 8.5, 9.4 and 9.5 of this Agreement shall survive termination. ARTICLE X GENERAL 10.1 HARVARD does not warrant the validity of the PATENT RIGHTS licensed hereunder and makes no representations whatsoever with regard to the scope of the licensed PATENT RIGHTS or that such PATENT RIGHTS may be exploited by LICENSEE, an AFFILIATE, or sublicensee without infringing other patents. 10.2 HARVARD EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED OR EXPRESS WARRANTIES AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE PATENT RIGHTS OR INFORMATION SUPPLIED BY HARVARD, LICENSED PROCESSES OR LICENSED PRODUCTS CONTEMPLATED BY THIS AGREEMENT. 10.3 (a) LICENSEE shall indemnify, defend and hold harmless HARVARD and The Regents and their current or former directors, governing board members, trustees, officers, faculty, medical and professional staff, employees, students, and agents and their respective successors, heirs and assigns (collectively, the 'Indemnitees'), against any liability, damage, loss or expenses (including reasonable attorneys' fees and expenses of litigation) incurred by or imposed upon the Indemnitees or any of them in connection with any claims, suits, actions, demands or judgments arising out of any theory of product liability (including, but not limited to, actions in the form of tort, warranty, or strict liability) concerning any product, process or service made, used or sold pursuant to any right or license granted under this Agreement. (b) LICENSEE shall, at its own expense, provide attorneys reasonably acceptable to HARVARD to defend against any actions brought or filed against any Indemnitee hereunder with respect to the subject of indemnity contained herein, whether or not such actions are rightfully brought. (c) Beginning at the time any such product, process or service is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by LICENSEE or by a sublicensee, AFFILIATE or agent of LICENSEE, LICENSEE shall, at its sole cost and expense, procure and maintain commercial general liability insurance in amounts not less than two million dollars ($2,000,000) per incident and two million dollars ($2,000,000) annual aggregate and naming the Indemnitees as additional insureds. During clinical trials of any such product, process or service, LICENSEE shall, at its sole cost and expense, procure and maintain commercial general liability insurance in such equal or lesser amount as HARVARD shall reasonably require, naming the Indemnitees as additional insureds. Such commercial general liability insurance shall provide (i) product liability coverage and (ii) broad form contractual liability coverage for LICENSEE's indemnification under this Agreement. If LICENSEE elects to self-insure all or part of the limits described above (including deductibles or retentions which are in excess of two hundred and fifty thousand dollars ($250,000) annual aggregate) such self-insurance program must be acceptable to HARVARD and the Risk Management Foundation of the Harvard Medical Institutions, Inc. in their sole discretion. The minimum amounts of insurance coverage required shall not be construed to create a limit of LICENSEE's liability with respect to its indemnification under this Agreement. (d) LICENSEE shall provide HARVARD with written evidence of such insurance upon request of HARVARD. LICENSEE shall provide HARVARD with written notice at least [**] prior to the cancellation, non-renewal or material change in such insurance; if LICENSEE does not obtain replacement insurance providing comparable coverage within such [**] period, HARVARD shall have the right to terminate this Agreement effective at the end of [**] period without notice or any additional waiting periods. (e) LICENSEE shall maintain such commercial general liability insurance beyond the expiration or termination of this Agreement during (i) the period that any product, process, or service, relating to, or developed pursuant to, this Agreement is being commercially distributed or sold by LICENSEE or by a sublicensee, AFFILIATE or agent of LICENSEE and (ii) a reasonable period after the period referred to in (e)(i) above which in no event shall be less than fifteen (15) years. 10.4 LICENSEE shall not use HARVARD's or The Regents' name or insignia, or any adaptation of them, or the name of any of HARVARD's or The Regents' inventors in any advertising, promotional or sales literature without the prior written approval of HARVARD. 10.5 Without the prior written approval of HARVARD in each instance, which approval shall not be unreasonably withheld, neither this Agreement nor the rights granted hereunder shall be assigned in whole or in part by LICENSEE to any person whether voluntarily or involuntarily, by operation of law or otherwise, except that LICENSEE may assign this Agreement and the rights granted hereunder, in whole or in part, without such consent, to a successor to substantially all of the business or assets relating to the LICENSED PRODUCTS, and such succession may include but not be limited to one by acquisition, merger, change of corporate name or change in make-up, organization, state of incorporation, or identity. Any such assignment shall occur without any further consideration to HARVARD. This Agreement shall be binding upon the respective successors, legal representatives and assignees of HARVARD and LICENSEE. 10.6 The interpretation and application of the provisions of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts. 10.7 LICENSEE shall comply with all applicable laws and regulations. In particular, it is understood and acknowledged that the transfer of certain commodities and technical data is [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. subject to United States laws and regulations controlling the export of such commodities and technical data, including all Export Administration Regulations of the United States Department of Commerce. These laws and regulations among other things, prohibit or require a license for the export of certain types of technical data to certain specified countries. LICENSEE hereby agrees and gives written assurance that it will comply with all United States laws and regulations controlling the export of commodities and technical data, that it will be solely responsible for any violation of such by LICENSEE or its AFFILIATES or sublicensees, and that it will defend and hold HARVARD and The Regents harmless in the event of any legal action of any nature occasioned by such violation. 10.8 LICENSEE agrees (i) to use reasonable efforts to obtain all regulatory approvals required for the manufacture and sale of LICENSED PRODUCTS and LICENSED PROCESSES and (ii) to utilize appropriate patent marking on such LICENSED PRODUCTS, as required by applicable law. LICENSEE also agrees to register or record this Agreement as is required by law or regulation in any country where the license is in effect. 10.9 Any notices to be given hereunder shall be sufficient if signed by the party (or party's attorney) giving same and either (a) delivered in person, or (b) mailed certified mail return receipt requested, or (c) faxed to the other party if the sender has evidence of successful transmission and if the sender promptly sends the original by ordinary mail, in any event to the following addresses: If to LICENSEE: KOSAN Biosciences, Inc. 1450 Rollins Road Burlingame, CA 94010 Attention: Chief Executive Officer Fax No.: 650-343-2931 If to Harvard to: Office for Technology and Trademark Licensing Harvard University 124 Mt. Auburn Street, Suite 410 South Cambridge, MA 02138 Fax No.: 617-495-9568 and to: Harvard Medical School Office of Technology Licensing and Industry-Sponsored Research 220 Longwood Avenue Room 159 Boston, MA 02115 Fax No.: 617-432-2788 By such notice either party may change their address for future notices. Notices delivered in person shall be deemed given on the date delivered. Notices sent by fax shall be deemed given on the date faxed. Notices mailed shall be deemed given on the date postmarked on the envelope. 10.10 Should a court of competent jurisdiction later hold any provision of this Agreement to be invalid, illegal, or unenforceable, and such holding is not reversed on appeal, it shall be considered severed from this Agreement. All other provisions, rights and obligations shall continue without regard to the severed provision, provided that the remaining provisions of this Agreement are in accordance with the intention of the parties. 10.11 Neither party shall lose any rights hereunder or be liable to the other party for damages or losses (except for payment obligations) on account of failure of performance by the defaulting party if the failure is occasioned by war, strike, fire, Act of God, earthquake, flood, lockout, embargo, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the negligence, intentional conduct or misconduct of the nonperforming party and the nonperforming party has exerted all reasonable efforts to avoid or remedy such force majeure; provided, however, that in no event shall a party be required to settle any labor dispute or disturbance. 10.12 Each party shall furnish to the other party any information related to the subject matter of this Agreement requested or required by that party during the term of this Agreement or any extensions hereof to enable that party to comply with the requirements of any U.S. or foreign federal, state and/or government agency. 10.13 NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES ARISING OUT OF THE PERFORMANCE OF THIS AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF LIABILITY. 10.14 In the event of any controversy or claim arising out of or relating to any provision of this Agreement or the breach thereof, the parties shall try to settle such conflict amicably between themselves. Subject to the limitation stated in the final sentence of this section, any such conflict which the parties are unable to resolve promptly shall be settled through arbitration conducted in accordance with the rules of the American Arbitration Association. The demand for arbitration shall be filed within a reasonable time after the controversy or claim has arisen, and in no event after the date upon which institution of legal proceedings based on such controversy or claim would be barred by the applicable statute of limitation. Such arbitration shall be held in Boston, Massachusetts. The award through arbitration shall be final and binding. Either party may enter any such award in a court having jurisdiction or may make application to such court for judicial acceptance of the award and an order of enforcement, as the case may be. Notwithstanding the foregoing, either party may, without recourse to arbitration, assert against the other party a third-party claim or cross-claim in any action brought by a third party, to which the subject matter of this Agreement may be relevant. 10.15 This Agreement constitutes the entire understanding between the parties and neither party shall be obligated by any condition or representation other than those expressly stated herein or as may be subsequently agreed to by the parties hereto in writing. 10.16 At any time or from time to time on and after the date of this Agreement, HARVARD shall at the written request of LICENSEE (i) deliver to LICENSEE such records, data or other documents consistent with the provisions of this Agreement, (ii) execute, and deliver or cause to be delivered, all such consents, documents or further instruments of transfer or license, and (iii) take or cause to be taken all such actions, as LICENSEE may reasonably deem necessary or desirable in order for LICENSEE to obtain the full benefits of this Agreement and the transactions contemplated hereby. 10.17 This Agreement may be executed in two (2) counterparts, each of which shall be deemed an original and which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives. PRESIDENT AND FELLOWS OF HARVARD COLLEGE Signature: /s/ Joyce Brinton 11/20/98 --------------------------------------------------- Name: Joyce Brinton Title: Director Office for Technology and Trademark Licensing Date: 11/20/98 -------------------------------------------------------- LICENSEE Signature: /s/ Michael Ostrach --------------------------------------------------- Name: Michael Ostrach Title: Chief Operating Officer KOSAN Biosciences Inc Date: 12/2/98 -------------------------------------------------------- APPENDIX A INTERINSTITUTIONAL ADMINISTRATION AGREEMENT HARVARD CASE # 1185 U.C. CASE # SF-97-133 N.D. 4/18/97 Effective this 10TH day of APRIL 1997, (the "Effective Date") the President and Fellows of Harvard College, a charitable corporation of the Commonwealth of Massachusetts, having an address at University Place, Fourth Floor South, 124 Mt. Auburn Street, Cambridge, MA 02138, hereinafter referred to as "Harvard," and The Regents of the University of California, a California corporation having its corporate offices located at 300 Lakeside Drive, 22nd floor, Oakland, CA 94612 acting through its offices located at Office of Technology Management, University of California San Francisco, 745 Parnassus Ave. Box 1209, San Francisco, CA 94143-1209, hereinafter referred to as "The Regents" agree as follows: 1. BACKGROUND 1.1 Harvard and The Regents, with support from the National Institutes of Health, have conducted certain research in the field of isolated and purified natural and recombinant phosphopantethenyl transferases. Such research resulted in an invention, generally characterized as "Phosphopantethenyl Transferases and Uses Thereof", (hereinafter the "Invention"), and is covered by Patent Rights, as defined below. 1.2 The Invention was invented jointly by Ralph H. Lambalot, Amy M. Gehring and Christopher T. Walsh of Harvard and Ralph Reid of The Regents, hereinafter referred to as the "Inventors." Lambalot, Gehring and Walsh have assigned or will assign their undivided Patent Rights and interest in the Invention to Harvard, and Reid has assigned or will assign his undivided Patent Rights and interest in the Invention to The Regents. 1.3 It is the mutual desire of the parties to this Agreement that the Patent Rights be administered by Harvard, subject to any overriding obligations to the aforesaid sponsors of the research, and that Harvard manage the marketing and licensing efforts of said Patent Rights. 2. DEFINITIONS 2.1 "Patent Rights" means the subject matter of a United States patent application filed October 11, 1996 entitled "Phosphopantethenyl Transferases and Uses Thereof" (Serial No. to be determined), assigned to The Regents (Case No. SF 97-133) and to Harvard (Harvard Case No. 1185); any continuations, divisions or extensions; any patents issuing on said applications including reissues and reexaminations; any continuations-in-part for which Inventors are legally listed among the legal inventors on the U.S. patent application and any foreign (non-U.S.) counterparts including continuations, divisions or extensions and all patents which issue therefrom in any country; all of which will be automatically incorporated in and added to this Agreement from time to time, and to the extent now existing are identified in Appendix A attached to the Agreement and made a part thereof. 2.2 "Sponsor" means NIH under Grant Nos. HL-43821 awarded to The Regents and the National Institutes of Health under Grant Nos. GM 20011 and GM 16583 awarded to Harvard. 2.3 "Revenues" mean every receipt, royalty, commission, fee or reimbursement of patent prosecution costs (previously split with The Regents) by licensees arising from the ownership or licensing of Patent Rights, but excludes recoveries resulting from infringement litigation, less any direct expenses incurred by Harvard or The Regents in the licensing or marketing of Patent Rights. 2.4 "Patent Costs" mean all reasonable and actual out-of-pocket past, present and future costs incurred for the preparation, filing, prosecution, maintenance and litigation (other than infringement litigation) of Patent Rights, exclusive of any salaries, administrative or other indirect costs. 3. PATENT PROSECUTION AND PROTECTION 3.1 Upon execution of this Agreement, Harvard shall assume responsibility for the prosecution and maintenance of the Patent Rights. Such Patent Rights shall be held in the names of Harvard and The Regents and shall be obtained with counsel of Harvard's choice. Harvard shall promptly provide to The Regents all serial numbers and filing dates, together with copies of all such applications or patents, including copies of all Office Actions, Responses and all other Patent Office communications to allow The Regents to comment on such prior to filing. Any comments or suggestions by The Regents shall be given due consideration by Harvard. 3.2 Notwithstanding any other provision of this Agreement, Harvard shall not abandon the prosecution of any patent application (except for purposes of filing continuation or continuation-in-part applications) or the maintenance of any patent contemplated by this Agreement without sixty (60) days prior written notice to The Regents. Within thirty (30) days of receipt of notice of proposed abandonment, The Regents must, in writing, either (a) concur in the abandonment or (b) elect to assume responsibility for the prosecution and maintenance of all Patent Rights that Harvard proposes to abandon. Lack of written response to Harvard within thirty (30) days shall be deemed to constitute concurrence. 3.3 All Patent Costs shall be shared on a [**] proprtionate basis by The Regents and Harvard, respectively. Harvard shall submit quarterly itemized statements [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. to The Regents of Patent Costs incurred by Harvard. The Regents shall reimburse Harvard for [**] percent ([**]%) of the incurred Patent Costs within [**] of receipt of such itemized statements. 3.4 Upon execution of this Agreement, Harvard shall submit statements of itemized Patent Costs incurred by Harvard (and not previously reimbursed by an optionee or licensee) prior to the Effective Date. The Regents shall reimburse Harvard for [**] percent ([**]%) of the Patent Costs within [**] of receipt of such itemized statements. 3.5 If The Regents should fail to reimburse Harvard for its share of Patent Costs according to Paragraph 3.3 or 3.4, Harvard may give written notice of default to The Regents pursuant to Article 7 (Governing Laws, Settling Disputes) of this Agreement. If The Regents should fail to repair such default within thirty (30) days from the receipt of such notice, Harvard may construe such default as termination pursuant to Article 13 (Termination by Harvard), provided that in the case where The Regents has identified discrepancies in billing, payment for the contested item(s) may be delayed pending resolution. All such disputes shall be resolved by good faith negotiation between the parties and, if that fails, then by arbitration in accordance with Article 7 (Governing Laws, Settling Disputes). 3.6 In the event that Harvard anticipates the possibility of any extraordinary expenditures arising from the preparation, filing, prosecution, licensing or defense of any patent application or patent contemplated by this Agreement, Harvard shall provide The Regents with full particulars and shall discuss with The Regents a mutually acceptable course of action prior to incurrence of such expenditures. 4. LICENSING 4.1 Harvard shall use reasonable efforts to seek licensee(s) for the commercial development of the Patent Rights and shall administer the Patent Rights for the mutual benefit of the parties and in the best public interest. The parties shall consult and mutually agree prior to the granting of any licenses, which shall be signed by Harvard on behalf of Institution. Harvard shall promptly provide copies of all fully executed licenses issued on said Patent Rights to The Regents. 4.2 Harvard shall not negotiate any paid-up licenses, other than pursuant to the patent provisions of Sponsor's grant as cited in Paragraph 1.1 or unless restricted to research use only. Further, Harvard shall not assign patent rights to any third party, notwithstanding any other provision of this Agreement or Sponsor consent, without prior written notice to The Regents. [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4.3 Harvard shall distribute Revenues on the basis of [**] percent ([**]%) to the Regents and [**] percent ([**]%) to Harvard not later than [**] for Revenues received in the preceding calendar year. 4.4 Each party shall be solely responsible for calculating and distributing to its respective Inventors a share of Revenues in accordance with its respective patent policy. 5. RECORDS AND REPORTS 5.1 Harvard shall keep complete, true and accurate accounts of all Patent Costs and of all Revenues received by it from each licensee and, at the request of The Regents, shall permit a reasonably acceptable certified public accounting firm to examine its books and records in order to verify the payments due or owing under this Agreement. 6. INFRINGEMENT 6.1 In the event Harvard or The Regents learns of the substantial infringement of any patent contemplated by this Agreement, the party who learned of the infringement shall promptly inform the other party in writing and shall provide the other party with evidence of such infringement. Harvard, in cooperation with The Regents and any licensee(s), shall attempt to terminate such infringement without litigation. If the efforts of Harvard are not successful in abating the infringement within ninety (90) days after the infringer has been formally notified of the infringement, the parties shall confer among themselves regarding mutually acceptable possible courses of action, with or without any licensee(s), at the discretion of Harvard. Harvard shall not be obligated to bring any infringement action; however, The Regents may not unilaterally prevent Harvard from bringing such an action. Any recovery resulting from a settlement or judgment on such an infringement action shall be divided between Harvard and The Regents based on the percentage of involvement by the respective parties. Both parties agree to do all things reasonably necessary to assist with litigation. In the event the terms of a license agreement conflict with this clause, the terms of the license agreement will prevail. 7. GOVERNING LAWS, SETTLING DISPUTES 7.1 This Agreement shall be governed and interpreted according to the laws of the Commonwealth of Massachusetts, but the scope and validity of any patent or patent application shall be governed by the applicable laws of the country of such patent or patent application. 7.2 Any controversy or any disputed claim by either party against the other arising under or related to this Agreement shall be settled by arbitration, upon the [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. request of either party, in accordance with the then current Licensing Agreement Arbitration Rules of the American Arbitration Association. Judgment upon the award rendered by the Arbitrator(s) shall be binding on the parties. Any arbitration under Paragraph 7.2 shall be held at a place chosen by the party receiving the request for arbitration, and judgment upon the award rendered by the arbitration may be entered by any court having jurisdiction thereof. The costs of such arbitration shall be shared by the parties. 8. NOTICES 8.1 Any notice required or permitted to be given to the parties shall be deemed to have been properly given if delivered, in writing, in person or by facsimile, airmail or air express delivery to the following addresses: To Harvard: Office for Technology and Trademark Licensing University Plase, Fourth Floor South 124 Mt. Auburn Street Cambridge, MA 02138 ATTENTION: Director with a copy to: Office of Technology Licensing and Industry-Sponsored Research Harvard Medical School 333 Longwood Avenue, Suite 640 Boston, MA 02115 ATTENTION: Nan Doyle To The Regents: Office of Technology Management University of California, San Francisco 745 Parnassus Ave., Box 1209 San Francisco, CA 94143-1209 ATTENTION: Director 9. WAIVER 9.1 It is agreed that no waiver by any party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default. 10. ASSIGNABILITY 10.1 This Agreement is binding upon and shall inure to the benefit of the parties hereto, their successors or assigns, but this Agreement may not be assigned by any party without the prior notification of the other parties and the Sponsor. 11. TERM OF AGREEMENT 11.1 This Agreement shall be in full force and effect from the Effective Date and shall remain in effect for the life of the last-to-expire patent contemplated by this Agreement, unless otherwise terminated by operation of law or by acts of the parties in accordance with the terms of this Agreement or Sponsor's requirements. 12. USE OF NAMES 12.1 No party may use the name of the other party in any way for advertising or publicity without the express written consent of the other party, provided, however, that Harvard has the right to use The Regents' name within the context of a licensing agreement. 13. TERMINATION BY HARVARD 13.1 Harvard may terminate this Agreement upon at least sixty (60) days' written notice to The Regents, but in any event not less than sixty (60) days prior to the date on which action upon any pending Patent Office action needs to be taken to preserve Patent Rights. 13.2 If Harvard terminates this Agreement, The Regents may elect to assume responsibility for administration of Patent Rights and any licenses. The Regents shall advise Harvard in writing of its election within thirty (30) days after receipt of notice of termination; Harvard shall thereupon convey to The Regents any licenses and shall do all things necessary to transfer the wrappers and other files related to the Patent Rights and licenses. In the event The Regents elects not to assume responsibility for administration of Patent Rights and any licenses, then Harvard shall be free to dispose of said Patent Rights in accordance with any obligations to the Sponsor, and this Agreement shall terminate, with Harvard having no further obligation to The Regents. 13.3 Upon termination of this Agreement, Harvard shall have no further rights or obligations under this Agreement, except that The Regents shall reimburse Harvard, pursuant to Paragraph 3.3, for The Regents' twenty-percent share of Patent Costs incurred prior to the termination date and for which Harvard has not yet received reimbursement. 14. TERMINATION BY THE REGENTS 14.1 The Regents may terminate this Agreement for any reason upon sixty (60) days' written notice to Harvard. Thereafter, The Regents shall have no further rights or obligations under this Agreement, except that The Regents shall be obligated to reimburse Harvard for The Regents' share of Patent Costs incurred prior to the termination date, and for which The Regents has not yet made reimbursement, and to make any necessary assignments of patent and/or license rights to Harvard. 15. COMPLETE AGREEMENT 15.1 It is understood and agreed by Harvard and The Regents that this Agreement embodies the entire understanding of the parties and shall supersede all previous communications, representations or understanding, either oral or written, between the parties relating to the subject matter hereof. This Agreement shall not be amended except by written consent of both parties in the form of an Addendum to this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate originals by their respective officers. PRESIDENT AND FELLOWS THE REGENTS OF HARVARD COLLEGE /s/ Joyce Brinton /s/ Jeffrey Labovitz - ---------------------------------------------- ----------------------------------- Joyce Brinton, Director Signature Office for Technology and Trademark Licensing Jeffrey Labovitz ----------------------------------- Name Senior Licensing Officer OTM. UCSF ----------------------------------- Title 3/7/97 4/10/97 ------------------------------------- ----------------------------------- Date Date
EX-10.11 8 a2026613zex-10_11.txt EXHIBIT 10.11 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 10.11 RESEARCH AND LICENSE AGREEMENT BETWEEN KOSAN BIOSCIENCES, INC. AND ORTHO-MCNEIL PHARMACEUTICAL CORPORATION AND THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE September 28, 1998 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 -- DEFINITIONS -2- ARTICLE 2 -- RESEARCH -11- ARTICLE 3 -- SCREENING BY LICENSEE -19- ARTICLE 4 -- LICENSES -24- ARTICLE 5 -- DEVELOPMENT AND COMMERCIALIZATION -29- ARTICLE 6 -- LICENSE FEES AND MILESTONE PAYMENTS -32- ARTICLE 7 -- ROYALTIES, RECORDS AND REPORTS -34- ARTICLE 8 -- SUPPLY OF PRODUCTS -37- ARTICLE 9 -- CONFIDENTIALITY -38- ARTICLE 10 -- REGULATORY MATTERS -40- ARTICLE 11 -- PATENT INFRINGEMENT -41- ARTICLE 12 -- INTELLECTUAL PROPERTY -42- ARTICLE 13 -- PUBLICITY -45- ARTICLE 14 -- WARRANTIES AND REPRESENTATIONS -45- ARTICLE 15 -- STANFORD LICENSE -47- ARTICLE 16 -- TRADEMARKS -47- ARTICLE 17 -- INDEMNIFICATION -48- ARTICLE 18 -- BANKRUPTCY -49- ARTICLE 19 -- TERM AND TERMINATION -49- ARTICLE 20 -- ASSIGNMENT -53- ARTICLE 21 -- DISPUTE RESOLUTION -54- ARTICLE 22 -- MISCELLANEOUS -57-
RESEARCH AND LICENSE AGREEMENT This RESEARCH AND LICENSE AGREEMENT (hereinafter called the "AGREEMENT"), made as of September 28, 1998 by and between KOSAN BIOSCIENCES, INC., a corporation organized under California law having its principal office at 1450 Rollins Road, Burlingame, California 94010 (hereinafter called "KOSAN"); ON THE ONE HAND, AND: ORTHO-MCNEIL PHARMACEUTICAL, INCORPORATED (hereinafter called "ORTHO"), a company organized under Delaware law, having its principal office at U.S. Route 202, Raritan, New Jersey 08869; and the R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE (hereinafter called "RWJPRI"), a division of Ortho-McNeil Pharmaceutical, Incorporated, having its principal office at U.S. Route 202, Raritan, New Jersey 08869 (ORTHO and RWJPRI hereinafter collectively called "LICENSEE") ON THE OTHER HAND, WITNESSETH: A. WHEREAS, KOSAN has an on-going RESEARCH PROGRAM in the FIELD (as defined below) and has developed certain technology useful in the FIELD to which it has the right to grant licenses; B. WHEREAS, patent applications have been filed in the name of KOSAN in the United States and other territories for the granting of letters patent relating to certain polyketides which may have activity within the FIELD; C. WHEREAS, LICENSEE has been engaged in research efforts focused on the development of new antibacterials and has certain research, development and commercialization capabilities in the FIELD; D. WHEREAS, KOSAN and RWJPRI desire to engage in collaborative research to conduct a drug discovery program as generally described in the RESEARCH PLAN attached hereto as Exhibit A; E. WHEREAS, LICENSEE is prepared to undertake a program for the development, manufacture and sale of PRODUCTS developed from the collaborative research, provided that LICENSEE is able to obtain a license under the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW (as hereinafter defined) with exclusivity to protect its investment in such program; F. WHEREAS, KOSAN recognizes that LICENSEE requires such a license in order to justify the investment in funding and personnel needed to develop and market products developed from the collaborative research and is willing to grant such rights. NOW, THEREFORE, in consideration of the premises and the performance of the covenants herein contained, IT IS AGREED AS FOLLOWS: ARTICLE 1 -- DEFINITIONS For the purposes of this AGREEMENT and solely for such purposes, the terms hereinafter set forth shall have the following respective meanings: 1.1 "AFFILIATE" or "AFFILIATES" shall mean any corporation(s) or organization(s) which directly or indirectly CONTROLS, is (are) CONTROLLED by, or is (are) under common CONTROL with LICENSEE or KOSAN. 1.2 "ANTIBIOTIC ACTIVITY" shall mean bactericidal or bacteristatic activity. 1.3 "ANTI-INFLAMMATORY ACTIVITY" shall mean [**]. 1.4 "AROMATIC POLYKETIDE" shall mean [**]. 1.5 "BULK PRODUCT" shall mean the purified active ingredient, or purified intermediate for manufacture of any PRODUCT, as the case may be, in bulk form. 1.6 "CLOSE STRUCTURAL ANALOG" shall mean, with respect to a [**] which is designated a LICENSED COMPOUND pursuant to Section 3.5, another [**] , as the case may be, which (i) is claimed in a patent application or patent within the PATENT RIGHTS which claims the applicable LICENSED COMPOUND, and is in the same chemical genus as the applicable LICENSED COMPOUND and (ii) has activity against the same molecular target as the LICENSED COMPOUND, which activity shall be (x) if activity other than [**], at a level agreed by the parties at the time the corresponding [**] -2- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] is designated a LICENSED COMPOUND, or (y) if [**], shall be at the level specified in the RESEARCH PLAN, at the time the corresponding [**] is designated a LICENSED COMPOUND. 1.7 "COMMITTED FTEs" shall mean, with respect to a particular PROJECT, those KOSAN FTEs for which LICENSEE will provide RESEARCH FUNDING as set forth in the RESEARCH PLAN to conduct such PROJECT until the applicable DECISION POINT for such PROJECT as set forth in Section 2.6. 1.8 "CONTINGENT FTEs" shall mean, with respect to a particular PROJECT, those KOSAN FTEs for which LICENSEE will provide RESEARCH FUNDING as set forth in the RESEARCH PLAN to conduct CONTINGENT WORK for such PROJECT if the LICENSEE makes a GO DECISION at the applicable DECISION POINT(s), or otherwise elects to proceed with the CONTINGENT WORK for such PROJECT as set forth in Section 2.6. 1.9 "CONTINGENT WORK" shall mean research conducted by CONTINGENT FTEs. 1.10 "CONTRACT YEAR" shall mean any twelve (12) consecutive month period beginning with the EFFECTIVE DATE of the AGREEMENT. 1.11 "CONTROL", "CONTROL(S)" or "CONTROLLED" shall refer to direct or indirect beneficial ownership of at least fifty percent (50%) of the voting stock of a corporation or other business entity, or a fifty percent (50%) or greater interest in the income of such corporation or other business entity, or the power to direct or cause the direction of the management or policies of such corporation or other business entity whether by ownership of voting securities, by contract or otherwise, or such other relationship as, in fact, constitutes actual control. 1.12 "CPI" shall mean the Consumer Price Index, All Urban Consumers, as published by the U.S. Bureau of Labor Statistics. 1.13 "DECISION POINT(S)" shall mean with respect to a particular PROJECT, the point at which LICENSEE must elect by notice to KOSAN to provide for funding the CONTINGENT WORK for such PROJECT (a "GO DECISION"), or discontinue the PROJECT and not support further research with respect to such PROJECT (a "NO-GO DECISION"), subject to Section 2.6.3. 1.14 "DERIVATIVE" shall mean a compound which (i) results from a chemical synthesis program based on a LICENSED COMPOUND, or (ii) is based on structure-function data derived from one or more LICENSED COMPOUNDS, which data is not in the public -3- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. domain as a result of a disclosure (x) by a THIRD PARTY, (y) by KOSAN (solely or jointly with LICENSEE), or (z) in a patent application owned solely by LICENSEE, in each case prior to the time the applicable compound is synthesized or acquired, or (iii) is synthesized or acquired by LICENSEE using KOSAN KNOW-HOW or KOSAN PATENT RIGHTS or any biological materials provided to LICENSEE by KOSAN or any progeny or derivative thereof, or (iv) is claimed or contained within a chemical genus, as defined in any issued VALID CLAIM within the PATENT RIGHTS, or in a VALID CLAIM within the PATENT RIGHTS of a pending application for such a patent which application is being prosecuted in good faith, and as to which one member of such chemical genus is within (i), (ii) or (iii) above. For purposes of determining whether a given composition is a DERIVATIVE, it is understood that a compound which meets one or more of the foregoing criteria and is discovered, identified, synthesized or acquired on or before the CUTOFF DATE, shall be included as a DERIVATIVE notwithstanding whether the composition was identified by LICENSEE as being active after the end of the RESEARCH PROGRAM. For purposes of this Section 1.14, the CUTOFF DATE shall mean: (i) if the RESEARCH PROGRAM continues for at least two (2) years, the date two (2) years after the end of the NON-EXCLUSIVE SCREENING PERIOD, (ii) if the EXCLUSIVE SCREENING PERIOD and the NON-EXCLUSIVE SCREENING PERIOD terminate pursuant to Section 19.1.3, the date two (2) years after the effective date of any such termination, and (iii) if the entire AGREEMENT terminates prior to the second anniversary of the EFFECTIVE DATE, the date two years after the effective date of any such termination. "DERIVATIVE" shall include any compound synthesized based on, or derived from, another DERIVATIVE, as described in subsections (i) through (iv) above. Notwithstanding the above, DERIVATIVE shall not include any compound which is conceived and synthesized by or on behalf of LICENSEE after the CUTOFF DATE, unless such compound is within the scope of a patent within the KOSAN PATENT RIGHTS or RWJPRI PATENT RIGHTS which (i) was issued as of the CUTOFF DATE, or (ii) issued from a patent application pending as of the CUTOFF DATE (or a division or continuation of such an application), and issued after such date. 1.15 "DESIGNATION NOTICE" shall have the meaning set forth in Section 3.5. 1.16 "DEVELOPMENT" shall mean all work involved in STAGES O, I, II, and III for a PRODUCT in any country or territory. 1.17 "DEVELOPMENT PLAN" shall mean the plan for DEVELOPMENT of a PRODUCT pursuant to Article 5. 1.18 "EFFECTIVE DATE" shall mean the date at the head of this AGREEMENT. 1.19 "EXCLUDED TECHNOLOGY" shall mean any intellectual property owned or controlled by KOSAN or its AFFILIATES relating to the creation, or generation of [**] or their genes, the practice of combinatorial biosynthesis or cell-free enzymatic synthesis to make [**] -4- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**]. It is understood that EXCLUDED TECHNOLOGY shall not include intellectual property necessary for RWJPRI to make chemical modifications of the [**] prepared by KOSAN or for RWJPRI to otherwise carry out its activities pursuant to the RESEARCH PLAN during the RESEARCH TERM, to conduct process development and strain selection research with cells provided to RWJPRI by KOSAN for the production of [**], to produce LICENSED PRODUCTS for DEVELOPMENT and commercialization purposes, and to characterize, evaluate and test such LICENSED PRODUCTS. 1.20 "EXCLUSIVE SCREENING PERIOD" shall mean the period commencing on the EFFECTIVE DATE and ending one (1) year after the end of the RESEARCH PROGRAM. 1.21 "FDA" shall mean the United States Food and Drug Administration. 1.22 "FIELD" shall mean the treatment of bacterial infections for all human and animal pharmaceutical applications. 1.23 "FINISHED PRODUCT" shall mean the finished pharmaceutical form, in any formulation, of a PRODUCT packaged for sale to a THIRD PARTY. 1.24 "FTE" shall mean a full time scientific person with appropriate academic credentials and training dedicated to the RESEARCH PROGRAM or in the case of less than a full-time dedicated scientific person, a full-time, equivalent scientific person year (based upon a total of fifty-two (52) weeks or two thousand eighty (2080) hours per year, with the foregoing including all working days and vacations, paid holidays, sick days, etc., consistent with KOSAN's normal business practices) of scientific work, on or directly related to the RESEARCH, carried out by such a person. Included are research scientists (Ph.D. or equivalent) and their associates (MS or BS). Excluded are project management personnel, administrative facilities support, general information and computer support, laboratory support and other internal or external support personnel involved in the RESEARCH PROGRAM. 1.25 "IND" shall mean an Investigational New Drug Application filed pursuant to the requirements of the FDA as more fully defined in 21 C.F.R. Section 312.3 or its equivalent in any MAJOR MARKET COUNTRY or in the European Economic Community. 1.26 "JDAC" shall mean the Joint Development Advisory Committee described in Section 5.1.1 below. 1.27 "JRC" shall mean the Joint Research Committee described in Section 2.3.1 below. 1.28 "KNOW-HOW" shall mean all information, not generally known to the public, including techniques and data, including but not limited to, screens, models, methods, assays, -5- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. inventions, discoveries, trade secrets, improvements, and technical information, together with all experience, data, formulas, procedures and results, and including all chemical, pharmacological, toxicological, clinical, analytical and quality control data, in each case, which is necessary or materially useful in the development, manufacturing or use of LICENSED COMPOUNDS or PRODUCTS. Notwithstanding the foregoing, KNOW-HOW shall not include any biological materials or the subject matter covered by any published patent or patent application. 1.29 "KOSAN KNOW-HOW" shall mean all KNOW-HOW which (i) KOSAN owns as of the EFFECTIVE DATE, and which relates to the FIELD, or (ii) is developed by KOSAN in performance of the RESEARCH PROGRAM during the RESEARCH TERM. It is understood and agreed that the KOSAN KNOW-HOW shall not include any EXCLUDED TECHNOLOGY. 1.30 "KOSAN PATENT RIGHTS" shall mean (i) the patents and patent applications identified in Exhibit C hereof, and in respect of such letters patent, and patent applications, all corresponding Patent Co-operation Treaty applications, European Patent Convention applications or applications under similar administrative international conventions and corresponding national patents and patent applications, together with any divisional, continuation, (but not a continuation-in-part except to the extent described in (ii) or (iii) below), substitution, reissue, extension, supplementary protection certificate or other application based thereon; and (ii) other patents or patent applications to the extent they disclose and claim inventions made by KOSAN in performance of the RESEARCH PROGRAM, and (iii) any other patents or patent applications containing one or more claims covering the manufacture, use or sale of a PRODUCT to the extent such patents or patent applications disclose and claim inventions made by KOSAN during the EXCLUSIVE SCREENING PERIOD, in each case, which is necessary or materially useful for the development, manufacture or use of LICENSED COMPOUNDS or PRODUCTS, and which KOSAN has rights to grant licenses to (e.g., have not been developed in the course of an exclusive collaboration with a THIRD PARTY or exclusively licensed to a THIRD PARTY). It is understood and agreed that the KOSAN PATENT RIGHTS shall not include any EXCLUDED TECHNOLOGY. 1.31 "LICENSED COMPOUND" shall mean a particular [**], as the case may be, with respect to which RWJPRI has provided a DESIGNATION NOTICE and acquired an exclusive license pursuant to Section 3.5. For purposes of this AGREEMENT, each CLOSE STRUCTURAL ANALOG of any such LICENSED COMPOUND shall also be deemed to be a LICENSED COMPOUND. 1.32 "MACROLIDE(S)" shall mean [**], in each case, which are actually -6- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. utilized in connection with the RESEARCH PROGRAM that (i) exist in KOSAN's proprietary compound library as of the EFFECTIVE DATE; or (ii) are synthesized or acquired by or on behalf of KOSAN or LICENSEE in connection with the RESEARCH PROGRAM. 1.33 "MAJOR MARKET COUNTRY" shall mean each of the United States, United Kingdom, Germany, France, Italy, Spain or Japan. 1.34 "MARKETING AUTHORIZATION" shall mean all allowances and approvals (including pricing and reimbursement approvals) granted by the appropriate federal, state and local regulatory agencies, departments, bureaus or other governmental entities within a country necessary to market and SELL PRODUCT. 1.35 "MOTILIDE ACTIVITY" shall mean [**]. 1.36 "NCE" shall mean a MACROLIDE which has ANTIBIOTIC ACTIVITY in accordance with criteria set forth in the RESEARCH PLAN. 1.37 "NDA" shall mean a New Drug Application and any supplements filed pursuant to the requirements of the FDA, including all documents, data and other information concerning the PRODUCT which are necessary for or included in, FDA approval to market such PRODUCT as more fully defined in 21 C.F.R. section 314.50 ET SEQ., as well as equivalent submissions to the appropriate health authorities in other countries. 1.38 "NET SALES" shall mean the revenue billed by ORTHO or an AFFILIATE or SUBLICENSEE from the sale of PRODUCTS to independent THIRD PARTIES, less the following amounts: (i) discounts, including cash discounts, or rebates, including rebates to governmental agencies such as Medicaid rebates and the like, actually allowed or granted, (ii) credits or allowances actually granted upon claims or returns regardless of the party requesting the return, (iii) freight charges paid for delivery, (iv) taxes or other governmental charges levied on or measured by the billed amount, when included in billing, as adjusted for rebates and refunds, and (v) provisions for uncollectible amounts determined in accordance with U.S. Generally Accepted Accounting Practices, consistently applied to all products of the selling party. A "sale" shall include any transfer or other disposition for consideration, and NET SALES shall include the fair market value of all other consideration received by LICENSEE or its AFFILIATES or SUBLICENSEES in respect of any grant of rights to make, use, sell or otherwise distribute PRODUCTS, whether such consideration is in cash, payment in kind, exchange or another form. In the case of discounts on "bundles" of products or services which include PRODUCTS, ORTHO may with notice to KOSAN calculate NET SALES by discounting the bona fide list -7- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. price of a PRODUCT by the average percentage discount of all products of ORTHO and/or its AFFILIATES or SUBLICENSEES in a particular "bundle", calculated as follows: Average percentage discount on a = (1 - A/B) x 100 particular "bundle" where A equals the total discounted price of a particular "bundle" of products, and B equals the sum of the undiscounted bona fide list prices of each unit of every product in such "bundle." ORTHO shall provide KOSAN documentation, reasonably acceptable to KOSAN, establishing such average discount with respect to each "bundle." If ORTHO cannot so establish the average discount of a "bundle", NET SALES shall be based on the undiscounted list price of the PRODUCT in the "bundle." If a PRODUCT in a "bundle" is not sold separately and no bona fide list price exists for such PRODUCT, the parties shall negotiate in good faith an imputed list price for such PRODUCT, and NET SALES with respect thereto shall be based on such imputed list price. In the event that PRODUCTS are sold in the form of combination products containing one or more active ingredients other than the PRODUCT, NET SALES for such combination products will be calculated by multiplying actual NET SALES of such combination products by the fraction A/(A+B) where A is the invoice price of the PRODUCT if sold separately, and B is the total invoice price of any other active component or components in the combination, if sold separately by LICENSEE or an AFFILIATE OR SUBLICENSEE. If on a country-by-country basis the other active component or components in the combination are not sold separately in said country by the LICENSEE or an AFFILIATE or SUBLICENSEE, NET SALES, for the purpose of determining royalties on the combination products shall be calculated by multiplying actual NET SALES of such combination products by the fraction A/C where A is the invoice price of the PRODUCT if sold separately and C is the invoice price of the combination product. If on a country-by-country basis neither the PRODUCT nor the combination product is sold separately in said country by the LICENSEE or an AFFILIATE or SUBLICENSEE, NET SALES for purposes of determining royalties on the combination products shall be reasonably allocated between the LICENSED PRODUCT and the other active components based on their relative value as determined by the parties in good faith. 1.39 "NON-EXCLUSIVE SCREENING PERIOD" shall mean the period commencing on the EFFECTIVE DATE and continuing until three (3) years after the end of the EXCLUSIVE SCREENING PERIOD. -8- 1.40 "PATENT RIGHTS" shall mean all United States and foreign patents (including all reissues, extensions, substitutions, confirmations, re-registrations, re-examinations, revalidations and patents of addition) and patent applications (including, without limitation, all continuations, continuations-in-part and divisions thereof) in each case, claiming an invention which is necessary or useful for the design, development, testing, use, manufacture or sale of LICENSED COMPOUNDS or PRODUCTS. 1.41 "PHASE I", "PHASE II", and "PHASE III" shall mean Phase I (or Phase I/II), Phase II, and Phase III clinical trials, respectively, in each case as prescribed by the regulations of the applicable government agency or other regulatory entity. 1.42 "PRODUCT" shall mean any pharmaceutical product containing a LICENSED COMPOUND or a DERIVATIVE thereof which is selected for DEVELOPMENT and/or marketing by LICENSEE or its AFFILIATES or SUBLICENSEES. 1.43 "PROJECT" shall mean each of the Fast Track Project and the SAR Project. 1.44 "RESEARCH FUNDING" shall mean the funding to be paid by RWJPRI to KOSAN for the conduct of the RESEARCH PROGRAM. 1.45 "RESEARCH PLAN" shall have the meaning described in Section 2.2 hereof and shall be attached as Exhibit A. 1.46 "RESEARCH PROGRAM" shall mean all research and development performed in the course of performing the PROJECTS pursuant to the RESEARCH PLAN during the RESEARCH TERM. 1.47 "RESEARCH TERM" shall mean the period set forth in Section 2.5 hereunder, unless this AGREEMENT or the RESEARCH TERM is earlier terminated under Article 19 below. 1.48 "RESERVED COMPOUND" shall mean a [**] that is designated by RWJPRI pursuant to Section 3.5.6 below. 1.49 "RWJPRI KNOW-HOW" shall mean such KNOW-HOW which RWJPRI or ORTHO or its AFFILIATE discloses to KOSAN under this AGREEMENT. 1.50 "RWJPRI PATENT RIGHTS" shall mean any patents and patent applications, including all corresponding Patent Co-operation Treaty applications, European Patent Convention applications or applications under similar administrative international conventions, and corresponding national patents and patent applications, together with any divisional, continuation, continuation-in-part, substitution, reissue, extension, supplementary protection -9- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. certificate or other application based thereon, owned or controlled by LICENSEE or its AFFILIATES, and to which LICENSEE or its AFFILIATES has the ability to grant a license or sublicense to without violating the terms of any agreement with any THIRD PARTY. 1.51 "SELLER" shall mean one who SELLS. 1.52 "SOLD," "SALE," "SALES," "SELL," "SELLING" and "SELLS" shall refer to the act of selling or disposing of for value. 1.53 "STAGE O" shall mean that portion of the DEVELOPMENT program which starts with the selection of a LICENSED COMPOUND for development into a PRODUCT under Article 5 hereunder and which generally provides for toxicological and pharmacological studies as well as drug substance and drug product formulation and manufacturing development necessary to obtain the permission of regulatory authorities to begin and continue human clinical testing. 1.54 "STAGE I" shall mean that portion of the DEVELOPMENT program which provides for the first introduction into humans of a PRODUCT with the purpose of determining safety, metabolism, absorption, elimination and other pharmacological action in humans as well as additional development work on animal toxicity, metabolism, drug substance and drug product formulation and manufacturing development to ensure continuation of human clinical testing. 1.55 "STAGE II" shall mean that portion of the DEVELOPMENT PROGRAM which provides for the initial trials of PRODUCT on a limited number of patients for the purposes of determining dose and evaluating safety and preliminary efficacy data in the proposed therapeutic indication as well as additional development work on animal toxicity, metabolism, drug substance and drug product formulation and manufacturing development to ensure continuation of human clinical testing. 1.56 "STAGE III" shall mean that portion of the DEVELOPMENT PROGRAM which provides for continued trials of PRODUCT on sufficient numbers of patients to establish the safety and efficacy of a PRODUCT to support MARKETING AUTHORIZATION in the proposed indication. In addition, all other development work on animal toxicity, metabolism, drug substance and drug product formulation and manufacturing development will be finalized in STAGE III. 1.57 "STANFORD LICENSE" shall mean that certain License Agreement effective as of March 11, 1996, as amended March 31, 1996, entered by and between KOSAN and the Board of Trustees of Leland Stanford Jr. University. -10- 1.58 "SUBLICENSEE" shall mean, with respect to a particular PRODUCT, a THIRD PARTY to whom LICENSEE has granted a licensee or sublicense to make and sell such PRODUCT. As used in this AGREEMENT, "SUBLICENSEE" shall also include a THIRD PARTY to whom LICENSEE has granted the right to distribute such PRODUCT, provided that such THIRD PARTY is responsible for marketing or promoting such PRODUCTS within the applicable territory. 1.59 "THIRD PARTY" shall mean any party other than KOSAN or LICENSEE or AFFILIATES of either of them. 1.60 "USE," "USES" and "USED" shall refer to the act of using for any commercial purposes whatsoever. 1.61 "VALID CLAIM" shall mean a claim of an issued, unexpired patent, or a claim being prosecuted in a pending patent application, in each case, which is within the PATENT RIGHTS. A claim of an issued, unexpired patent shall be presumed to be valid unless and until it has been held to be invalid by a final judgement of a court of competent jurisdiction from which no appeal can be or is taken. For the purposes of royalty determination and payment under Article 6 hereof, any claim being prosecuted in a pending patent application for a period of up to five (5) years from the filing date of such application shall be deemed to a VALID CLAIM, provided, that each claim in such an application shall again become a VALID CLAIM when and if a patent issues thereon. ARTICLE 2 -- RESEARCH 2.1 RESEARCH PROGRAM. Subject to the terms and conditions herein, KOSAN hereby agrees to conduct the RESEARCH PROGRAM in collaboration with RWJPRI with a goal of discovering, identifying and synthesizing LICENSED COMPOUNDS for DEVELOPMENT by RWJPRI into one or more PRODUCTS for commercialization by ORTHO, an AFFILIATE or SUBLICENSEE. 2.2 RESEARCH PLAN. The RESEARCH PROGRAM shall be conducted in accordance with the overall RESEARCH PLAN attached hereto as Exhibit A, as may be amended from time to time with the agreement of the parties. 2.3 MANAGEMENT. 2.3.1 JRC. The parties shall establish a Joint Research Committee ("JRC") within thirty (30) days of the EFFECTIVE DATE to administer the RESEARCH PROGRAM. Each party shall present one consolidated view and have one vote on any issue. All decisions of the JRC must be unanimous. -11- 2.3.2 MEMBERSHIP. The JRC shall include three (3) representatives of each of LICENSEE and KOSAN, each Party's members selected by that party. KOSAN and LICENSEE may each replace its JRC representatives at any time, upon written notice to the other party. From time to time, the JRC may establish subcommittees, to oversee particular projects or activities, and such subcommittees will be constituted as the JRC agrees. 2.3.3 MEETINGS; MINUTES. During the EXCLUSIVE SCREENING PERIOD, the JRC shall meet at least quarterly, or more frequently as agreed by the parties, at such locations as the parties agree, and will otherwise communicate regularly by telephone, electronic mail, facsimile and/or video conference. With the consent of the parties, other representatives of KOSAN or LICENSEE may attend JRC meetings as nonvoting observers. Each party shall be responsible for all of its own expenses associated with attendance of such meetings. The first meeting of the JRC shall occur within forty-five (45) days after the EFFECTIVE DATE. The JRC shall prepare written minutes of each JRC meeting and a written record of all JRC decisions, whether made at a JRC meeting or otherwise. A written record shall be provided to each party by the presenting party of all materials presented at meetings of the JRC. 2.3.4 FUNCTIONS OF THE JRC. The JRC shall be responsible for managing the RESEARCH PROGRAM. In carrying out this function, the JRC will: (i) oversee directed research activities to be undertaken under the RESEARCH PROGRAM in accordance with the RESEARCH PLAN, which will specify the details by which the parties will conduct the Research; (ii) review progress of the RESEARCH PROGRAM, revise the RESEARCH PLAN as it deems appropriate, set priorities for research activities, review results achieved, and provide general guidance to assist the overall program in meeting its objective of fostering successful identification of LICENSED COMPOUNDS for DEVELOPMENT by RWJPRI; (iii) advise RWJPRI regarding the selection of LICENSED COMPOUNDS for full DEVELOPMENT under Article 5; (iv) attempt to settle disputes or disagreements between the parties regarding the performance of the RESEARCH PROGRAM hereunder; (v) approve any material agreements with THIRD PARTIES to be made by KOSAN related to performance of the RESEARCH PROGRAM under this AGREEMENT; and (vi) perform such other functions as are appropriate to further the purposes of this AGREEMENT as determined by the parties. -12- 2.3.5 DISPUTE RESOLUTION. If the JRC fails to reach unanimous agreement on any issue being considered by the JRC, and which after a reasonable amount of discussion between the JRC representatives of RWJPRI and KOSAN cannot be resolved, the issue will be referred to the Chief Executive Officer of KOSAN and the Vice President, Drug Discovery, RWJPRI, for resolution. If there is no resolution of the issue at that level, and the issue pertains to the RESEARCH PLAN, the status quo as reflected in the last previous approved RESEARCH PLAN shall remain in effect. If the issue pertains to making a Go/No-GO DECISION for a given PROJECT, RWJPRI shall make the final determination. 2.3.6 INFORMATION AND ACCESS. KOSAN and RWJPRI shall provide the JRC, its members and authorized representatives with reasonable access during regular business hours to all records and documents relating to the performance of this AGREEMENT which it reasonably may request in order to perform its obligations hereunder; provided that if such documents are under a bona fide obligation of confidentiality to a THIRD PARTY, KOSAN or RWJPRI, as the case may be, may withhold access thereto to the extent necessary to satisfy such obligation. 2.4 RESPONSIBILITIES. 2.4.1 REASONABLE EFFORTS. RWJPRI and KOSAN shall each use reasonable efforts to conduct the RESEARCH PROGRAM in a professional manner in accordance with the applicable RESEARCH PLAN within the time schedules contemplated therein. 2.4.2 RESOURCES. Each party agrees to commit the personnel, facilities, expertise and other resources necessary to perform its obligations under the RESEARCH PLAN; provided, however, that neither party warrants that the RESEARCH PROGRAM shall achieve any of the research objectives contemplated by them. 2.4.3 KOSAN RESEARCH EFFORTS. KOSAN agrees to commit to the RESEARCH PROGRAM such efforts as are specified in the RESEARCH PLAN, to maintain and utilize the scientific staff, laboratories, offices and other facilities consistent with such undertaking, and to reasonably cooperate with RWJPRI in the conduct of the RESEARCH PROGRAM. KOSAN agrees that, on average for each twelve (12) month period during the RESEARCH TERM, KOSAN shall dedicate FTEs to each phase of each PROJECT and the RESEARCH PROGRAM as specified the RESEARCH PLAN. 2.4.4 SUBCONTRACTORS. KOSAN may have work performed by THIRD PARTY collaborators as provided in the RESEARCH PLAN or otherwise approved by the JRC. 2.4.5 INFORMATION AND REPORTS. (a) DISCLOSURES. -13- (i) Each party will make available and use all reasonable efforts to disclose to the other party the information necessary to conduct the other party's responsibilities under the RESEARCH PLAN and all KNOW-HOW relating to (a) MACROLIDES which are RESERVED COMPOUNDS, and (b) all MACROLIDES and AROMATIC POLYKETIDES that are designated as LICENSED COMPOUNDS, and (c) the activity of such MACROLIDES and AROMATIC POLYKETIDES, including information regarding compounds synthesized or discovered, initial leads, activities of leads, derivatives, results of IN VITRO and IN VIVO studies, assay techniques and new assays. Significant discoveries or advances shall be communicated as soon as practical after such KNOW-HOW is obtained or its significance is appreciated. (ii) Subject to its obligations to THIRD PARTIES, KOSAN will make available and use all reasonable efforts to disclose to RWJPRI KNOW-HOW necessary for RWJPRI to make chemical modifications of the MACROLIDE scaffolds provided by KOSAN to RWJPRI in accordance with the RESEARCH PLAN, to conduct process development and strain selection research with respect to LICENSED COMPOUNDS, to make PRODUCTS for DEVELOPMENT and commercialization purposes, to characterize, evaluate and test such PRODUCTS and to otherwise carry out its activities pursuant to the RESEARCH PLAN and DEVELOPMENT PLAN. (iii) RWJPRI will make available and use all reasonable efforts to disclose to KOSAN such RWJPRI KNOW-HOW necessary or materially useful in evaluating MACROLIDES, AROMATIC POLYKETIDES and DERIVATIVES of the preceding. (b) REPORTS. The JRC shall periodically and not less often than semiannually during the RESEARCH TERM, request and the parties shall have the obligation to prepare and provide to the JRC, written reports summarizing the progress of the research performed by or sponsored by the parties pursuant to the RESEARCH PLAN during the preceding half-year. In addition, the parties will exchange at least quarterly verbal or written reports presenting a meaningful summary of their activities performed in connection with the RESEARCH PROGRAM. (c) PROJECT COORDINATOR. Each party shall designate a single project coordinator whose duties shall be to oversee matters arising under the provisions of this AGREEMENT and to facilitate the communication of research results. Such project coordinator shall be responsible for day-to-day worldwide coordination of the RESEARCH PROGRAM and will serve to facilitate communication between the parties relating to the RESEARCH PROGRAM. Each party may change its designated project coordinator upon notice to the other party. (d) RECORDS. Personnel working on the RESEARCH PROGRAM shall use all reasonable efforts to make accurate laboratory notebook records of the RESEARCH -14- PROGRAM in a manner suitable for use in United States patent prosecution and litigation. Each party shall be permitted to review such laboratory notebooks and records at any reasonable time and to obtain copies thereof for further review by the other party. Each party shall make reasonable effort to safeguard such notes and records against theft and loss by fire, flood or other damage. (e) ASSIGNMENT AGREEMENTS. To the extent permitted by applicable law, KOSAN shall require all persons, agents, contractors, and consultants employed or retained by KOSAN to work on the RESEARCH PROGRAM, prior to beginning such employment, to be bound in writing to (i) assign to KOSAN all rights, title and interest in and to any ideas, discoveries, improvements, inventions, KNOW-HOW, patents, patent applications, and the like which were made or conceived in performing the RESEARCH PROGRAM, and to sign all documents and give lawful assistance necessary for filing, and defending patents, and patent applications in all countries, whether such filing is by KOSAN, or designees or assignees thereof, and (ii) to be bound in writing to provisions of confidentiality substantially similar to those of Article 9 hereof. 2.5 RESEARCH TERM. The RESEARCH PROGRAM shall commence on the EFFECTIVE DATE and continue for two (2) years thereafter (such period and any extension thereof referred to as the "RESEARCH TERM"). The RESEARCH TERM may be extended as follows: (i) the RESEARCH TERM shall automatically be emended to include any CONTINGENT WORK undertaken by the parties pursuant to Section 2.6.4; (ii) RWJPRI shall have the one-time option, exercisable by written notice to KOSAN not later than ninety (90) days prior to the expiration of the then-current RESEARCH TERM, to extend the RESEARCH TERM for one additional period of up to six (6) months at the level of funding and FTE rate applicable to the preceding six (6) month period, unless otherwise agreed by the JRC; and (iii) the RESEARCH PROGRAM may be extended by mutual written agreement of KOSAN and LICENSEE. 2.6 GO/NO-GO DECISIONS. 2.6.1 RESEARCH FUNDING. At each DECISION POINT for each PROJECT, RWJPRI shall have the right to elect whether to proceed with the CONTINGENT WORK for such PROJECT consequent to such DECISION POINT. It is understood and agreed that RWJPRI must provide RESEARCH FUNDING as set forth in the RESEARCH PLAN until at least the second anniversary of the EFFECTIVE DATE subject to the provisions of Article 19. RWJPRI shall provide RESEARCH FUNDING (i) for the Fast Track PROJECT, until the earlier of (a) identification of a [**] as an NCE in the Fast Track PROJECT ("N1" in Exhibit A) or (b) twelve (12) months from the EFFECTIVE DATE, and (ii) for the SAR PROJECT, until the earlier of (x) identification of [**] MACROLIDES as NCEs in the SAR PROJECT ("N2" and "N3" in Exhibit A) or (y) twenty-four (24) months from the EFFECTIVE DATE. -15- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2.6.2 DECISION POINTS. The DECISION POINTS for the PROJECTS will be as follows:
PROJECT DECISION EVENTS DECISION TIME ------- --------------- ------------- Fast Track Identification of a Macrolide 15 months from the as an NCE ("N1" in EFFECTIVE DATE Exhibit A) SAR Identification of a Macrolide 24 months from the as an NCE ("N2" in EFFECTIVE DATE for "N2" Exhibit A) Identification of Macrolide 36 months from the as an NCE ("N3" in EFFECTIVE DATE for N3 Exhibit A)
A DECISION POINT for a PROJECT shall occur upon the earlier of (i) the occurrence of the applicable Decision Event, or (ii) the applicable Decision Time; provided, at any time RWJPRI with notice to KOSAN may elect to proceed with the CONTINGENT WORK for either PROJECT, and in such case such election shall be deemed a GO DECISION, subject to Sections 2.6.4 and 2.7.4. Upon reaching a DECISION POINT, RWJPRI shall notify KOSAN whether RWJPRI wishes to proceed with the applicable CONTINGENT WORK. 2.6.3 EXTENSION OF DECISION POINTS. RWJPRI shall have the right to extend the DECISION POINT of the Fast Track PROJECT for [**]and/or the SAR PROJECT for [**], in each case, with at least [**] advance notice to KOSAN. In any such event, RWJPRI agrees to fund the applicable PROJECT during the extension period at the FTE level required under the RESEARCH PLAN for the [**] period preceding the applicable DECISION POINT, and any such extension shall constitute an extension of the RESEARCH TERM subject to Section 2.5. The parties may, but shall have no obligation to, agree on additional extensions of the DECISION POINT(S) for each or both PROJECTS. 2.6.4 CONSEQUENCE OF A GO DECISION. In the event that a GO DECISION is made with respect to a particular PROJECT, the parties shall immediately commence the CONTINGENT WORK with respect to such PROJECT, and RWJPRI shall fund the CONTINGENT FTEs therefore for the periods set forth in the RESEARCH PLAN. In the event of a GO DECISION in the Fast Track PROJECT, then RWJPRI will provide further RESEARCH FUNDING for the Fast Track PROJECT for an [**]. In the event of a GO DECISION with respect to the first NCE ("N2") and/or second NCE ("N3") in the SAR PROJECT, then RWJPRI will provide further RESEARCH FUNDING for the SAR PROJECT for an [**] period for each NCE with respect to which there has been a GO DECISION. -16- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2.6.5 CONSEQUENCE OF A NO-GO DECISION. In the event that a NO-GO DECISION is made with respect to a particular PROJECT at a DECISION POINT for that PROJECT, that PROJECT shall terminate and cease to be part of the RESEARCH PROGRAM. In the event of termination of both research PROJECTS, LICENSEE's rights and license to the MACROLIDES made in such PROJECTS, and the corresponding intellectual property rights shall terminate concurrently, subject to RWJPRI's non-exclusive right pursuant to Section 3.2.1 to continue screening the MACROLIDES [**] MOTILIDE [**] ANTI-INFLAMMATORY ACTIVITIES other than ANTIBIOTIC ACTIVITY. In any such event, at KOSAN's request, RWJPRI shall grant to KOSAN an exclusive, worldwide, royalty-free license to RWJPRI's interest in any RWJPRI KNOW-HOW and RWJPRI PATENT RIGHTS to make, use and sell the MACROLIDES [**] CLOSE STRUCTURAL ANALOGS thereof conceived or reduced to practice in connection with such PROJECTS. Notwithstanding the foregoing, RWJPRI shall retain ownership of the RWJPRI PATENT RIGHTS and RWJPRI KNOW-HOW, and the right to practice the RWJPRI KNOW-HOW and RWJPRI PATENT RIGHTS to conduct internal research, and, subject to its obligations under this AGREEMENT, to make, use and sell compounds (other than the MACROLIDES [**] CLOSE STRUCTURAL ANALOGS that were conceived or reduced to practice in connection with the terminated PROJECTS, or their DERIVATIVES). 2.6.6 PROJECT MANAGEMENT. Each PROJECT shall be managed by the parties independently of the other PROJECT. DECISIONS impacting the continuation of any individual PROJECT (e.g., Go/No-GO DECISIONS with respect any given PROJECT) will not affect the continuation of the other PROJECT. So long as any one of the PROJECTS is on-going, the RESEARCH PROGRAM shall be deemed to be in effect. 2.7 RESEARCH PROGRAM FUNDING. 2.7.1 FTE FUNDING. For the conduct of the RESEARCH PROGRAM by KOSAN, RWJPRI shall pay KOSAN RESEARCH FUNDING on an annualized FTE basis (FTE-years). FTE positions will be paid at an annual rate of $[**] per FTE during the [**] CONTRACT YEARS of the RESEARCH PROGRAM, and thereafter shall be revised annually to reflect increases in the CPI, using 1998 as the base year, according to the following formula: [**] Where CPI is a fraction, the numerator of which is the difference between the Consumer Price Index (All Urban Consumers, U.S. City Average for All Items, with 1982-84 = 100) as of the last month of the research year immediately preceding the research year to be adjusted and the Consumer Price Index as of the last month before the EFFECTIVE DATE, and the denominator of which is the Consumer Price Index as of the last month before the EFFECTIVE DATE. -17- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2.7.2 TIMING OF PAYMENTS. Research funding shall be paid in four (4) equal quarterly installments during each Calendar Year, payable in advance on or about January 1, April 1, July 1, and October 1; provided that the first quarterly payment for the first CONTRACT YEAR shall be due ten (10) days after the EFFECTIVE DATE. Any payment for a portion of a quarter shall be made on a pro rata basis. 2.7.3 USE OF RESEARCH FUNDS. All funds provided by RWJPRI under this Section 2.7 shall be used by KOSAN in the conduct of the RESEARCH PROGRAM, except as expressly provided in Section 2.7.4. Subject to the approval of the JRC and minimum FTE commitments for each PROJECT set forth in the RESEARCH PLAN, RWJPRI-funded KOSAN FTE's may be used in either of the PROJECTS. RWJPRI shall be under no obligation to provide FTE support to KOSAN beyond the levels stated above except at RWJPRI's sole discretion. KOSAN shall have no obligation to expend any amount on the RESEARCH PROGRAM except the amounts paid by RWJPRI. 2.7.4 EARLY SUCCESS. In the event that an NCE is designated in the Fast Track Project and/or both NCEs are designated in the SAR Project, or RWJPRI elects to initiate the CONTINGENT WORK for either PROJECT prior to the applicable DECISION POINT, then within [**] RWJPRI shall pay to KOSAN any remaining FTE support allocated in the RESEARCH PLAN for such PROJECT for research which was to be conducted prior to the commencement of the applicable CONTINGENT WORK for the applicable PROJECT. KOSAN may, but shall have no obligation to, expend such amounts on the RESEARCH PROGRAM. 2.7.5 SUPPLIES AND EQUIPMENT. The purchase of any item including, but not limited to, equipment, materials and cell lines reasonably required by KOSAN to carry out the RESEARCH PROGRAM shall be paid for by KOSAN and shall be owned by KOSAN. KOSAN may, but shall not be required to, purchase items including, but not limited to, equipment, materials and cell lines that would be useful, but are not required by KOSAN to carry out the RESEARCH PROGRAM, and any such items shall be owned by KOSAN. With the approval of the JRC, such items may be purchased with RESEARCH FUNDING. RWJPRI shall inform KOSAN if it has equipment available which it believes would be useful for the conduct of the RESEARCH PROGRAM, and discuss with KOSAN the possible use of such equipment by KOSAN for such purpose. 2.7.6 THIRD PARTY LICENSES. In the event that KOSAN or LICENSEE becomes aware that it is necessary for KOSAN to acquire a license from any THIRD PARTY specifically for the conduct of the RESEARCH PROGRAM, such party shall inform the JRC, and the JRC shall discuss which party will be responsible for acquiring such license and how the costs of negotiating and preparing such license, as well as any payments thereunder, shall be allocated. Notwithstanding the above, it is understood that KOSAN shall be responsible for [**] due (i) under the STANFORD LICENSE, and (ii) to any THIRD PARTY for intellectual -18- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. property rights which are necessary for the practice by KOSAN of the KOSAN PATENT RIGHTS existing as of the EFFECTIVE DATE for the creation or preparation of MACROLIDES or AROMATIC POLYKETIDES, and which are within the scope of an issued patent or published patent application owned by a THIRD PARTY as of the EFFECTIVE DATE. 2.8 AUDIT. KOSAN will maintain complete and accurate records which are relevant to its expenditure of Research funding provided to it by RWJPRI pursuant to Section 2.7 hereof. Such records shall be open during regular business hours for a period of [**] from creation of individual records for examination at RWJPRI's expense for the sole purpose of verifying that KOSAN has devoted to the RESEARCH PROGRAM the FTE's required by Section 2.4.3 above; provided however, that such right may not be exercised more than once in any calendar year. RWJPRI shall be entitled to a credit against future research payments or a refund in the event such audit reveals that the proper FTE's were not allocated in accordance with Section 2.4.3 above. ARTICLE 3 -- SCREENING BY LICENSEE 3.1 EXCLUSIVE SCREENING. 3.1.1 ANTIBIOTIC ACTIVITY. During the EXCLUSIVE SCREENING PERIOD, RWJPRI shall have the exclusive right to screen MACROLIDES provided by KOSAN for ANTIBIOTIC ACTIVITY in accordance with the RESEARCH PLAN. Until the termination of the EXCLUSIVE SCREENING PERIOD, KOSAN agrees that during the EXCLUSIVE SCREENING PERIOD (i) it shall not grant a THIRD PARTY the right to screen or develop the MACROLIDES or CLOSE STRUCTURAL ANALOGS for ANTIBIOTIC ACTIVITY, and (ii) except in connection with the RESEARCH PROGRAM, shall not itself screen or develop the MACROLIDES or CLOSE STRUCTURAL ANALOGS for ANTIBIOTIC ACTIVITY. Following the expiration of the EXCLUSIVE SCREENING PERIOD, KOSAN may screen and/or develop and allow others to screen the MACROLIDES for ANTIBIOTIC ACTIVITY; provided, that so long as LICENSEE retains rights hereunder to a particular LICENSED COMPOUND, KOSAN shall not grant any THIRD PARTY a license to such LICENSED COMPOUND or its CLOSE STRUCTURAL ANALOGS and, if reasonably feasible, will not provide such compounds to THIRD PARTIES for screening. 3.1.2 OTHER ACTIVITIES. On a [**] basis, KOSAN shall not (i) allow THIRD PARTIES to screen MACROLIDES provided to RWJPRI hereunder, or (ii) itself screen such MACROLIDES [**] ANTIBIOTIC ACTIVITY until [**] following the date that KOSAN delivers the applicable MACROLIDES to RWJPRI. -19- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3.2 NON-EXCLUSIVE SCREENING. 3.2.1 MACROLIDES. During the NON-EXCLUSIVE SCREENING PERIOD, RWJPRI and its AFFILIATES shall have the non-exclusive right to screen the MACROLIDES [**] in any biological test system for any therapeutic indication; provided, however, RWJPRI may not screen the MACROLIDES for MOTILIDE ACTIVITY and/or ANTI-INFLAMMATORY ACTIVITY until the [**] of the EFFECTIVE DATE and then only subject to the following conditions. If LICENSEE wishes to screen the MACROLIDES for MOTILIDE ACTIVITY and/or ANTI-INFLAMMATORY ACTIVITY, it shall provide KOSAN notice thereof by the [**] of the EFFECTIVE DATE, and by [**] KOSAN shall notify LICENSEE whether it has entered into an exclusive agreement with a THIRD PARTY for screening for such activities, or initiated research and development in such regard to such activities on its own behalf. If KOSAN has not entered into an exclusive agreement with a THIRD PARTY for screening for the relevant activity, or initiated research and development tin such regard to such activity on its own behalf as evidenced by prior written records, then RWJPRI may screen the MACROLIDES for MOTILIDE ACTIVITY and/or ANTI-INFLAMMATORY ACTIVITY, as the case may be, on a non-exclusive basis during the NON-EXCLUSIVE SCREENING PERIOD. To notify RWJPRI of targets relating to ANTI-INFLAMMATORY ACTIVITY, KOSAN may periodically provide LICENSEE notice of any targets which are reported in the scientific literature to be involved in inflammation. 3.2.2 AROMATIC POLYKETIDES. During the NON-EXCLUSIVE SCREENING PERIOD, RWJPRI shall have a non-exclusive right to screen the AROMATIC POLYKETIDES for any biological activity in any biological test system for any therapeutic indication. 3.3 DELIVERY OF EXTRACTS AND CELLS. 3.3.1 MACROLIDES. (a) During the EXCLUSIVE SCREENING PERIOD, KOSAN will deliver to RWJPRI agreed quantities of MACROLIDE extracts sufficient to conduct IN VITRO screening for ANTIBIOTIC ACTIVITY, as specified in the RESEARCH PLAN. (b) During the NON-EXCLUSIVE SCREENING PERIOD, at RWJPRI's request, KOSAN (or its designee) shall provide RWJPRI with agreed quantities of extracts of MACROLIDES. For expenses incurred by KOSAN in preparing such MACROLIDES, RWJPRI shall pay to KOSAN a reasonable rate to be agreed to by the parties, provided, however, if the parties are unable to agree on such payments, KOSAN shall have no obligation to provide any such extracts or cells producing such MACROLIDES to RWJPRI. -20- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3.3.2 AROMATIC POLYKETIDES. During the NON-EXCLUSIVE SCREENING PERIOD, at RWJPRI's request, KOSAN (or its designee) shall provide RWJPRI with agreed quantities of extracts of such AROMATIC POLYKETIDES. For expenses incurred by KOSAN in preparing such AROMATIC POLYKETIDES, RWJPRI shall pay to KOSAN an amount to be agreed upon by the parties; provided, however, if the parties are unable to agree on such payments, KOSAN shall have no obligation to provide such extracts or cells producing such AROMATIC POLYKETIDES to RWJPRI. KOSAN shall provide to RWJPRI, without charge, a set of plates containing the AROMATIC POLYKETIDES which KOSAN has in stock as of the EFFECTIVE DATE. Exhibit B describes the estimated numbers and concentrations of the AROMATIC POLYKETIDES in stock as of the EFFECTIVE DATE. It is understood that Exhibit B is provided for general identification of the AROMATIC POLYKETIDES KOSAN has in stock as of the EFFECTIVE DATE, and that KOSAN makes no representations or warranties regarding the accuracy of the information contained in Exhibit B concerning AROMATIC POLYKETIDES [**]. 3.3.3 NO TRANSFER; LIMITED USE. Except as expressly provided herein, RWJPRI shall not (i) transfer any of the [**] AROMATIC POLYKETIDES or the MACROLIDES supplied to LICENSEE to any THIRD PARTY other than an AFFILIATE without the express prior written consent of KOSAN, or (ii) use or permit any other person or entity to use any of the [**] AROMATIC POLYKETIDES or the MACROLIDES supplied to LICENSEE for any purpose other than for screening or development and/or commercialization as expressly permitted in this AGREEMENT. 3.4 SCREENING RESULTS. LICENSEE shall provide KOSAN with written quarterly summary reports within thirty (30) days of the end of each calendar quarter with respect to RWJPRI's non-exclusive screening activities, identifying all assays in which any of the MACROLIDES and/or AROMATIC POLYKETIDES demonstrated activity and the level of such activity for the MACROLIDES and AROMATIC POLYKETIDES, all assays in which the MACROLIDES and/or AROMATIC POLYKETIDES did not demonstrate activity, and a summary of all other results of RWJPRI's non-exclusive screening activities. 3.5 DESIGNATION OF RESERVED COMPOUNDS AND LICENSED COMPOUNDS. 3.5.1 DESIGNATION NOTICE. (a) MACROLIDES. Until the end of the NON-EXCLUSIVE SCREENING PERIOD, RWJPRI may notify KOSAN with notice ("DESIGNATION NOTICE") that RWJPRI wishes to designate [**] MACROLIDE(S) as LICENSED COMPOUNDS by notice to KOSAN identifying the MACROLIDE(S) and the activity thereof. It is understood that designation of a LICENSED COMPOUND shall be in RWJPRI's sole discretion. Further, all decisions concerning the selection of a LICENSED COMPOUND for DEVELOPMENT shall be in RWJPRI's sole discretion. -21- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (b) AROMATIC POLYKETIDES. During the NON-EXCLUSIVE SCREENING PERIOD, RWJPRI may notify KOSAN that RWJPRI wishes to designate one or more AROMATIC POLYKETIDES as LICENSED COMPOUNDS by notice to KOSAN ("DESIGNATION NOTICE") identifying the AROMATIC POLYKETIDES and the activity thereof. 3.5.2 LICENSED COMPOUND STATUS. Within thirty (30) days following receipt of any DESIGNATION NOTICE from LICENSEE pursuant to Section 3.5.1 above, KOSAN shall notify LICENSEE if KOSAN has granted a THIRD PARTY any rights or a license with respect to the same MACROLIDE or AROMATIC POLYKETIDE [**] CLOSE STRUCTURAL ANALOG thereof, before KOSAN's receipt of such DESIGNATION NOTICE; provided, KOSAN shall have no obligation to disclose to LICENSEE the identity of the THIRD PARTY, the structure of such compound or the activity(s) with respect to which such THIRD PARTY identified such activity. Unless KOSAN has previously granted a THIRD PARTY rights to such a MACROLIDE or AROMATIC POLYKETIDE [**] CLOSE STRUCTURAL ANALOG thereof, or elected to develop such MACROLIDE or AROMATIC POLYKETIDE [**] CLOSE STRUCTURAL ANALOG thereof itself, in each case, as shown by prior written records, upon KOSAN's receipt of DESIGNATION NOTICE from RWJPRI, such MACROLIDE or AROMATIC POLYKETIDE shall be deemed to be a LICENSED COMPOUND for all purposes of this AGREEMENT. 3.5.3 NCE STATUS. It is understood and agreed that each MACROLIDE designated by LICENSEE in a DESIGNATION NOTICE which becomes a LICENSED COMPOUND shall be deemed to be an NCE for the purposes of Section 6.2.1 hereunder. It is further understood and agreed that a MACROLIDE which meets the criteria for an NCE shall be deemed to be an NCE for the purposes of Section 6.2.1 hereunder without any further affirmative action on the part of KOSAN or LICENSEE. 3.5.4 NOTICE TO THIRD PARTIES. Once a MACROLIDE or AROMATIC POLYKETIDE has become a LICENSED COMPOUND pursuant to Section 3.5.2 above, KOSAN shall notify any THIRD PARTIES who attempt to subsequently designate or claim rights to such LICENSED COMPOUND of the existence of LICENSEE's prior claim with respect to such compound without disclosing LICENSEE's identity, the structure of such compound (unless earlier disclosed) or the activity(s) with respect to which LICENSEE has identified such activity. LICENSEE hereby consents to such notice. KOSAN shall promptly inform LICENSEE of such THIRD PARTY'S designation or claim; provided KOSAN shall have no obligation to disclose to LICENSEE the identity of such THIRD PARTY or the activity(s) with respect to which such THIRD PARTY identified such activity. If the THIRD PARTY desires to negotiate with LICENSEE, KOSAN shall transmit notice of such intent (including the THIRD PARTY'S identity) to LICENSEE. In addition, once a MACROLIDE or AROMATIC POLYKETIDE has become a LICENSED COMPOUND pursuant to Section 3.5.2 above, if -22- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. reasonably feasible, KOSAN shall not provide such LICENSED COMPOUND to THIRD PARTIES for screening. 3.5.5 CLOSE STRUCTURAL ANALOGS. At the time that each MACROLIDE and/or AROMATIC POLYKETIDE becomes a LICENSED COMPOUND, a non-binding, written list identifying the compounds which are CLOSE STRUCTURAL ANALOGS of such MACROLIDE and/or AROMATIC POLYKETIDE will be prepared by the parties. Any compounds determined to be CLOSE STRUCTURAL ANALOGS shall remain CLOSE STRUCTURAL ANALOGS until and unless such compounds have been actually synthesized and tested and found not to have the level of activity specified in the RESEARCH PLAN or agreed by the parties at the time the compound became a LICENSED COMPOUND. In the event that either party, determines that such compound does not have the required level of activity it shall notify, the other providing the relevant data and unless the other party, disputes the validity of such data, the applicable compound shall cease to be a CLOSE STRUCTURAL ANALOG thirty (30) days thereafter. In the event of any dispute regarding the status of whether a particular compound should become, is or will remain a CLOSE STRUCTURAL ANALOG, the matter shall be settled by the dispute resolution procedure set forth in Article 21. 3.5.6 RESERVED COMPOUNDS. (a) DESIGNATION. Subject to Section 3.5.6(b) and (c), until the end of the RESEARCH TERM, RWJPRI may give KOSAN written notice that RWJPRI wishes to designate as RESERVED COMPOUNDS one or more MACROLIDE(S) which have ANTIBIOTIC ACTIVITY, which notice shall identify, such MACROLIDES. (b) LIMITATIONS. Notwithstanding the foregoing, RWJPRI may not designate more than [**] RESERVED COMPOUNDS at any time without the written consent of KOSAN. RWJPRI may, with notice to KOSAN discontinue the RESERVED COMPOUND status of any MACROLIDE, and thereafter such MACROLIDE shall no longer be a RESERVED COMPOUND. If RWJPRI has designated RESERVED COMPOUNDS such that there exist more than [**] RESERVED COMPOUNDS at any time, then RWJPRI shall pay to KOSAN, for each RESERVED COMPOUND beyond [**], a fee of [**] dollars ($[**]) per RESERVED COMPOUND, as set forth in Section 6.6. (c) EFFECT OF RESERVATION. Until the end of the RESEARCH TERM, KOSAN shall not grant a license to any THIRD PARTY with respect to any RESERVED COMPOUND except as follows: if KOSAN receives a request from a THIRD PARTY to obtain a LICENSE for any RESERVED COMPOUND, it shall notify RWJPRI and RWJPRI shall have [**] days to notify. KOSAN whether RWJPRI will designate such RESERVED COMPOUND as a LICENSED COMPOUND and pay concurrently the fee required under Section 6.3. In such event, such RESERVED COMPOUND shall become a LICENSED COMPOUND for all purposes of this AGREEMENT. If RWJPRI fails to provide such notice to -23- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. KOSAN during the [**] period, then such COMPOUND shall cease to be a RESERVED COMPOUND and KOSAN shall have the right to grant such THIRD PARTY a license to such MACROLIDE [**] ANTIBIOTIC ACTIVITY during the EXCLUSIVE SCREENING PERIOD. 3.6 SELECTION OF LICENSED COMPOUNDS. Following the expiration of the NON-EXCLUSIVE SCREENING PERIOD, all rights to MACROLIDES and AROMATIC POLYKETIDES for which LICENSEE does not have a LICENSED COMPOUND in DEVELOPMENT or commercialization shall lapse and KOSAN shall have the right to develop, market and commercialize such MACROLIDES and AROMATIC POLYKETIDES independently and all rights and licenses thereto shall revert to KOSAN at the conclusion of such period. 3.7 RESERVED RIGHTS. At all times, KOSAN shall have the right to use the MACROLIDES for screening of any and all activities other than ANTIBIOTIC ACTIVITY, and for its internal research programs, including without limitation, the preparation and synthesis of POLYKETIDES, as intermediates and otherwise. Nothing in this AGREEMENT shall restrict or limit KOSAN from using all or any portion of any [**] which is used in connection with the RESEARCH PROGRAM in any research or development not subject to this AGREEMENT. 3.8 RIGHT OF FIRST NEGOTIATION. Until January 10, 1999, if a THIRD PARTY wishes to enter into an exclusive agreement with KOSAN to screen the MACROLIDE(S) for MOTILIDE ACTIVITY or develop or commercialize MACROLIDE(S) for MOTILIDE ACTIVITY, before entering into an agreement with such a THIRD PARTY granting a license for such rights, KOSAN shall notify RWJPRI, and for a period of [**] (or such longer period as the parties may agree) from the date of such notice (the "Negotiation Period") KOSAN and RWJPRI shall negotiate the terms of such an agreement. In the event that the parties do not agree on terms within the Negotiation Period, KOSAN may grant any THIRD PARTY rights with respect to screening MACROLIDE(S) for MOTILIDE ACTIVITY and developing and commercializing MACROLIDE(S) for MOTILIDE ACTIVITY; provided, however, prior to January 10, 1999 or the end of the Negotiation Period, KOSAN shall not enter into an agreement with a THIRD PARTY on terms less favorable to KOSAN, when taken as a whole, than those last offered in writing by RWJPRI to KOSAN. It is understood and agreed that KOSAN shall have the unrestricted rights itself to screen, develop and/or commercialize MACROLIDE(S) for MOTILIDE ACTIVITY. ARTICLE 4 -- LICENSES 4.1 RESEARCH LICENSES. 4.1.1 TO RWJPRI. Subject to the terms and conditions of this AGREEMENT, KOSAN hereby grants RWJPRI a non-exclusive paid-up license, with no right to grant -24- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. sublicenses, under KOSAN PATENT RIGHTS and KOSAN KNOW-HOW to make and use methods and materials to carry, out the RESEARCH PROGRAM during the RESEARCH TERM. 4.1.2 TO KOSAN. Subject to the terms and conditions of this AGREEMENT, LICENSEE hereby grants KOSAN a non-exclusive paid-up license, with no right to grant sublicenses, under RWJPRI PATENT RIGHTS and RWJPRI KNOW-HOW to make and use methods and materials to carry out the RESEARCH PROGRAM during the RESEARCH TERM. 4.2 SCREENING LICENSES. KOSAN hereby grants to RWJPRI the following fully paid, non-transferable licenses, with the right to grant sublicenses to RWJPRI AFFILIATES, under the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW to conduct screening pursuant to Article 3: 4.2.1 an exclusive, worldwide license during the EXCLUSIVE SCREENING PERIOD to use the MACROLIDES [**] ANTIBIOTIC ACTIVITY; 4.2.2 a non-exclusive, worldwide license during the NON-EXCLUSIVE SCREENING PERIOD: (a) to use the MACROLIDES to conduct screening for ANTIBIOTIC ACTIVITY; (b) to use the AROMATIC POLYKETIDES to conduct screening for [**]; and 4.2.3 Subject to the terms and conditions of Section 3.2.1, a non-exclusive, worldwide license during the EXCLUSIVE SCREENING PERIOD and NON-EXCLUSIVE SCREENING PERIOD to use the MACROLIDES [**] ANTIBIOTIC ACTIVITY [**] MACROLIDES for MOTILIDE or ANTI-INFLAMMATORY ACTIVITY. 4.3 DEVELOPMENT AND COMMERCIALIZATION LICENSE. 4.3.1 GRANT. Subject to the terms and conditions of this AGREEMENT, KOSAN hereby grants to LICENSEE, and LICENSEE hereby accepts from KOSAN, a worldwide, exclusive license, with the right to grant sublicenses, under the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW, to make, use and develop LICENSED COMPOUNDS, and, to make, have made, USE, import, offer for SALE, SELL and have SOLD PRODUCTS. -25- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4.3.2 TERM. Unless LICENSEE's rights are terminated earlier as provided in Section 2.6.5 or Article 19, the foregoing license in Section 4.3.1 shall remain exclusive on a LICENSED COMPOUND-by-LICENSED COMPOUND and PRODUCT-by-PRODUCT basis (i) as to the applicable KOSAN PATENT RIGHTS, for their respective lives on a country-by-country basis, and (ii) as to the KOSAN KNOW-HOW, until the termination of LICENSEE's obligation to make royalty payments under Section 7.1 hereof, at which time the license under the KOSAN KNOW-HOW shall automatically become a fully paid, non-exclusive license. Notwithstanding the foregoing, however, with respect to any country of the European Union, the license to the KOSAN KNOW-HOW shall remain exclusive until the earlier of (i) the date on which the KOSAN KNOW-HOW becomes published or generally known to the public through no fault on the part of LICENSEE, its AFFILIATES or SUBLICENSEES or (ii) the tenth (10th) anniversary of the first commercial sale of the first PRODUCT in any country of the European Union, at which time the license under the KOSAN KNOW-HOW shall automatically become a fully paid, non-exclusive license. 4.4 DELIVERY OF CELLS; LIMITED USE. For each MACROLIDE or AROMATIC POLYKETIDE designated by LICENSEE in a DESIGNATION NOTICE which becomes a LICENSED COMPOUND pursuant to Section 3.5, and for which LICENSEE pays the amounts set forth in Section 6.2.1, KOSAN will, if available, deliver to LICENSEE a viable sample of clonal cells which produces such MACROLIDE or AROMATIC POLYKETIDE for use in PRODUCT manufacture. Except as expressly provided herein, LICENSEE shall not (i) transfer any cells or other biological materials supplied by KOSAN (or any derivatives or progeny thereof) to any THIRD PARTY other than an AFFILIATE or SUBLICENSEE without the express prior written consent of KOSAN, or (ii) use or permit others to use any of the cells or other biological materials supplied by KOSAN (or any derivatives or progeny thereof) for research use relating to drug discovery or any other purpose, except the manufacture of LICENSED COMPOUNDS for clinical trials and commercial sale as expressly provided in this AGREEMENT. 4.5 LIMITATIONS ON LICENSES. Notwithstanding any other provision of this AGREEMENT, it is understood and agreed that nothing in this AGREEMENT grants LICENSEE the right to practice any aspect of the EXCLUDED TECHNOLOGY. 4.6 AFFILIATE LICENSES. In the event LICENSEE wishes to manufacture PRODUCT or SELL in a country where its AFFILIATE is unable to pay royalties to ORTHO or where payment of royalties to ORTHO are limited as to their tax deductibility, KOSAN hereby agrees, at the request of ORTHO, to grant direct licenses containing the same terms, conditions and provisions as this AGREEMENT to any AFFILIATE under KOSAN PATENT RIGHTS and KOSAN KNOW-HOW to make, have made use and sell PRODUCTS. Any such licensed AFFILIATE shall thereafter report NET SALES directly to KOSAN and the activities of any such AFFILIATE shall not be includable in any reports made by ORTHO to KOSAN. -26- 4.7 SUBLICENSES. RWJPRI and its AFFILIATES shall have the right to grant to THIRD PARTIES sublicenses under the licenses granted to LICENSEE in Section 4.3 (or to its AFFILIATES under Section 4.6) with respect to PRODUCTS developed by or on behalf of RWJPRI, but shall have no right to grant sublicenses to THIRD PARTIES with respect to any technology licensed by KOSAN from Stanford University without the written consent to KOSAN, which consent will not be unreasonably withheld; provided, such sublicense under the STANFORD LICENSE is necessary to develop and/or commercialize PRODUCTS pursuant to the license granted in Section 4.3 and limited to such activities. 4.8 STANFORD LICENSE. LICENSEE acknowledges that it has received a sublicense under the STANFORD LICENSE. LICENSEE has received a copy of the STANFORD LICENSE and, having read and understood the same, agrees to comply with the provisions thereof, including without limitation, Articles 4, 5.3, 8 and 10 thereof. KOSAN agrees that in the event of a termination of the STANFORD LICENSE, in accordance with the provisions of Section 14.3 of the STANFORD LICENSE, the sublicense granted LICENSEE herein shall be assigned to STANFORD. 4.9 NO COMPETING RESEARCH. During the RESEARCH TERM, KOSAN shall not knowingly conduct, have conducted or fund any research or development activity specifically directed at discovery or developing products intended for use in the FIELD derived from expression of the [**], except pursuant to this AGREEMENT. 4.10 LICENSED COMPOUND EXCLUSIVITY. During the term of this AGREEMENT, KOSAN shall not develop, commercialize or sublicense to any THIRD PARTY any LICENSED COMPOUND to which LICENSEE retains commercial license rights, without the prior written consent of LICENSEE. 4.11 MODE OF COMMERCIALIZATION. ORTHO may SELL PRODUCTS through its AFFILIATES, SUBLICENSEES or agents in any country. ORTHO agrees to be responsible and liable for the performance hereunder by its AFFILIATES, agents and SUBLICENSEES to which the license and rights hereunder shall have been extended. For the purposes of reporting and making payments of earned royalties under this AGREEMENT, the manufacture, SALE or USE of PRODUCTS by any AFFILIATE, or SUBLICENSEE to which such license rights shall have been extended shall be considered the manufacture, SALE or USE of such PRODUCT by ORTHO and any such AFFILIATE or SUBLICENSEE may make the pertinent reports and royalty payments specified in Article 7 hereof directly to KOSAN on behalf of ORTHO; otherwise, such reports and payments on account of SALES of PRODUCTS by each AFFILIATE and SUBLICENSEE shall be made by ORTHO; and, in any event, the SALES of PRODUCT by each such AFFILIATE and SUBLICENSEE shall be separately shown in the reports to KOSAN if such information is readily available to ORTHO. -27- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4.12 THIRD PARTY RIGHTS. 4.12.1 KOSAN THIRD PARRY ACTIVITIES. It is understood that KOSAN provides libraries of polyketide compounds to THIRD PARTIES, and that KOSAN will grant such THIRD PARTIES rights after the EFFECTIVE DATE to acquire licenses for compounds derived from such libraries similar to LICENSEE's rights under this Article 4, subject to the provisions of Section 3. I. Notwithstanding the licenses granted to LICENSEE under Section 4.3 above, it is possible that a THIRD PARTY may acquire rights from KOSAN with respect to one or more compounds of which KOSAN is a sole or joint owner, which compounds were made and designed independently of KOSAN's activities and knowledge gained under the RESEARCH PROGRAM; accordingly, KOSAN's grant of rights under Section 4.3 is limited to the extent that (i) a THIRD PARTY (either alone or jointly with KOSAN) has filed a patent application with respect to such a compound prior to the filing by LICENSEE (either alone or jointly with KOSAN) of a patent application with respect to such a compound, or (ii) KOSAN has previously granted a THIRD PARTY a license or other rights with respect to such a compound, and subject to any such grant of rights to a THIRD PARTY. 4.12.2 NO LIABILITY. It is understood and agreed that, even if KOSAN complies with its obligations under this AGREEMENT, compounds provided to THIRD PARTIES in the course of KOSAN's other business activities may result in THIRD PARTY patent applications and patents, including patent applications and patents owned by such THIRD PARTIES, or owned jointly by KOSAN and such THIRD PARTIES, which could conflict with patent applications and patents owned by LICENSEE, or jointly owned by LICENSEE and KOSAN hereunder. KOSAN shall use its reasonable efforts to avoid such conflict. It is understood that, unless LICENSEE is damaged as a proximate result of a material breach by KOSAN of Section 3.1 or 4.3 then KOSAN shall have no liability, under this AGREEMENT with respect to any such conflict. 4.13 RETAINED RIGHTS. It is understood and agreed that, KOSAN shall retain the exclusive right to develop (including pre-clinical and clinical development), make, have made, use and sell all products other than PRODUCTS. It is understood and agreed that KOSAN may practice and use the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW to facilitate the exercise of its rights. 4.14 NO IMPLIED RIGHTS. No other, further or different license or right, except as expressly provided in this Article 4 hereof, is hereby granted or implied. -28- ARTICLE 5 -- DEVELOPMENT AND COMMERCIALIZATION 5. 1 DEVELOPMENT. 5.1.1 JDAC. Promptly after selection by RWJPRI of a LICENSED COMPOUND or a DERIVATIVE for DEVELOPMENT, the parties shall establish a Joint Development Advisory. Committee (the "JDAC") to oversee the DEVELOPMENT of PRODUCTS. 5.1.2 MEMBERSHIP. The JDAC shall include three (3) representatives from each of KOSAN and RWJPRI, each Party's members to be selected by that party. KOSAN and LICENSEE may each replace its JDAC representatives at any time, upon written notice to the other party. One of the RWJPRI members of the JDAC, chosen at the sole discretion of RWJPRI, shall serve as chair of the JDAC. 5.1.3 MEETINGS; MINUTES. The JDAC shall meet at least quarterly, or more frequently as agreed by the parties, at such locations as the parties agree, and will otherwise communicate regularly by telephone, electronic mail, facsimile and/or video conference. Meetings of the JDAC shall be held at least quarterly and may be called by either party with not less than ten (10) working days notice to the other unless such notice is waived, and meetings shall be held at the office of the party not calling the meeting, unless otherwise agreed. The JDAC may be convened, polled or consulted from time to time by means of telecommunication or correspondence. Each party will disclose to the other proposed agenda items reasonably in advance of each meeting of the JDAC. With the consent of the parties, other representatives of KOSAN or LICENSEE may attend JDAC meetings as observers. Each party shall be responsible for all of its own expenses associated with attendance of such meetings. The JDAC shall prepare written minutes of each JDAC meeting and a written record of all JDAC recommendations, whether made at a JDAC meeting or otherwise. A written record shall be provided by the presenting party, to each party of all materials presented at meetings of the JDAC. 5.1.4 FUNCTIONS OF THE JDAC. The JDAC shall serve in an advisory capacity concerning the management of the DEVELOPMENT of PRODUCTS as well as related pre-market activities performed under the provisions of this AGREEMENT. In carrying out this function, the JDAC will: (a) Promptly upon selection of a PRODUCT for DEVELOPMENT, advise RWJPRI in the preparation of a written DEVELOPMENT PLAN, including appropriate timelines for DEVELOPMENT, for such PRODUCT, which DEVELOPMENT PLAN shall be provided by RWJPRI to the parties; -29- (b) review progress of the DEVELOPMENT work at least quarterly, and advise RWJPRI concerning changes or modifications to the DEVELOPMENT PLAN; (c) oversee and direct the transfer of LICENSED COMPOUNDS from KOSAN to LICENSEE; and (d) review progress reports as to the performance of the DEVELOPMENT PLAN, the first such report to be submitted by RWJPRI [**] following selection of such LICENSED COMPOUND for DEVELOPMENT and at [**] intervals thereafter until the SALE of PRODUCT is approved and PRODUCT is being marketed on a regular commercial basis in the United States and each MAJOR MARKET COUNTRY and such approval and marketing is reported in writing to KOSAN. Minutes of meetings of the JDAC may serve as such. progress reports. The parties agree to maintain information in such reports in confidence in accordance with the confidentiality, provisions of Article 9 hereof. 5.1.5 DEVELOPMENT PROGRAM. RWJPRI shall be solely responsible for and have the exclusive right, at its discretion but in consultation with the JDAC, to select LICENSED COMPOUNDS which shall then be designated PRODUCTS for further DEVELOPMENT by RWJPRI and marketing by ORTHO and its AFFILIATES. RWJPRI shall provide KOSAN with written notice of its decision to select a LICENSED COMPOUND for DEVELOPMENT. Once a PRODUCT has been selected for further DEVELOPMENT, RWJPRI, with the advice of the JDAC, shall have the exclusive right to develop the PRODUCT through STAGES O, I, II and III and shall have the exclusive right to prepare and file, and shall be the owner of, all applications for MARKETING AUTHORIZATION throughout the world. During such DEVELOPMENT efforts, KOSAN will assist RWJPRI as may be mutually agreed, at RWJPRI's expense, in chemical development, formulation development, production of labeled material and production of sufficient quantities of material for STAGE O and initial STAGE I studies. RWJPRI shall exercise diligent efforts, commensurate with the efforts it would normally exercise for products with similar potential sales volume and consistent with its overall business strategy, in developing such PRODUCT in accordance with the DEVELOPMENT PLAN established by RWJPRI. In the course of such efforts RWJPRI shall, either directly or through an AFFILIATE or SUBLICENSEE to which the license shall have been extended, take appropriate steps including the following: (i) in consultation with the JDAC, select certain LICENSED COMPOUNDS for STAGE O DEVELOPMENT; and (ii) establish and maintain a program reasonably designed, funded and resourced to obtain information adequate to enable the preparation and filing with an appropriate and properly empowered national regulatory authority all necessary documentation, data and -30- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. other evidence required for IND non-rejection to commence and conduct human clinical trials of such PRODUCT. (iii) proceed following IND non-rejection to commence PHASE I, II, and III clinical trials, associated studies and such other work which RWJPRI reasonably deems to be required for subsequent inclusion in filings for MARKETING AUTHORIZATION; (iv) after such submissions are filed prosecute such submissions and file all reasonably necessary, reports and respond to all reasonable requests from the pertinent regulatory, authorities for information, data, samples, tests and the like. 5.2 DELIVERY. For each MACROLIDE in DEVELOPMENT, if available, KOSAN will provide to RWJPRI the clone producing the LICENSED COMPOUND or an intermediate therefor, and all information related to fermentation conditions, process development, scale-up, etc. 5.3 MARKETING AUTHORIZATION. MARKETING AUTHORIZATION applications shall be compiled by ORTHO based on information generated during the DEVELOPMENT program. Subject to Section 19.3.4, ORTHO shall own such MARKETING AUTHORIZATIONS. KOSAN shall prepare supporting documentation requested by ORTHO. At ORTHO's request and expense, KOSAN shall further assist ORTHO with the preparation of supporting data to apply for and pursue MARKETING AUTHORIZATIONS. 5.4 COMMERCIALIZATION STATUS. If LICENSEE is developing a LICENSED COMPOUND, or any PRODUCT, during the period from the end of the RESEARCH TERM to the first commercial sale of such PRODUCT, LICENSEE shall keep KOSAN informed of its development activities with respect to such LICENSED COMPOUND and PRODUCT, including without limitation, the achievement of the milestones set forth in Section 6.4 and the commercialization of such LICENSED COMPOUND and PRODUCT, by [**] providing KOSAN with a written report stating the status of development of each such LICENSED COMPOUND and PRODUCT. It is understood that the report provided to the JDAC under Section 5.1.4(d) may serve to fulfill LICENSEE's obligation to KOSAN hereunder. 5.5 COMMERCIALIZATION. Once a PRODUCT has been approved for marketing, ORTHO shall exercise reasonable efforts, commensurate with the efforts it would normally exercise for products with similar potential sales volume and consistent with its overall business strategy, in promoting, advertising and SELLING such PRODUCT under this AGREEMENT. 5.6 PERFORMANCE OBLIGATIONS. 5.6.1 LACK OF DILIGENCE. Non-performance of this Article 5, or any subparagraph thereof by LICENSEE, shall be a breach of this AGREEMENT, subject to -31- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. KOSAN's right to terminate this AGREEMENT pursuant to Section 19.2. In such event, KOSAN agrees that (except in the case of a breach of Section 5.7) subject to the terms of Section 19.3, such termination shall be KOSAN's sole and complete remedy for such a breach. 5.6.2 ACKNOWLEDGMENT. Notwithstanding any other provision hereunder, LICENSEE makes no representation or warranty, that development and marketing of PRODUCT shall be the exclusive means by which LICENSEE will participate in the FIELD. Furthermore, all business decisions concerning the DEVELOPMENT, marketing and SALES of PRODUCT(S) including, without limitation, the design, sale, price and promotion of PRODUCTS covered under this AGREEMENT shall be within the sole discretion of LICENSEE. KOSAN realizes that LICENSEE already sells products for the treatment of [**], and acknowledges that LICENSEE may now or in the future develop or acquire other products for the treatment and prevention of such conditions. 5.7 NO OTHER PRODUCTS OTHER THAN PRODUCTS. Except as otherwise agreed in writing or specifically provided in the terms of this AGREEMENT, neither LICENSEE nor its SUBLICENSEES shall commercialize any LICENSED COMPOUND or DERIVATIVE thereof; other than as a PRODUCT in accordance with this AGREEMENT. ARTICLE 6 -- LICENSE FEES AND MILESTONE PAYMENTS 6.1 INITIAL FEE. In consideration of the rights and licenses granted to LICENSEE under this AGREEMENT on EFFECTIVE DATE, ORTHO shall pay KOSAN an initial fee of one million dollars ($1,000,000) to reimburse KOSAN for past research and development. Such fee shall not be refundable nor creditable against other amounts due KOSAN under this AGREEMENT. 6.2 RESEARCH MILESTONE PAYMENTS. 6.2.1 NCE IDENTIFICATION. RWJPRI shall pay the following amounts to KOSAN within [**] following accomplishment of the following Research Milestones in connection with the Research PROJECTS: $[**] Identification of a [**] in the FAST TRACK PROJECT $[**] Identification of each [**] in the SAR PROJECT 6.2.2 DELIVERY OF FIRST MACROLIDES. LICENSEE shall pay to KOSAN a one-time fee of one million dollars ($1,000,000) thirty (30) days following the delivery to RWJPRI of -32- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] MACROLIDES from the Fast Track PROJECT, provided that any such payment shall not be made prior to [**]. 6.3 LICENSED COMPOUND FEE. Within [**] after any compound becomes a LICENSED COMPOUND, RWJPRI shall pay [**]dollars ($[**]) for each such LICENSED COMPOUND (other than the [**] for which RWJPRI has already paid the $[**] set forth in Section 6.2.1). 6.4 DEVELOPMENT MILESTONE PAYMENTS. Within [**] following the occurrence of the relevant events specified below with respect to the each PRODUCT, LICENSEE shall pay to KOSAN the following amounts:
DEVELOPMENT MILESTONE PAYMENT --------------------- ------- [**] $[**]
6.5 BACKUP PRODUCTS. In the event one or more of the aforesaid milestone payments have been paid in respect of a given PRODUCT for which DEVELOPMENT or commercialization is subsequently discontinued, LICENSEE shall receive a credit for such milestone payments against milestone payments due for the next PRODUCT to meet such milestone. It is understood that in no event shall LICENSEE be obligated to make the payment due on any milestone event more than once with respect to the same PRODUCT, regardless of the number of indications for which such PRODUCT is developed. If at the time a milestone is achieved by a PRODUCT any prior milestones have not been achieved for such PRODUCT, the payments for such prior milestones for such PRODUCT shall then be due. 6.6 RESERVED COMPOUND FEE. If RWJPRI has designated more than [**] MACROLIDES as RESERVED COMPOUNDS at any time, for each such RESERVED COMPOUND in excess of [**], RWJPRI shall pay [**] dollars ($[**]) within [**] after the date of the designation of the applicable RESERVED COMPOUND. 6.7 NO WITHHOLDING. All amounts paid to KOSAN pursuant to this Article 6 shall be made without withholding for taxes or any other charge. -33- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. ARTICLE 7 -- ROYALTIES, RECORDS AND REPORTS 7.1 EARNED ROYALTIES; ROYALTY TERM. For the rights and privileges granted under this AGREEMENT, subject to Article 19, ORTHO shall pay to KOSAN, on a country-by-country and PRODUCT-by-PRODUCT basis, earned royalties on NET SALES as follows: 7.1.1 where the manufacture, USE or SALE of the PRODUCT falls within the scope of a VALID CLAIM which is (i) owned sorely by KOSAN, (ii) owned jointly by KOSAN and LICENSEE, or (iii) filed during the RESEARCH TERM or claims priority to a patent application filed during the RESEARCH TERM and in connection with the RESEARCH PROGRAM which is owned solely by LICENSEE or its AFFILIATES or SUBLICENSEES, ORTHO shall pay to KOSAN a royalty on the NET SALES of all such PRODUCTS that are SOLD by or for ORTHO or AFFILIATES or SUBLICENSEES under this AGREEMENT until the expiration of the last to expire of such patents in the PATENT RIGHTS in such country., as follows: Annual Cumulative NET SALES/PRODUCT ROYALTY RATE ------------- ------------ [**] [**]% 7.1.2 where the manufacture, USE or SALE of the applicable PRODUCT is not within the scope of a VALID CLAIM subject to Section 7.1.1, ORTHO shall pay to KOSAN a royalty on NET SALES equal to [**] the royalties in (a) above with respect to such PRODUCTS that are SOLD by or for ORTHO or AFFILIATES or SUBLICENSEES under this AGREEMENT in such country, for a period of the longer of (i) ten (10) years from the date of first commercial sale of such PRODUCT in such country, or (ii) so long as there is a VALID CLAIM in such country. 7.1.3 It is understood and agreed that the increased royalty rates due pursuant to Sections 7.1.1 and 7.1.2 on higher levels of NET SALES shall only be due on the incremental NTT SALES over the lower tier. 7.l.4 It is understood and agreed that regardless of any credits or offsets to which LICENSEE is entitled under the terms of this AGREEMENT, the royalty, payments due KOSAN under Article 7 shall not be less than [**] of the royalties due pursuant to Sections 7.1.1 or 7.1.2 as applicable, on NET SALES of any PRODUCT in the applicable quarter. Any such royalty credits or offsets may be carried forward until applied. 7.2 ROYALTY ON NET SALES TO THIRD PARTIES. Earned royalties shall be paid pursuant to Section 7.1 hereof on all PRODUCTS SOLD under this AGREEMENT and the -34- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. earned royalty payable on a given PRODUCT made hereunder shall not become due and owing until such PRODUCT is SOLD. Except where LICENSEE or its AFFILIATES or SUBLICENSEE is an end-user of a PRODUCT, the earned royalty for any particular PRODUCT shall be due upon the first bona fide arm's length SALE to a THIRD PARTY other than an AFFILIATE or SUBLICENSEE thereof and any subsequent SALE of such PRODUCT by a THIRD PARTY that is not an AFFILIATE or SUBLICENSEE shall be royalty-free. 7.3 THIRD-PARTY ROYALTIES. KOSAN shall be responsible for paying [**] royalties due Stanford University on PRODUCTS pursuant to the STANFORD LICENSE and for [**] THIRD PARTY royalties for which KOSAN is responsible pursuant to Section 2.7.6. Except as provided in the preceding sentence, LICENSEE shall be responsible for procuring such licenses as it deems, in its sole discretion, appropriate for the manufacture, use, marketing, sale or distribution of PRODUCTS by LICENSEE and its AFFILIATES and SUBLICENSEES, and for the payment of any amounts due THIRD PARTIES under such licenses; provided that with regard to licenses entered by RWJPRI with THIRD PARTIES for intellectual property rights which are necessary, for the practice of the KOSAN PATENT RIGHTS existing as of the EFFECTIVE DATE for the creation or preparation of MACROLIDES and/or AROMATIC POLYKETIDES, which licenses have been approved by the JRC, LICENSEE may offset against the royalties owed to KOSAN up to [**] percent ([**]%) of royalties owed such THIRD PARTY, up to a maximum of [**] percent ([**]%) of the royalty owed to KOSAN in any quarter with respect to the applicable PRODUCT. Any such amounts which are uncredited in a quarter may be carried forward until expended. 7.4 ONE ROYALTY. Notwithstanding the provisions of Section 7.2 hereof, in the case of transfers or SALES of any PRODUCT among ORTHO, AFFILIATES and SUBLICENSEE or between AFFILIATES for re-sale to THIRD PARTIES, one and only one royalty shall be payable thereon and such royalty, shall become payable upon the SALE thereof to a THIRD PARTY. 7.5 AUDIT RIGHTS. ORTHO shall keep, and shall cause its AFFILIATES and SUBLICENSEES to keep, full, true and accurate books of account containing all particulars in accordance with ORTHO's normal accounting procedures then in effect for the purpose of showing the amount payable to KOSAN by way of royalty as aforesaid or by way of any other provision hereunder. Said books of account shall be kept at ORTHO's (or if sales by a SUBLICENSEE, at the SUBLICENSEE's) principal place of business. Said books and the supporting data shall be maintained and kept open during reasonable business hours, for [**] following the end of the calendar year to which they pertain (and access shall not be denied thereafter, if reasonably available), to the inspection of an independent certified public accountant retained by KOSAN and reasonably acceptable to ORTHO or such SUBLICENSEE for the purpose of verifying ORTHO's royalty statements, or ORTHO's compliance in other respects with this AGREEMENT, but this right to inspect may not be exercised more than once in any year and once a calendar period is audited, it may not be re-audited unless a payment -35- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. discrepancy is identified. Said accountant shall disclose to KOSAN only information relating to the accuracy of the royalty reports and the royalties paid under this AGREEMENT. Names of customers and other confidential information shall not be disclosed to KOSAN by such independent accountant. Such accountant shall be retained at KOSAN's sole expense. Notwithstanding the foregoing, inspections of the records of SUBLICENSEES shall be limited to the extent that ORTHO has the right to authorize KOSAN to make such inspection; provided that if ORTHO does not have the right to authorize KOSAN to make such an inspection, upon KOSAN's request, ORTHO, at its expense, using an independent certified accountant reasonably acceptable to KOSAN, shall inspect the SUBLICENSEE's records and shall provide to KOSAN the results of such inspection. In any audit, if an underpayment of more than five percent (5%) is established for a quarter, LICENSEE shall pay the costs of the audit of such period and shall promptly pay to KOSAN any amounts due together with interest as provided in Section 7.7. 7.6 ROYALTY REPORTS. ORTHO within [**] of each year (the "Reporting Date") shall deliver to KOSAN a true and accurate report, giving such particulars of the PRODUCTS SOLD by ORTHO, AFFILIATES, and SUBLICENSEES and the NET SALES due during the [**] preceding the Reporting Date ("Accounting Period") under this AGREEMENT as are pertinent to an accounting for royalty under this AGREEMENT. Each such report shall state, separately for LICENSEE and each AFFILIATE and SUBLICENSEE, the number, description, and aggregate NET SALES, by country, of each PRODUCT sold during the calendar quarter upon which a royalty is payable under this AGREEMENT. Simultaneously with the delivery of each such report, ORTHO shall pay to KOSAN the royalty due under this AGREEMENT for the period covered by such report. If no royalties are due, it shall be so reported. 7.7 PAYMENT METHOD; LATE PAYMENTS. All amounts due KOSAN hereunder shall be paid in U.S. dollars by wire transfer in immediately available funds to a bank account designated by KOSAN. Any payments or portions thereof due hereunder which are not paid on the date such payments are due under this AGREEMENT shall bear interest at a rate equal to the lesser of [**], or the maximum rate permitted by law, calculated on the number of days such payment is delinquent, compounded monthly. This Section 7.7 shall in no way limit any other remedies available to KOSAN. 7.8 CURRENCY CONVERSION. All royalty, payments by ORTHO to KOSAN shall be converted into U.S. Dollars in accordance with ORTHO's current customary and usual procedures for calculating same which are the following: the rate of currency conversion shall be calculated using a [**], or if such rate is not available, the [**]. ORTHO shall give KOSAN prompt written notice of any changes to ORTHO's customary and usual procedures for currency conversion, which shall only apply after -36- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. such notice has been delivered and provided that such changes continue to maintain a set methodology for currency conversion. If the transfer or the conversion into U.S. Dollars in any such instance is not lawful or possible, the payment of each pan of the royalties due as is necessary, shall be made by the deposit thereof, in whatever currency is allowable, to the credit and account of KOSAN in any commercial bank or trust company of KOSAN's choice located in that country. Prompt notice of said deposit shall be given by ORTHO to KOSAN and ORTHO shall use reasonable efforts to assist KOSAN in securing the payment of such funds to KOSAN's U.S. bank account. 7.9 TAXES. Any tax required to be withheld on royalties payable to KOSAN under the laws of any foreign country shall be promptly paid by ORTHO for and on behalf of KOSAN to the appropriate governmental authority, and ORTHO shall furnish KOSAN with proof of payment of such tax together with official documents issued by the appropriate governmental authority and other appropriate evidence sufficient to enable KOSAN to support a claim for a tax credit in respect of any sum so withheld, and at KOSAN's request, provide reasonable assistance to KOSAN in recovering such amounts, if possible. 7.10 LEGAL LIMIT ON ROYALTIES. In any country where the rate of royalty is limited by applicable law, the royalty payment shall be made to KOSAN at the highest rate permitted by law in that country for licenses of the type herein granted, provided that such rate is equal to or less than the rate specified in this AGREEMENT. 7.11 RESTRICTIONS ON PAYMENTS. The obligation to pay royalties to KOSAN under this AGREEMENT shall be waived and excused to the extent that applicable statutes, laws, codes or government regulations in a particular country prevent such royalty payments; provided, however, in such event, if legally permissible, LICENSEE shall pay the royalties owed to KOSAN by depositing such amounts, to the credit and account of KOSAN or its nominee in any commercial bank or trust company of KOSAN's choice located in that country, prompt notice of which shall be given by ORTHO to KOSAN. ARTICLE 8 -- SUPPLY OF PRODUCTS 8.1 ORTHO RESPONSIBILITY. ORTHO shall be solely responsible for making or having made PRODUCTS for DEVELOPMENT and commercialization. During DEVELOPMENT or commercialization of the PRODUCTS, the parties may agree that KOSAN shall manufacture and supply to ORTHO quantities of certain compounds. 8.2 CONSIDERATION OF KOSAN. If KOSAN wishes to be responsible for production of and purification of MACROLIDE and/or AROMATIC POLYKETIDES for preclinical and clinical testing and manufacture of bulk PRODUCTS for commercial sale it may notify LICENSEE and demonstrate that KOSAN (or its designee) is able to manufacture PRODUCTS meeting the relevant LICENSEE specifications with respect to cost and quality in a timely -37- manner, then, subject to the approval of LICENSEE, KOSAN may conduct such manufacturing. In such event, the parties shall enter into a separate supply agreement on terms to be mutually agreed by the parties. 8.3 TECHNOLOGY TRANSFER. Upon LICENSEE's request, KOSAN shall provide reasonable technical assistance, and, to the extent that KOSAN has a right to do so without incurring additional expense, licenses, as may reasonably be requested by LICENSEE to transfer such technology as needed for LICENSEE or its designee to commence or continue manufacturing under Section 8.1. All such technical assistance shall be provided at LICENSEE's expense. ARTICLE 9 -- CONFIDENTIALITY 9.1 CONFIDENTIAL INFORMATION. Except as expressly provided herein, the parties agree that, for the term of this AGREEMENT and for [**] thereafter, the receiving party, shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose except for the purposes contemplated by this AGREEMENT, any confidential information of the other party, or any data, samples, technical and economic information (including the economic terms hereof), commercialization, clinical and research strategies and KNOW-HOW and other information provided by the other party (the "Disclosing Party") during the TERM of this AGREEMENT or during the negotiation of this AGREEMENT, or in connection with the transactions contemplated thereby, or any RESEARCH PROGRAM Technology and all other data, results and information developed pursuant to the RESEARCH PROGRAM and solely owned by the Disclosing Party (collectively, the "Confidential Information") furnished to it by the Disclosing Party hereto pursuant to this AGREEMENT or the transactions contemplated thereby. Notwithstanding the above, Confidential Information shall not include information that: (i) is or hereafter becomes generally available to the public other than by reason of any default with respect to a confidentiality, obligation under this AGREEMENT; or (ii) was already known to the recipient as evidenced by prior written documents in its possession; or (iii) is disclosed to the recipient by a THIRD PARTY who is not in default of any confidentiality, obligation to the disclosing party hereunder; or (iv) is developed by or on behalf of the receiving party, without reliance on Confidential Information received from the other party hereunder; or -38- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (v) is used with the consent of the Disclosing Party (which consent shall not be unreasonably withheld) in applications for patents or copyrights under the terms of this AGREEMENT; or (vi) has been approved in writing for publication by the Disclosing Party; or (vii) is PRODUCT-related information which is reasonably required to be disclosed in connection with marketing of PRODUCT covered by this AGREEMENT. Confidential Information shall be safeguarded by the recipient, shall not be disclosed to THIRD PARTIES and shall be made available only to recipient's employees or independent contractors who agree in writing to equivalent conditions and who have a need to know the information for the purposes specified under this AGREEMENT; however, the recipient may disclose Confidential Information to the extent such disclosure is required in compliance with applicable laws or regulations in connection with the manufacture or sale of products covered by this AGREEMENT, or is otherwise required to be disclosed in compliance with applicable laws or regulations or order by a court or other regulatory body having competent jurisdiction, provided that in the event such disclosure is required, the recipient (i) shall, unless prohibited by law, give reasonable advance notice of such disclosure to the other party and (ii) shall use reasonable efforts to secure confidential treatment of such information (whether by protective order or otherwise). Notwithstanding the foregoing, Confidential Information may be provided to THIRD PARTIES under appropriate terms and conditions including confidentiality provisions equivalent to those in this AGREEMENT for consulting, manufacturing development, manufacturing, external testing and marketing trials with respect to the products covered by this AGREEMENT. 9.2 PUBLICATION. The parties shall cooperate in appropriate publication of the results of research and development work performed pursuant to this AGREEMENT, but subject to the predominating interest to obtain patent protection for any patentable subject matter. To this end, it is agreed that prior to any public disclosure of such results, the party proposing disclosure shall send the other party a copy of the information to be disclosed, and shall allow the other party thirty (30) days from the date of receipt in which to determine whether the information to be disclosed contains subject matter for which patent protection should be sought prior to disclosure, or otherwise contains Confidential Information of the reviewing party which such party desires to maintain as a trade secret. Each party shall designate a representative for receipt of proposed publications from the other party. Confidential Information of the reviewing party which such party desires to maintain as a trade secret shall not be published if the reviewing party objects in writing within such thirty (30) day period. If notification is not received during the thirty (30) day period, the party proposing disclosure shall be free to proceed with the disclosure. If due to a valid business reason or a reasonable belief by the non-disclosing party that the disclosure contains subject matter for which a patentable invention should be sought, then prior to the expiration of the thirty (30) day period, the non-disclosing party shall so notify -39- the Disclosing Party, who shall then delay public disclosure of the information for an additional period of up to ninety (90) days to permit the preparation and filing of a patent application on the subject matter to be disclosed or other action to be taken. The party proposing disclosure shall thereafter be free to publish or disclose the information. Notwithstanding the foregoing, if the publication discloses a LICENSED COMPOUND, either party may delay publication until such time as the applicable patent application disclosing the LICENSED COMPOUND is published in the normal course of events. The determination of authorship for any paper shall be in accordance with accepted scientific practice. 9.3 ACQUISITION. In the event a party hereto is acquired, such party shall take reasonable efforts to ensure that the Confidential information of the other party hereto is used only for the purposes of this AGREEMENT, and is not disclosed to the acquiror. ARTICLE 10 -- REGULATORY MATTERS 10.1 ADVERSE EVENT REPORTING. Each party shall promptly inform the other in writing within twenty-four (24) hours of its receipt of any information which it receives regarding or related to any serious, unexpected adverse reaction in humans to PRODUCT. Each party shall comply with each Adverse Drug Experience reporting requirement of it in the United States Federal Food Drug and Cosmetic Act, as amended (21 U.S.C. Section 301 ET SEQ.) and the similar requirements of international regulatory authorities. In addition, on an on-going basis, each party agrees to make a good faith effort to promptly provide the other party with any additional information in its possession which indicates adverse effects in humans associated with PRODUCT. The obligations of this article shall survive termination of this AGREEMENT as to PRODUCT continued to be sold by ORTHO, or its AFFILIATES or SUBLICENSEES. 10.2 REGULATORY AND OTHER INQUIRIES. In the event KOSAN is manufacturing pursuant to Article 8 hereof, then upon being contacted by the FDA or any drug regulatory Agency for any regulatory purpose pertaining to this AGREEMENT or to a PRODUCT, KOSAN and LICENSEE shall promptly (within two (2) business days) notify and consult with one another and LICENSEE shall provide a response as it deems appropriate. LICENSEE shall have sole responsibility for responding to all inquiries to LICENSEE or KOSAN regarding the benefits, side effects and other characteristics of PRODUCTS. The party which is responsible for manufacturing the BULK PRODUCT form of the pertinent PRODUCT shall have the sole responsibility for responding to all inquiries regarding the manufacture of such BULK PRODUCT after consultation with the other party. 10.3 PRODUCT RECALL. In the event that LICENSEE or KOSAN determines that an event, incident or circumstance has occurred which may result in the need for a recall or other removal of any PRODUCT, or any lot or lots thereof, from the market, it shall advise and consult with the other party with respect thereto. LICENSEE shall make the final determination to recall or otherwise remove the PRODUCT or any lot or lots thereof from the market. KOSAN shall be -40- responsible for the costs of any recall due to defects in BULK PRODUCTS manufactured by KOSAN, and LICENSEE shall be responsible for the costs of other recalls. ARTICLE 11 -- PATENT INFRINGEMENT 11.1 NOTICE. In the event that there is infringement on a commercial scale by a THIRD PARTY of any patent licensed to LICENSEE hereunder that covers the manufacture, USE or SALE of a PRODUCT. LICENSEE shall notify KOSAN in writing to that effect, including with said written notice evidence establishing a prima facie case of infringement by such THIRD PARTY. 11.2 SOLELY OWNED INVENTIONS. 11.2.1 KOSAN ACTION. With respect to patents solely owned by KOSAN, KOSAN shall after any such notification, at its option, take action to obtain a discontinuance of such infringement or bring suit against the THIRD PARTY infringer. KOSAN shall bear all the expenses of any suit brought by it. In the event damages or other monies are awarded or received in settlement of such suit, KOSAN shall be entitled to deduct an amount to cover its out-of-pocket expenses, including attorneys' and professional fees, and including a reasonable allocation for in-house attorney's time, incurred for such suit. The balance of any recoveries shall then be shared by the parties with KOSAN receiving [**] percent ([**]%) and [**] percent ([**]%). LICENSEE and its AFFILIATES will cooperate with KOSAN in any such suit and shall have the right to consult with KOSAN and be represented by its own counsel at its own expense. KOSAN shall incur no liability to LICENSEE and its AFFILIATES as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding KOSAN's patent invalid or unenforceable. 11.2.2 ORTHO ACTION. If, after the expiration of one hundred eighty (180) days from the date of a request by ORTHO to do so, KOSAN has not overcome the prima facie case of infringement, obtained a discontinuance of such infringement, or brought suit against the THIRD PARTY infringer, then after such one hundred eighty (180) days notice period, ORTHO shall have the right, but not the obligation, to bring suit against such infringer and join KOSAN as a party plaintiff with respect to infringements relating to patents claiming compositions of matter which are LICENSED COMPOUNDS and/or the method of commercial manufacture thereof used by ORTHO (but not with respect to patents relating to the creation or production of polyketides more generally), provided that ORTHO shall bear all the expenses of such suit. In the event ORTHO brings such suit, and damages or other monies are awarded or received in settlement of such suit. ORTHO shall be entitled to deduct an amount to cover its out-of-pocket expenses, including attorneys' and professional fees, and including a reasonable allocation for in-house attorney's time. incurred for such suit. The balance of any recoveries shall be shared by the parties with ORTHO receiving [**] percent ([**]%) and [**] percent ([**]%). KOSAN will cooperate with ORTHO in any suit for infringement of a -41- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. licensed patent brought by ORTHO against a THIRD PARTY, and shall have the right to consult with ORTHO and to participate in and be represented by independent counsel in such litigation at its own expense. ORTHO shall incur no liability to KOSAN as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding KOSAN's patent invalid or unenforceable; provided, ORTHO shall not enter into any settlement which (i) makes any admission of wrongdoing on the part of KOSAN, or (ii) admits that any of KOSAN PATENT RIGHTS are invalid, unenforceable or not infringed, without the prior written consent of KOSAN. 11.3 JOINT INVENTIONS. In the event KOSAN or LICENSEE becomes aware of any actual or threatened infringement of any PATENT RIGHT which claims a Joint Invention that party shall promptly notify the other and the parties shall promptly discuss how to proceed in connection with such actual or threatened infringement. In the event only one party wishes to participate in such proceeding, it shall have the right to proceed alone, at its expense, and may retain any recovery; provided, at the request and expense of the participating party, the other party agrees to cooperate and join in any proceedings in the event that a THIRD PARTY asserts that the co-owner of such Joint Invention is necessary or indispensable to such proceedings. 11.4 COOPERATION. In the event either party hereto shall initiate or carry on legal proceedings to enforce the PATENT RIGHTS against an alleged infringer, as provided herein, the other party hereto shall fully co-operate with the party initiating or carrying on such proceedings. ARTICLE 12 -- INTELLECTUAL PROPERTY 12.1 OWNERSHIP. 12.1.1 OWNERSHIP OF INVENTIONS. KOSAN will own any inventions, and patents claiming such inventions, conceived or reduced to practice by KOSAN personnel in connection with the performance of the RESEARCH PROGRAM, subject to the licenses granted in Article 4 above. RWJPRI will own any inventions, and patents claiming such inventions, conceived and reduced to practice solely by RWJPRI personnel in connection with the RESEARCH PROGRAM. The parties will jointly own any inventions, and patent claiming such inventions, conceived and reduced to practice jointly by RWJPRI and KOSAN personnel in connection with the RESEARCH PROGRAM ("Joint Inventions"); provided, KOSAN shall have sole ownership of all MACROLIDES and AROMATIC POLYkETIDES transferred to LICENSEE hereunder and all EXCLUDED TECHNOLOGY and intellectual property relating thereto, and LICENSEE shall and hereby assigns to KOSAN any interest that LICENSEE may have in or to the foregoing. 12.1.2 U.S. LAW. Inventorship and rights of ownership shall be determined in accordance with U.S. patent law. The laws of the United States with respect to joint ownership -42- of inventions shall apply in all jurisdictions, and each party hereby waives any right (other than as set forth in this AGREEMENT) to obtain an accounting of profits or approve any license or exploitation thereof. 12.2 PATENT PROSECUTION. 12.2.1 KOSAN shall file, maintain and prosecute the patent applications within the KOSAN PATENT RIGHTS to obtain patents thereon in such countries it deems appropriate, at its own expense. KOSAN does not represent or warrant that any such patent will be obtained, and KOSAN shall, in its sole discretion, be responsible for determining whether to abandon any or all of said patent applications or any portions thereof. 12.2.2 KOSAN shall promptly notify LICENSEE in the event KOSAN decides not to file, or decides to abandon or discontinue prosecution or maintenance of any one or more patents or patent applications included in the KOSAN PATENT RIGHTS. Such notification will be given as early as possible which in no event will be less than sixty (60) days prior to the date on which said application(s) will become abandoned. LICENSEE shall have the option, exercisable upon written notification to KOSAN, to assume full responsibility for the filing, prosecution or maintenance of the affected patents or patent application(s), in LICENSEE's name, at its expense. Royalty obligations with respect to such affected patents or patent applications shall be governed by, and at the royalty rate, set forth in Section 7.1.2 hereinabove for the life of such patent. 12.2.3 LICENSEE shall file, maintain and prosecute the patent applications within the PATENT RIGHTS solely owned by LICENSEE to obtain patents thereon in such countries it deems appropriate, at its own expense. LICENSEE does not represent or warrant that any such patent will be obtained, and LICENSEE shall, in its sole discretion be responsible for determining whether to abandon any or all of said patent applications or any portions thereof. 12.3 CONSULTATION. LICENSEE shall have the right to consult with KOSAN regarding the content of said patent applications, prior art searches and correspondence, and to comment thereon. KOSAN shall consider all such comments offered by LICENSEE, it being agreed, however, that all final decisions respecting conduct of the prosecution of said patent applications shall rest solely in the discretion of KOSAN. KOSAN agrees to promptly provide LICENSEE with copies of: 12.3.1 All patent applications included in KOSAN PATENT RIGHTS which claim LICENSED COMPOUNDS; 12.3.2 All prior art searches conducted on behalf of KOSAN related to said patent applications and the subject matter of this AGREEMENT; and -43- 12.3.3 All correspondence to and from the United States Patent and Trademark Office related to said patent applications as well as all requested correspondence relating to corresponding national and international patent applications. 12.4 JOINT INVENTIONS. 12.4.1 The parties will cooperate to file, prosecute and maintain patent applications covering the Joint Invention(s) within the RESEARCH PROGRAM in the United States, Japan and the European Union (in Europe through a European Patent Convention application) (collectively, the "Core Countries") and other countries agreed by the parties. The parties will share equally all expenses and fees associated with the filing, prosecution, issuance and maintenance of any patent application and resulting patent for a Joint Invention in the Core Countries and other agreed countries. Subject to Section 12.4.3 below, it is understood that, after the termination of the RESEARCH PROGRAM, the parties shall share equally the expenses and fees associated with the filing, prosecution, issuance and maintenance of any patent application and resulting patent for a Joint Invention in the Core Countries and other agreed countries. 12.4.2 In the event that either party wishes to seek patent protection with respect to any Joint Invention outside the Core Countries, it shall notify the other party hereto. If both parties wish to seek patent protection with respect to such Joint Invention in such country or countries, activities shall be subject to Section 12.4.1 above. If only one party wishes to seek patent protection with respect to such Joint Invention in such country or countries, it may file, prosecute and maintain patent applications and patents with respect thereto, at its own expense. Whenever possible, the parties shall cooperate to obtain the benefit of international treaties, conventions and/or agreements (e.g., the Patent Cooperation Treaty.) in order to obtain the benefits afforded thereby. In any such case, the party declining to participate in such activities shall not grant any THIRD PARTY a license under its interest in the applicable joint invention in the applicable country or countries without the prior written consent of the other party, which shall not be unreasonably withheld. KOSAN agrees to provide its written consent, if necessary, for LICENSEE to sublicense any joint invention in any country pursuant to the terms of this AGREEMENT. 12.5 PATENT TERM EXTENSIONS. LICENSEE shall cooperate with KOSAN, and unless KOSAN has previously applied for such an extension on its own behalf or on behalf of a THIRD PARTY with respect to the applicable patent, KOSAN agrees to diligently seek any extension under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, the Supplementary Certificate of Protection of the Member States of the European Community or other similar measure in any other country that is available or that becomes available in respect of the term of any patent within the KOSAN PATENT RIGHTS including any patent that may issue on a patent application within the KOSAN PATENT RIGHTS. LICENSEE shall diligently advise KOSAN in a timely manner of approval by the Food and Drug Administration of the United States of America to USE, SELL or market PRODUCTS or any other governmental -44- approval obtained by or on behalf of LICENSEE or an AFFILIATE that is pertinent to any such extension and LICENSEE shall supply KOSAN with any pertinent information and data in its possession or control or that is in the possession or control of any AFFILIATE or SUBLICENSEE and shall cooperate fully in assisting KOSAN to obtain any such extension that it may seek and LICENSEE shall supply KOSAN in a timely manner with any information and data and any supporting affidavits or documents required to comply with 35 U.S.C. Section 156 Extension of Patent Term (and any successor legislation) and any administrative rules or regulation thereunder or required to comply with any corresponding laws and regulations that are or shall be in effect in any country within the KOSAN PATENT RIGHTS, all without further consideration. ORTHO shall require its AFFILIATES to comply with this Section 12.5. ARTICLE 13 -- PUBLICITY Neither party shall originate any publicity, news release or public announcement, written or oral, whether to the public or press, stockholders or otherwise, relating to this AGREEMENT, including its existence, the subject matter to which it relates, performance under it or any of its terms, to any amendment hereto or performances hereunder without the written consent of the other party save only (i) such announcements as in the opinion of counsel for the party making such announcement is required by applicable law to be made, or (ii) announcements to KOSAN's private advisors, present investors, and bona fide prospective investors so long as such disclosure is made under a binder of confidentiality wherein such advisor or investor agrees not to disclose the information contained in the announcement to any THIRD PARTY or to use the information for any purpose other than to evaluate its investment or prospective investment in KOSAN. Such announcements shall be factual and as brief as reasonable. If a party decides to make an announcement required by law or otherwise permitted under this AGREEMENT, it will give the other party ten (10) days' advance written notice of the text of the announcement so that the other party will have an opportunity to comment upon the announcement. Upon request by a party for approval of any other disclosures, such approval or disapproval shall be given in writing within fifteen (15) days of its receipt. Upon request by either party, the parties agree to prepare a mutually agreed press release and related Question and Answer document with respect to this AGREEMENT. Once information has been approved for disclosure, no further consent or approval shall be required under this Article with respect to such information. ARTICLE 14 -- WARRANTIES AND REPRESENTATIONS 14.1 KOSAN warrants that as of the EFFECTIVE DATE it owns or exclusively controls by agreement, assignment or license right, title and interest in the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW and that it has full power and authority to execute, deliver and perform this AGREEMENT and the obligations hereunder. 14.2 KOSAN expressly warrants and represents that it has no outstanding encumbrances or agreements, either written, oral, or implied, in connection herewith that are -45- inconsistent with the rights granted herein, and that it has not granted and will not grant during the term of this AGREEMENT or any renewal hereof, any rights, license, consent or privilege that conflict with the rights granted herein. 14.3 LICENSEE expressly warrants and represents that it has no outstanding encumbrances or agreements, either written, oral, or implied, in connection herewith that are inconsistent with the obligations undertaken by LICENSEE herein, and that it has not entered into, and during the term of this AGREEMENT or any renewal hereof will not enter into, any agreements, either written, oral, or implied, that conflict with the rights granted, and obligations undertaken, by LICENSEE herein. 14.4 Each party expressly represents and warrants that it has the full power and authority to enter into this AGREEMENT and to carry out the transactions contemplated hereby. 14.5 Each party hereby warrants that the execution, delivery and performance of this AGREEMENT has been duly approved and authorized by all necessary corporate or partnership actions of both parties: do not require any shareholder or partnership approval which has not been obtained or the approval and consent of any trustee or the holders of any indebtedness of either party; do not contravene any law, regulation, rules or order binding on either party, and do not contravene the provisions of or constitute a default under any indenture, mortgage, contract or other agreement or instrument to which either party is a signatory. 14.6 Each party hereby represents and warrants that to the extent the United States government has any interest in the KOSAN PATENT RIGHTS as a result of government funded research, that it will continue to make good faith efforts to comply in all respects with the applicable provisions of any applicable law, regulation, or requirement by the U.S. Government relating to the KOSAN PATENT RIGHTS and shall make reasonable efforts to ensure that such laws, regulations and requirements are fulfilled with respect to the KOSAN PATENT RIGHTS including without limitation the provisions of 35 U.S.C. Section 202. Each party agrees that it will make good faith efforts to ensure that all necessary steps are taken to comply with the requirements of 35 U.S.C. Section 202 ET SEQ. and 37 C.F.R. Section 401.1 ET SEQ. to retain the maximum rights under the KOSAN PATENT RIGHTS allowable by law. LICENSEE and KOSAN agree that it will provide the necessary reports and information required to comply with 35 U.S.C. Sec. 202 et seq. and 37 C.F.R. Section 401.1 et seq., including periodic reports on utilization or efforts at utilization of the inventions covered by the KOSAN PATENT RIGHTS. 14.7 KOSAN and LICENSEE each specifically disclaim that the RESEARCH PROGRAM or the DEVELOPMENT will be successful, in whole or part or that any clinical or other studies undertaken by it will be successful. KOSAN AND LICENSEE EXPRESSLY DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE CONFIDENTIAL INFORMATION, OR KOSAN PATENT RIGHTS OR KNOW-HOW, LICENSED COMPOUNDS, RESERVED -46- COMPOUNDS, NCEs OR PRODUCTS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF ANY INTELLECTUAL PROPERTY, PATENTED OR UNPATENTED, OR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. ARTICLE 15 -- STANFORD LICENSE 15.1 KOSAN represents that as of the EFFECTIVE DATE the STANFORD LICENSE is in full force and effect. KOSAN shall use its reasonable efforts to not cause the termination and shall not seek to terminate the STANFORD LICENSE during the term of this AGREEMENT without the express written consent of LICENSEE. 15.2 KOSAN shall use its reasonable efforts to perform all duties and obligations required under the STANFORD LICENSE. KOSAN shall notify LICENSEE within five (5) days of its receipt of any termination notices from STANFORD of the STANFORD LICENSE and at LICENSEE's option shall seek to avoid said termination or shall subrogate LICENSEE to KOSAN's rights under the STANFORD LICENSE to enable LICENSEE to seek to avoid such termination. 15.3 KOSAN shall inform LICENSEE of any renegotiation of the STANFORD LICENSE, and shall not modify any terms or provisions of the STANFORD License, if such renegotiation or modification will adversely affect LICENSEE's rights under this AGREEMENT, without LICENSEE's written consent. KOSAN shall promptly provide LICENSEE with a copy of such renegotiated or modified STANFORD LICENSE. 15.4 In order to provide adequate protection of LICENSEE's interest in avoiding the termination of the STANFORD LICENSE, KOSAN agrees that should KOSAN default or receive a notice from STANFORD of default under the STANFORD LICENSE for failure to timely pay royalties which KOSAN does not intend to cure within the applicable period provided by the STANFORD LICENSE, KOSAN shall notify LICENSEE within ten (10) business days of its receipt of such notice and, LICENSEE may cure any such default on KOSAN's behalf, including paying any delinquencies. LICENSEE may credit any such payments made to STANFORD to cure KOSAN's delinquency against future payments due to KOSAN hereunder. ARTICLE 16 -- TRADEMARKS 16.1 ORTHO TRADEMARKS. ORTHO, at its expense, shall be responsible for the selection, registration and maintenance of all trademarks which it employs in connection with PRODUCTS and shall own and control such trademarks. KOSAN recognizes the exclusive ownership by ORTHO of any proprietary ORTHO name, logotype or trademark furnished by ORTHO (including ORTHO's AFFILIATES) for use in connection with the PRODUCT. KOSAN shall -47- not, either while this AGREEMENT is in effect or at any time thereafter, register, use or attempt to obtain any right in or to any such name. logotype or trademark or in and to any name, logotype or trademark confusingly similar thereto. ARTICLE 17 -- INDEMNIFICATION 17.1 BY ORTHO. ORTHO agrees to indemnity and hold harmless, KOSAN, its AFFILIATES and their respective officers, directors, employees and agents, and The Leland Stanford Jr. University, Stanford Health Services, Brown University, Brown University Research Foundation, and their respective, trustees, officers, employees, students and agents (each a "KOSAN Indemnitee") from and against any and all liability, damages, losses, claims, suits, proceedings, demands, recoveries or expenses, including reasonable attorney's fees and expenses, incurred or rendered against such KOSAN Indemnitees which arise out of or result from the use, testing, manufacture, processing, packaging, labeling, sale or distribution of PRODUCTS by ORTHO or its AFFILIATES or SUBLICENSEE; except to the extent such liability, damages, losses, claims, suits, proceedings, demands, recoveries or expenses, incurred by or rendered against KOSAN are based upon the gross negligence or wilful misconduct by KOSAN or its AFFILIATES. 17.2 BY KOSAN. KOSAN agrees to indemnify and hold harmless, LICENSEE, its AFFILIATES, and SUBLICENSEES and their respective officers, directors, employees and agents (each a "LICENSEE Indemnitee") from and against any and all THIRD PARTY liability, damages, losses, claims, suits, proceedings, demands, recoveries or expenses, including reasonable attorney's fees and expenses, incurred or rendered against such LICENSEE Indemnitee(s) which arise out of or result from (i) the negligence or wilful misconduct by KOSAN or its AFFILIATES in carrying out the RESEARCH PROGRAM under this AGREEMENT, or (ii) personal injury to KOSAN's employees or agents or damage to KOSAN's property resulting from acts performed by, under the direction of, or at the request of LICENSEE in carrying out activities contemplated by this AGREEMENT; except to the extent such liability, damages, losses, claims, suits, proceedings, demands, recoveries or expenses, incurred by or rendered against LICENSEE are based upon the gross negligence or wilful misconduct of a LICENSEE Indemnitee. 17.3 CONTROL. A party or person (the "Indemnitee") that intends to claim indemnification under this Article 17 shall promptly notify the other party (the "Indemnitor") in writing of any loss, claim, damage, liability, or action in respect of which the Indemnitee or any of its AFFILIATES, SUBLICENSEES or their directors, officers, employees, agents or counsel intend to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume the defense thereof with counsel chosen by Indemnitor, with consent of Indemnitee, which consent shall not be unreasonably withheld. The Indemnitee shall not enter into negotiations or enter into any agreement with respect to the settlement of any claim without the prior written approval of the Indemnitor, and the indemnity -48- agreement in this Article 17 shall not apply to amounts paid in settlement of any loss, claim, damage, liability, or action if such settlement is made without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 17. At the Indemnitor's request, the Indemnitee under this Article 17, and its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any action, claim or liability covered by this indemnification and provide full information with respect thereto. ARTICLE 18 -- BANKRUPTCY All rights and licenses granted under or pursuant to this AGREEMENT by each party are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11, United States Code (the "Bankruptcy Code"), licenses of rights to "intellectual property" as defined under Section 101(60) of the Bankruptcy Code. The parties agree that LICENSEE shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. ARTICLE 19 -- TERM AND TERMINATION 19.1 TERM. 19.1.1 TERM OF AGREEMENT. This AGREEMENT shall commence upon the EFFECTIVE DATE and shall, unless sooner terminated pursuant to any other provision of this AGREEMENT, continue in full force and effect until the latest of (i) the end of the RESEARCH TERM, or (ii) the date upon which LICENSEE ceases to have one or more PRODUCTS in active DEVELOPMENT or commercialization, or (iii) for as long as royalties are payable according to the provisions of Article 7 herein. The licenses granted herein to LICENSEE shall expire on a country-by-country and PRODUCT-by-PRODUCT basis, once ORTHO has paid royalties for the full period under which such royalty payments are due under Section 7.1 hereunder, and ORTHO and its AFFILIATES shall thereafter have a fully paid-up, irrevocable, non-exclusive license under the KOSAN KNOW-HOW to make, have made, USE, SELL and HAVE SOLD PRODUCTS. 19.1.2 TERM AND TERMINATION OF RESEARCH PROGRAM. (a) TERM. Unless earlier terminated as set forth in Section 19.1.2(b), the term of the RESEARCH PROGRAM shall be as set forth in Section 2.5, above. (b) PERMISSIVE TERMINATION. With six (6) months' prior written notice to KOSAN, LICENSEE may terminate the RESEARCH PROGRAM; provided, however, that no -49- such termination shall be effective prior to the date twenty-four (24) months following the EFFECTIVE DATE. (c) WIND-DOWN PAYMENT. At the end of the RESEARCH TERM, ORTHO shall pay to KOSAN a "wind-down" payment equal to fifty percent (50%) of the amount of RESEARCH FUNDING paid to KOSAN by LICENSEE in the twelve (12) months prior to the expiration of the RESEARCH TERM; provided, however, that if LICENSEE gave KOSAN prior written notice that the RESEARCH PROGRAM would not be extended (by exercise of the option in Section 2.5(ii) or otherwise), then the amount of the "wind-down" payment shall be reduced as follows: (i) if such prior notice was given at least six (6) full months prior to the end of the RESEARCH TERM, then ORTHO shall not owe any "wind-down" payment, and (ii) if such notice was given less than six (6) full months prior to the end of the RESEARCH PROGRAM, then the wind-down payment shall be reduced by one-sixth (1/6) for each full month between the date KOSAN receives such written notice and the expiration or termination of the RESEARCH TERM. Notwithstanding the above, it is understood that if the Fast Track PROJECT is not extended beyond the first anniversary of the AGREEMENT, then payments made by RWJPRI for the Fast Track Project shall not be included in the calculation of the "wind-down" payment. It is further understood and agreed that no "wind-down" payment shall be due if the RESEARCH TERM remains in effect until the fourth anniversary of the EFFECTIVE DATE. 19.1.3 TERMINATION OF SCREENING. With sixty (60) days prior written notice to KOSAN, RWJPRI may terminate the EXCLUSIVE SCREENING PERIOD and/or the NON-EXCLUSIVE SCREENING PERIOD. In the former case, RWJPRI's right to exclusively screen the MACROLIDES for ANTIBIOTIC ACTIVITY shall terminate as of the effective date of such notice, and in the latter case RWJPRI's right to screen the MACROLIDES and AROMATIC POLYKETIDES for any activity shall terminate as of the effective date of such notice. 19.2 TERMINATION OF THE AGREEMENT. 19.2.1 PERMISSIVE TERMINATION FOLLOWING RESEARCH TERM. After the end of the RESEARCH TERM, LICENSEE may (i) terminate this AGREEMENT in its entirety or (ii) terminate this AGREEMENT as to any PRODUCT, upon three (3) months written notice to KOSAN. At its sole discretion, KOSAN may on receipt of such notice from LICENSEE immediately accelerate such termination of this AGREEMENT or PRODUCT, as the case may be, at any time within such three (3) month period. 19.2.2 FAILURE TO DESIGNATE MACROLIDE. In the event that LICENSEE has not designated at least one MACROLIDE as a LICENSED COMPOUND prior to the end of the NON-EXCLUSIVE SCREENING PERIOD, then the AGREEMENT shall automatically terminate concurrently with the end of the NON-EXCLUSIVE SCREENING PERIOD. -50- 19.2.3 MATERIAL BREACH. Notwithstanding any other provisions of this AGREEMENT either party, at its option, may terminate this AGREEMENT on ninety (90) days prior written notice served by one party should the other party fail to comply with or perform its obligations hereunder, unless such failure or non-performance is corrected within the ninety (90) day period following notification, or such extended period as may be agreed between the parties. In the event that KOSAN fails to comply with or perform its obligations hereunder during the RESEARCH TERM, LICENSEE may, at its option, terminate the RESEARCH PROGRAM, and not the AGREEMENT, on ninety (90) days prior written notice, unless such failure or non-performance is corrected within the ninety (90) day period following notification or such extended period as may be agreed by the parties. Failure to terminate this AGREEMENT following breach or failure to comply with this AGREEMENT shall not constitute a waiver of a party's defenses, rights or causes of action arising from such or any future breach or noncompliance. 19.2.4 BANKRUPTCY. If either party should be adjudicated bankrupt, file a voluntary petition in bankruptcy, have filed against it a petition for bankruptcy or reorganization unless such petition is dismissed within sixty (60) days of filing, make a general assignment for the benefit of creditors, enter into a procedure of winding up to dissolution, or should a Trustee or Receiver be appointed for its business assets or operations, the other party shall be entitled to terminate this AGREEMENT forthwith by giving written notice to the first party. 19.3 EFFECT OF TERMINATION. 19.3.1 ACCRUED RIGHTS AND OBLIGATIONS. Termination of this AGREEMENT for any reason shall not release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination, nor preclude either party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination. 19.3.2 RETURN OF CONFIDENTIAL INFORMATION. Upon any termination of this AGREEMENT, LICENSEE and KOSAN shall promptly return to the other party all Confidential Information received from the other party (except one copy of which may be retained by legal counsel solely for purposes of monitoring compliance with the provisions of Article 9 and archival purposes). 19.3.3 LICENSES. (a) In the event that the AGREEMENT terminates for any reason prior to the end of the RESEARCH PROGRAM other than pursuant to Section 19.1.2(b), the AGREEMENT and the licenses granted to LICENSEE in Sections 4.1 and 4.3 (and any license to its AFFILIATES under Section 4.6) shall terminate concurrently. -51- (b) In the event of any termination pursuant to Section 19.1.2(b), 19.1.3 or 19.2.2, the licenses granted to LICENSEE in Sections 4.1 and 4.2.1 shall terminate concurrently, and the license granted to LICENSEE in Section 4.3 (and any license to its AFFILIATES under Section 4.6) shall terminate concurrently with respect to all MACROLIDES and AROMATIC POLYKETIDES other than those designated as LICENSED COMPOUNDS pursuant to Section 3.5 prior to the effective date of such termination. In the event of any termination of this AGREEMENT pursuant to Section 19.2.1(ii) only with respect to one or more PRODUCTS, the licenses granted to LICENSEE shall terminate only with respect to such PRODUCT and the LICENSED COMPOUNDS and/or DERIVATIVES contained in such PRODUCTS. (c) In the event of any termination of this AGREEMENT in its entirety by LICENSEE pursuant to Section 19.2.1(i), 19.2.3 or 19.2.4, the licenses granted in Article 4 shall terminate concurrently. (d) In the event of any termination of this AGREEMENT by KOSAN pursuant to Section 19.2.3 or 19.2.4, the licenses granted to LICENSEE (and to its AFFILIATES) under this AGREEMENT shall terminate concurrently. (e) It is understood that, except as provided in Section 19.3.3(a), (c) and (d) above, the licenses granted in Section 4.2.2 and 4.2.3 shall survive until the end of the NON-EXCLUSIVE SCREENING PERIOD. (f) In the event of any termination of the RESEARCH PROGRAM (but not the AGREEMENT) by LICENSEE pursuant to Section 19.2.3 due to uncured material breach by KOSAN, or a termination pursuant to Section 19.1.3, any licenses then in effect with respect to LICENSED COMPOUNDS designated as LICENSED COMPOUNDS pursuant to section 3.5.1, or identified as CLOSE STRUCTURAL ANALOGS pursuant to Section 3.5.5, before the date of such termination shall remain in effect pursuant to the terms and conditions of this AGREEMENT, but RWJPRI shall not receive any further licenses under this AGREEMENT. 19.3.4 REVERSION. in the event that the licenses to LICENSEE (and its AFFILIATES) terminate as described in Section 19.3.3 above, then LICENSEE undertakes the following: (a) to deliver to KOSAN any KOSAN KNOW-HOW in its possession; (b) not to use the KOSAN KNOW-HOW as long as it has to be kept confidential pursuant to Article 9 hereunder; (c) at KOSAN's request, to transfer (and grant the right to access, cross-reference and use, without charge) all RWJPRI KNOW-HOW, MARKETING -52- AUTHORIZATIONS. pre-clinical and clinical data, and regulatory filings relating to LICENSED COMPOUNDS and PRODUCTS (including clinical studies and other supporting information, and any written communications to and with the FDA and other comparable agencies), and any data relating to reportable adverse events in respect of PRODUCTS for use in connection with developing and commercializing, and submitting regulatory filings for, PRODUCTS for which LICENSEE does not retain rights under this AGREEMENT and other products; (d) to the extent requested by KOSAN, to transfer to KOSAN responsibility for and control of ongoing DEVELOPMENT work, including contracts with THIRD PARTIES for such work, in an expeditious and orderly manner with the costs for such work assumed by KOSAN as of the date such contracts are transferred; and (e) to grant to KOSAN an irrevocable, exclusive, worldwide paid-up license under RWJPRI PATENT RIGHTS and RWJPRI KNOW-HOW owned or controlled by LICENSEE, with the right to grant and authorize sublicenses, to make, have made, USE, SELL and HAVE SOLD LICENSED COMPOUNDS and PRODUCTS, and provide KOSAN with all reasonable assistance to transfer the RWJPRI KNOW-HOW and enable KOSAN to continue DEVELOPMENT and to make, have made, USE, SELL and HAVE SOLD LICENSED COMPOUNDS and PRODUCTS. (f) It is understood that, in the event of a termination of licenses pursuant to Sections 19.3.3(b) or (f) wherein LICENSEE retains certain licenses, the foregoing provisions of Section 19.3.4 shall apply only to the terminated rights and licenses. 19.4 SURVIVAL. Sections 2.4.5(d), 2.6.5, 2.8, 3.3.3, 3.4, 3.5.5, 3.7, 4.5, 4.12, 4.13, 4.14, 7.1, 7.5, 7.6, 7.7, 7.9, 7.10, 7.11, 10.1, 11.3, 11.4, 12.1, 12.4, 14.7, 18, 19.3 and 19.4 and the last sentence of Section 4.4, and Articles 9, 13, 17, 21 and 22 shall survive the expiration and any termination of the AGREEMENT for any reason. ARTICLE 20 -- ASSIGNMENT 20.1 PERMITTED ASSIGNMENTS. This AGREEMENT or any interest herein shall not be assigned or transferred, in whole or in part, by either party hereto without the prior written consent of the other party hereto. However, without securing such prior written consent, either party may assign this AGREEMENT to an AFFILIATE or a successor of all or substantially all of its business to which this AGREEMENT relates provided, that no such assignment shall be binding and valid until and unless the assignee shall have assumed in a writing, delivered to the non-assigning party, all of the duties and obligations of the assignor, and, provided, further, that the assignor shall remain liable and responsible to the non-assigning party hereto for the performance and observance of all such duties and obligations. -53- 20.2 BINDING EFFECT. This AGREEMENT shall be binding upon, and inure to, the benefit of the parties hereto, and to the benefit of any permitted assignee or successor. LICENSEE shall also have the right, whether or not it elects to terminate this AGREEMENT, to require that all reasonable steps it may reasonably specify be taken to prevent disclosure of its confidential information to an acquiror or assignee of KOSAN in any way reasonably adverse to its interests. ARTICLE 21 -- DISPUTE RESOLUTION 21.1 DISCUSSION. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this AGREEMENT promptly by negotiations between the Chief Executive Officer of KOSAN and LICENSEE (who shall be the Chairman of RWJPRI for issues relating primarily to research and development, and the President of ORTHO for issues relating to PRODUCT commercialization), who each have authority to settle the controversy and who are at a higher level of management than the persons with direct responsibility for administration of this AGREEMENT. Any party may give the other party written notice of any dispute not resolved in the normal course of business. Within five (5) business days after receipt of the notice, the receiving party shall submit to the other a written response. The notice and the response shall include a detailed statement of each party's position and a summary of arguments supporting that position. Within five (5) days after delivery of the response, Chief Executive Officer of KOSAN and LICENSEE (who shall be the Chairman of RWJPRI for issues relating primarily to research and development and the President of ORTHO for issues relating to PRODUCT commercialization) shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this clause will be confidential and shall be treated as compromise and settlement negotiations for the purposes of the Federal Rules of Evidence and all other evidentiary purposes. 21.2 MEDIATION. If the matter has not been resolved within twenty (20) days of the disputing party's notice, or if the Chief Executive Officer of KOSAN and LICENSEE (who shall be the Chairman of RWJPRI for issues relating primarily to research and development and the President of ORTHO for issues relating to PRODUCT commercialization) fail to meet within the time frame set forth in Section 21.1, either party may initiate mediation of the dispute as set forth in Section 21.2 of this AGREEMENT. (a) Any dispute, controversy or claim arising out of or related to this AGREEMENT, or the interpretation, application, breach, termination or validity thereof, including any claim of inducement by fraud or otherwise, shall, before submission to arbitration, first be mediated through non-binding mediation in accordance with the Model Procedures for the Mediation of Business Disputes promulgated by the Center for Public Resources ("CPR") then in effect, except where those rules conflict with these provisions, in which case these provisions control. The mediation shall be conducted in New York, New York and shall be -54- attended by a senior executive with authority, to resolve the dispute from each of the operating companies that are parties. (b) The mediator shall be an attorney specializing in business litigation who has at least fifteen (15) years of experience as a lawyer with a law firm of over twenty-five (25) lawyers or was a judge of a court of general jurisdiction and who shall be appointed from the list of neutrals maintained by CPR. (c) The parties shall promptly confer in an effort to select a mediator by mutual agreement. In the absence of such an agreement, the mediator shall be selected from a list generated by CPR with each party, having the right to exercise challenges for cause and two peremptory challenges within three business days of receiving the CPR list. (d) The mediator shall confer with the putties to design procedures to conclude the mediation within no more than forty-five (45) days after initiation. Unless agreed upon by the parties in writing, under no circumstances shall the commencement of arbitration under Section 21.3 be delayed more than forty-five (45) days by the mediation process specified herein. (e) Each party, agrees to toll all applicable statutes of limitation during the mediation process and not to use the period or pendency of the mediation to disadvantage the other party procedurally or otherwise. All negotiations pursuant to this clause will be confidential and shall be treated as compromise and settlement negotiations for the purposes of the Federal Rules of Evidence and all other evidentiary purposes. 21.3 ARBITRATION. (a) Following the mediation procedures set forth in Section 21.2, Any dispute, claim or controversy arising from or related in any way to this AGREEMENT or the interpretation, application, breach, termination or validity, thereof, including any claim of inducement of this AGREEMENT by fraud or otherwise, will be submitted for resolution to arbitration pursuant to the commercial arbitration rules then pertaining of the Center for Public Resources ("CPR"), except where those rules conflict with these provisions, in which case these provisions control. The arbitration will be held in San Francisco, California. (b) The panel shall consist of three (3) arbitrators chosen from the CPR Panels of Distinguished Neutrals each of whom (i) is a lawyer specializing in business litigation, with experience in litigation relating to development and commercialization of pharmaceutical products and whom has never represented any party hereto or any of its Affiliates and whom has at least fifteen (15) years experience with a law from of over twenty-five (25) lawyers, or (ii) was a judge of a court of general jurisdiction and who has never represented either party hereto or any of its Affiliates. -55- (c) The parties agree to cooperate (l) to obtain selection of the arbitrators within thirty (30) days of initiation of the arbitration, (2) to meet with the arbitrators within thirty (30) days of selection and (3) to agree at that meeting or before upon procedures for discovery and as to the conduct of the hearing which will result in the hearing being concluded within no more than nine (9) months after selection of the arbitrators and in the award being rendered within sixty (60) days of the conclusion of the hearings, or of any post-hearing briefing, which briefing will be completed by both parties within twenty (20) days after the conclusion of the hearings. In the event no such agreement is reached, the CPR will select arbitrators, allowing appropriate strikes for reasons of conflict or other cause and three (3) peremptory challenges for each side. The arbitrators shall set a date for the hearing, commit to the rendering of the award within sixty (60) days of the conclusion of the evidence at the hearing, or of any post-hearing briefing (which briefing will be completed by both sides in no more than twenty (20) days after the conclusion of the hearings), and provide for discovery according to these time limits, giving recognition to the understanding of the parties hereto that they contemplate reasonable discovery, including document demands and depositions, but that such discovery be limited so that the time limits specified herein may be met without undue difficulty. In no event will the arbitrators allow either side to obtain more than a total of forty (40) hours of deposition testimony from all witnesses, including both fact and expert witnesses. In the event multiple hearing days are required, they will be scheduled consecutively to the greatest extent possible. (d) The arbitrators shall render their award following the substantive law of California, without reference to principles of conflicts of law. The arbitrators shall render an opinion setting forth findings of fact and conclusions of law with the reasons therefor stated. A transcript of the evidence adduced at the hearing shall be made and shall, upon request, be made available to either party. (e) To the extent possible, the arbitration hearings and award will be maintained in confidence. (f) Any United States District Court having jurisdiction of the matter may enter judgment upon any award. In the event the panel's award exceeds Five Million Dollars ($5,000,000) in monetary, damages or includes or consists of equitable relief, then the court shall vacate, modify or correct any award where the arbitrators' findings of fact are clearly erroneous, and/or where the arbitrators' conclusions of law are erroneous; in other words, it will undertake the same review as if it were a federal appellate court reviewing a district court's findings of fact and conclusions of law rendered after a bench trial. An award for less than Five Million Dollars ($5,000,000) in damages and not including equitable relief may be vacated, modified or corrected only upon the grounds specified in the Federal Arbitration Act. The parties consent to the jurisdiction of the District Court for the enforcement of these provisions, the entry of judgment on any award, and the vacatur, modification and correction of any award as above specified. -56- (g) Each party has the right before or during the arbitration to seek and obtain from the appropriate court provisional remedies such as attachment, preliminary injunction, replevin, etc. to avoid irreparable harm, maintain the status quo, or preserve the subject matter of the arbitration. (h) EACH PARTY HERETO WAIVES ITS RIGHT TO TRIAL OF ANY ISSUE BY JURY. (i) SUBJECT TO THE PROVISIONS OF ARTICLE 17, EACH PARTY HERETO WAIVES ANY CLAIM TO PUNITIVE, EXEMPLARY AND CONSEQUENTIAL DAMAGES FROM THE OTHER. ARTICLE 22 -- MISCELLANEOUS 22.1 ENTIRE AGREEMENT. Before signing this AGREEMENT the parties have had numerous conversations, including preliminary discussions, formal negotiations and informal conversations at meals and social occasions, and have generated correspondence and other writings, in which the parties discussed the transaction which is the subject of this AGREEMENT and their aspirations for its success. In such conversations and writings, individuals representing the parties may have expressed their judgments and beliefs concerning the intentions, capabilities, and practices of the parties, and may have forecasted future events. The parties recognize that such conversations and writings often involve an effort by both sides to be positive and optimistic about the prospects for the transaction. It is also recognized, however, that all business transactions contain an element of risk, as does the transaction contemplated by this AGREEMENT and that it is normal business practice to limit the legal obligations of contracting parties to only those promises and representations which are essential to their transaction so as to provide certainty as to their respective future rights and remedies. Accordingly, it is agreed that this AGREEMENT constitutes the entire agreement and understanding between the parties as to the legal undertakings hereunder. All prior negotiations, representations, agreements, contracts, offers and earlier understandings of whatsoever kind, whether written or oral between KOSAN and LICENSEE in respect of this AGREEMENT, are superseded by, merged into, extinguished by and completely expressed by this AGREEMENT. No aspect, part or wording of this AGREEMENT may be modified except by mutual agreement between the KOSAN and LICENSEE taking the form of an instrument in writing signed and dated by duly authorized representatives of both KOSAN and LICENSEE. 22.2 NOTICES. All communications, reports, payments and notices required by this AGREEMENT by one party to the other shall be addressed to the parties at their respective addresses set forth below or to such other address as requested by either party by notice in writing to the other. -57- If to KOSAN: KOSAN BIOSCIENCES, INC. 1450 Rollins Road Burlingame, California 94010 Attn: President Telefax No.: (650) 343-2931 With a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304 Arm: Michael S. Rabson Telefax No.: (415) 496-4006 If to RWJPRI, ORTHO or LICENSEE: ORTHO-MCNEIL PHARMACEUTICAL CORPORATION 1000 U.S. Route 202, Raritan. New Jersey 08869 Attention: President Telefax No.: (908) 218-1416 With a copy to: Chief Patent Counsel Johnson & Johnson One Johnson & Johnson Plaza New Brunswick, New Jersey 08903 Telefax No.: (908) 524-2808 AND R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE 920 U.S. Route 202 Raritan. New Jersey 08869 Attention: Chairman Telefax No.: (908) 704-9486 -58- All such notices, reports, payments and communications shall be made in writing by telefax to the numbers set forth above or by First Class mail, postage prepaid, and shall be considered made as of the date of deposit with the United States Post Office or when received by telefax. 22.3 GOVERNING LAW. All matters affecting the interpretation, validity, and performance of this AGREEMENT, including any arbitration proceeding conducted pursuant to Article 21, shall be governed by the internal laws of the State of California without regard to its conflict of law principles, except as to any issue which by California law depends upon the validity, scope or enforceability of any patent within the PATENT RIGHTS, which issue shall be determined in accordance with the applicable patent laws of the country of such patent. 22.4 SEVERABILITY. Should any part or provision of this AGREEMENT be held unenforceable or in conflict with the law of any jurisdiction, the validity of the remaining part or provisions shall not be affected by such holdings; provided that the parties shall use their best efforts to negotiate an enforceable provision that most nearly reflects the parties original intentions. 22.5 WAIVER. The waiver by either party, whether express or implied, of any provisions of this AGREEMENT, or of any breach or default of either party, shall not be construed to be a continuing waiver of such provision, or of any succeeding breach or default or of a waiver of any other provisions of this AGREEMENT. 22.6 NO REPRESENTATIONS. Notwithstanding anything to the contrary, in this AGREEMENT, nothing herein contained shall be construed as a representation by KOSAN that the PATENT RIGHTS can be or will be used to prevent the importation by a THIRD PARTY hereto of a product into or the SALE or USE by a THIRD PARTY hereto of a product in any country within the PATENT RIGHTS where such product shall have been placed in commerce under circumstances which preclude the use of the PATENT RIGHTS to prevent such importation or SALE or USE by reason of any applicable law or treaty. 22.7 FORCE MAJEURE. Notwithstanding any other provisions of this AGREEMENT, neither of the parties hereto shall be liable in damages or have the right to terminate this AGREEMENT for any delay or default in performing hereunder if such delay or default is caused by conditions beyond its control including, but not limited to acts of God, governmental restrictions, wars, or insurrections, strikes, floods, earthquakes, work stoppages and/or lack of materials, and any time for performance hereunder shall be extended for the actual time of delay caused by such occurrence; provided, however, that the party suffering such delay or default shall notify the other party in writing of the reasons for the delay or default and shall diligently seek to correct such conditions, if such reasons for delay or default continuously exist for twelve (12) months, this AGREEMENT may be terminated by either party. -59- 22.8 INDEPENDENT CONTRACTORS. It is understood that both parties hereto are independent contractors and are engaged in the operation of their own respective businesses, and neither hereto is to be considered the agent or partner of the other for any purpose whatsoever. Neither party has any authority to enter into any contracts or assume any obligations for the other party or make any warranties or representations on behalf of the other party. 22.9 ADVICE OF COUNSEL. KOSAN and LICENSEE have each consulted counsel of their choice regarding this AGREEMENT, and each acknowledges and agrees that this AGREEMENT shall not be deemed to have been drafted by one party or another and will be construed accordingly. 22.10 PATENT MARKING. LICENSEE agrees to mark and have its AFFILIATES and SUBLICENSEES mark all PRODUCTS they sell or distribute pursuant to this AGREEMENT in accordance with the applicable statute or regulations in the country, or countries of manufacture and sale thereof. 22.11 COMPLIANCE WITH LAWS. Each party, shall furnish to the other party any information requested or required by that party during the term of this AGREEMENT or any extensions hereof to enable that party, to comply with the requirements of any U.S. or foreign federal, state and/or government agency. Each party shall comply with all applicable U.S., foreign, state, regional and local laws, rules and regulations relating to its activities to be performed pursuant to this AGREEMENT, including without limitation, the United States Foreign Corrupt Practices Act, United States export regulations and such other United States and foreign laws and regulations as may be applicable, and to obtaining all necessary approvals, consents and permits required by the applicable agencies of the government of the United States and foreign jurisdictions. 22.12 FURTHER ASSURANCES. At any time or from time to time on and after the date of this AGREEMENT, each party shall at the request of the other party (i) deliver to such party such records, data or other documents consistent with the provisions of this AGREEMENT, (ii) execute, and deliver or cause to be delivered, all such consents, documents or further instruments of transfer or license, and (iii) take or cause to be taken all such actions, as the requesting party may reasonably deem necessary or desirable in order for the requesting party to obtain the full benefits of this AGREEMENT and the transactions contemplated hereby. 22.13 JOINT AND SEVERAL LIABILITY: PERFORMANCE WARRANTY. Notwithstanding any other provision of this AGREEMENT, it is understood and agreed that ORTHO and RWJPRI shall be jointly and severally liable for the obligations of ORTHO and RWJPRI under this AGREEMENT. LICENSEE hereby warrants and guarantees the performance of any and all rights and obligations of this AGREEMENT by its AFFILIATE(S) and SUBLICENSEE(S) including, without limitation, performance under any license granted pursuant to Section 4.3, 4.5, or 4.6 above. -60- 22.14 USE OF SINGULAR. As used in this AGREEMENT, singular includes the plural and plural includes the singular, wherever so required by the context. 22.15 HEADINGS. The captions to the several Sections and Articles hereof are not a part of this AGREEMENT, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. 22.16 COUNTERPARTS. This AGREEMENT may be executed in two counterparts, each of which shall be deemed an original and which together shall constitute one immanent. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and duly executed this AGREEMENT on the date(s) indicated below, to be effective the day and year first above written. For and on Behalf of KOSAN BIOSCIENCES, INC. By: /s/ Daniel V. Santi ----------------------------------------- Name: Daniel Santi --------------------------------------- Title: Chairman -------------------------------------- Date: Sept 28-98 --------------------------------------- For and on Behalf of ORTHO-MCNEIL PHARMACEUTICAL INC. By: /s/ Robert G. Savage ----------------------------------------- Robert G. Savage, President Date: 9-29-98 --------------------------------------- For and on Behalf of THE R.W. JOHNSON PHARMACEUTICALS RESEARCH INSTITUTE By: /s/ William A.M. Duncan ----------------------------------------- William A.M. DunCan, Chairman Date: 9-29-28 --------------------------------------- -61- Exhibit A Research Plan PART I. FAST -TRACK PROJECT OBJECTIVES AND SPECIFIC AIMS [**] Page 1 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 2 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] REFERENCES Jacobsen, J.R., Hutchinson, C.R., Cane, D.E., & Khosla, C. (1997) "Precursor-directed biosynthesis of erythromycin analogs by an engineered polyketide synthase," SCIENCE 277: 367-369. Zotchev, S.B., & Hutchinson, C.R. (1995) "Cloning and heterologous expression of the genes encoding nonspecific electron transport components for a cytochrome P450 system of SACCHAROPOLYSPORA ERYTHRAEA involved in erythromycin production," GENE 156: 101-106. PART II. SAR PROJECT OBJECTIVE AND SPECIFIC AIMS [**] Page 3 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 4 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 5 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 6 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 7 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] REFERENCES Andersen, J.F., Tatsuta, K., Gunji, H., Ishiyama, T., & Hutchinson, C.R. (1993) "Substrate specificity of 6-deoxyerythronolide B hydroxylase, a bacterial cytochrome P450 of erythromycin A biosynthesis," BIOCHEMISTRY 32:1905-1913. Bright, G.M., Nagel, A.A., Bordner, J., ET AL. (1988) "Synthesis, IN VITRO and IN VIVO activity of novel 9-deoxo-9a-aza-9a-homoerythromycin A derivatives; a new class of macrolide antibiotics, the azalides," J. ANTIBIOTICS 41: 1029-1047. Griesgraber, G., Or Y.S., Chu, D.T.W., Nilius, A.M., Johnson, P.M., Flamm, R.K., Henry, R.F., & Plattner, J.J. (1996) "3-keto-11,12 carbazate derivatives of 6-O-methyl erythromycin A: synthesis and IN VITRO activity," J. ANTIBIOTICS 49(5): 465-477. Jacobsen, J.R., Hutchinson, C.R., Cane, D.E., & Khosla, C. (1997) "Precursor-directed biosynthesis of erythromycin analogs by an engineered polyketide synthase," SCIENCE 277: 367-369. Kao, C.M., Luo, G., Katz, L., Cane, D.E., & Khosla, C. (1995) "Manipulation of macrolide ring size by directed mutagenesis of a modular polyketide synthase," J. AM. CHEM. SOC. 117: 9105-9106. Kealey, J.T., Liu, L., Santi, D.V., Betlach, M.C., & Barr, P.J. (1997) "Production of a polyketide natural product in non-polyketide producing prokaryotic and eukaryotic hosts," PROC. NATL. ACAD. SCI. USA, in press. Liu, L., Thamchaipenet, A., Fu, H., Betlach, M., & Ashley, G. (1997) "Biosynthesis of 2-nor-6-deoxyerythronolide B by rationally designed domain substitution," J. AM. CHEM. SOC. 119: 10553-10554. McDaniel, R., Kao, C.M., Fu, H., Hevezi, P., Gustafsson, C., Betlach, M., Ashley, G., Cane, D.E., & Khosla, C. (1997) "Gain-of-function mutagenesis of a modular polyketide synthase," J. AM. CHEM. SOC. 119: 4309-4310. Morimoto, S., Takahashi, Y., Watanabe, Y., & Omura, S. (1984) "Chemical modification of erythromycins. I. Synthesis and antibacterial activity of 6-O-methylerythromycins A," J., ANTIBIOTICS 37:187-189. Page 8 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Ruan, X., Pereda, A., Stassi, D., Zeidner, D., Summers, R.G., Jackson, M., Shivakumar, A., Kakavas, S., Staver, M.J., Donadio, S., & Katz, L. (1997) "Acyltransferase Domain substitutions in erythromycin polyketide synthase yield novel erythromycin derivatives, "J. BACTERIOLOGY 179:6416-6425. Zotchev, S.B., & Hutchinson, C.R. (1995) "Cloning and heterologous expression of the genes encoding nonspecific electron transport components for a cytochrome P450 system of SACCHAROPOLYSPORA ERYTHRAEA involved in erythromycin production," GENE 156: 101-106. PART III. CRITERIA FOR NCES [**] Page 9 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 10 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 11 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] PART IV. FTE TABLES AND TIMELINES The table below shows the number and cost of Kosan FTEs to be applied in the Fast-Track and SAR Projects though the course of the Research Program. [**] Page 12 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 13 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit B Aromatic Polyketides
- ----------------------------------------------------- ---------------- ---------------- ---------------- KOS002 CONCENTRATION DATA - ----------------------------------------------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- WELL EXTRACT PEAK RT COMPOUND MW CONC(mM) - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A2 KE-001 7.55 KA-058 302 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A2 KE-001 11.41 KA-060 302 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A2 KE-001 11.81 KA-061 302 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A2 KE-001 14.65 KA-042 284 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 10.60 KA-100 368 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 11.90 KA-118 386 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 15.25 KA-119 386 2.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 15.44 KA-120 386 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 19.17 KA-075 324 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 6.31 KA-068 318 2.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 7.52 KA-069 318 2.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 10.28 KA-056 300 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 10.93 KA-057 300 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 21.75 KA-031 270 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A5 KE-023 6.37 KA-068 318 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A5 KE-023 7.57 KA-069 318 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A5 KE-023 10.33 KA-056 300 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A6 KE-030 15.32 KA-119 386 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A6 KE-030 15.78 KA-120 386 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 10.47 KA-100 368 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 11.95 KA-118 386 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 15.28 KA-119 386 4.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 15.76 KA-120 386 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 25.08 KA-074 322 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 10.58 KA-100 368 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 12.93 KA-102 368 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 15.35 KA-119 386 4.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 15.83 KA-120 386 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 19.25 KA-075 324 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 23.01 KA-121 386 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 23.66 KA-122 386 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 25.06 KA-108 372 3.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 11.43 KA-101 368 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 13.38 KA-005 182 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 1 of 10 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 13.88 KA-150 453 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 14.78 KA-151 453 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 15.03 KA-127 392 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 15.60 KA-125 390 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 16.18 KA-128 392 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 16.71 KA-018 236 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 18.18 KA-138 413 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 18.70 KA-136 411 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 19.76 KA-142 427 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 20.31 KA-139 413 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 20.75 KA-140 413 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 21.25 KA-129 392 2.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 22.24 KA-126 390 1.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 23.65 KA-137 411 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 25.00 KA-109 374 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 26.58 KA-088 348 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A10 K005-83 26.73 KA-025 254 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A 11 K005-92D [**] 390 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 7.82 KA-058 302 1.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 11.30 KA-059 302 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 12.05 KA-061 302 4.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 14.87 KA-042 284 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 19.57 KA-052 298 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 21.13 KA-053 298 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 21.30 KA-054 298 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 21.98 KA-064 312 8.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 22.96 KA-044 286 2.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 23.75 KA-038 283 3.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 24.53 KA-055 298 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 25.40 KA-040 283 5.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 26.76 KA-025 254 9.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 27.10 KA-050 297 2.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 28.05 KA-022 240 3.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 29.21 KA-023 240 2.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 10.27 KA-100 368 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 13.71 KA-150 453 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 14.64 KA-046 290 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 15.19 KA-119 386 1.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 15.71 KA-120 386 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 16.55 KA-135 411 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 18.58 KA-136 411 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 26.28 KA-114 382 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 2 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B4 KE-016 12.78 KA-102 368 9.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B4 KE-016 15.97 KA-105 370 2.5 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B4 KE-016 16.73 KA-106 370 0.4 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B4 KE-016 21.43 KA-089 350 0.5 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 6.38 KA-068 318 1.1 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 7.59 KA-069 318 0.5 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 10.15 KA-065 315 2.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 10.33 KA-056 300 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 11.90 KA-001 166 0.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 12.26 KA-002 166 0.1 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 16.58 KA-030 260 0.4 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B6 KE-031 9.83 KA-116 384 0.7 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B6 KE-031 11.86 KA-098 366 0.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B7 KE-039 8.00 KA-058 302 4.7 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B7 KE-039 11.81 302 0.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B7 KE-039 12.23 KA-061 302 4.8 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B7 KE-039 14.97 KA-042 284 3.0 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B8 KE-046 10.00 KA-115 384 2.8 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B9 KE-075 14.93 KA-148 450 1.0 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B9 KE-075 15.96 KA-153 464 0.4 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B9 KE-075 16.65 KA-146 448 0.1 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B9 KE-075 17.56 KA-154 464 0.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B10 K005-80 19.30 KA-052 298 1.0 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B11 K005-92E [**] 924 1.0 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 13.13 KA-083 342 1.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 13.68 KA-051 298 0.7 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 14.38 KA-093 356 0.4 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 15.08 KA-095 360 0.1 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 16.30 KA-009 196 0.5 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 16.51 KA-010 196 0.9 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 16.96 KA-079 332 0.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 17.55 KA-080 332 0.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 18.98 KA-086 346 0.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 19.41 KA-087 346 0.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C3 KE-062 6.15 KA-026 258 0.7 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C3 KE-062 7.86 KA-058 302 0.8 - ------------------- ---------------- ---------------- -------------------- ------------ ----------------
Page 3 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
- ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 11.40 KA-059 302 0.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 12.07 KA-061 302 3.8 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 14.88 KA-042 284 2.6 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 16.51 KA-013 220 0.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 19.08 KA-052 298 6.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 19.51 KA-036 283 4.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 21.30 KA-037 283 2.0 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 22.85 KA-121 386 0.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 23.78 KA-038 283 1.1 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 25.00 KA-039 283 0.9 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 26.76 KA-025 254 1.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C4 KE-017 9.68 KA-115 384 0.8 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C5 KE-063 6.48 KA-068 318 6.8 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C5 KE-063 7.78 KA-069 318 3.2 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C5 KE-063 10.42 KA-065 314 0.3 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C5 KE-063 14.83 KA-151 453 0.9 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C6 KE-032 10.08 KA-024 242 0.2 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C6 KE-032 15.10 KA-119 386 1.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C6 KE-032 15.58 KA-120 386 0.3 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C7 KE-068 10.28 KA-056 300 1.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C7 KE-068 10.96 KA-057 300 1.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 8.12 KA-058 302 0.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 11.48 KA-059 302 1.1 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 12.25 KA-061 302 2.0 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 14.62 KA-041 284 1.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 15.01 KA-042 284 0.2 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 5.35 KA-067 318 0.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 10.95 KA-152 462 0.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 14.03 KA-148 450 0.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 15.73 KA-153 464 0.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 16.00 KA-146 448 0.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C10 K005-88 KA-092 354 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C11 K005-92F erythromycin A 734 1.0 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- D2 KE-057 5.28 KA-067 318 0.3 - ------------------- --------------- ------------------- --------------- --------------- ---------------- D2 KE-057 5.76 KA-032 276 0.3 - ------------------- --------------- ------------------- --------------- --------------- ---------------- D2 KE-057 6.18 KA-070 319 0.9 - ------------------- --------------- ------------------- --------------- --------------- ---------------- D2 KE-057 7.43 KA-071 319 0.2 - ------------------- --------------- ------------------- --------------- --------------- ---------------- Page 4 of 10 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 12.60 KA-141 421 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 13.13 KA-083 342 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 13.73 KA-150 453 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 14.41 KA-132 407 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 14.80 KA-133 409 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 18.58 KA-136 411 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 5.73 KA-016 234 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 7.62 KA-058 302 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 8.68 KA-165 302 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 11.20 KA-059 302 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 11.90 KA-061 302 1.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 12.46 KA-072 322 1.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 14.76 KA-041 284 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 17.15 KA-020 304 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 19.20 KA-052 298 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 19.65 KA-164 620 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 21.31 KA-163 618 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 26.70 KA-025 254 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D4 KE-018 7.95 KA-058 302 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D4 KE-018 11.75 KA-060 302 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D4 KE-018 12.12 KA-061 302 2.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D4 KE-018 14.93 KA-042 284 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D5 KE-025 10.05 KA-115 384 4.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D5 KE-025 15.05 KA-017 234 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D5 KE-025 17.85 KA-111 380 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D6 KE-033 5.75 KA-012 210 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D6 KE-033 9.82 KA-115 384 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D6 KE-033 11.93 KA-098 366 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 6.25 KA-026 258 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 19.12 KA-052 298 5.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 19.45 KA-036 283 5.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 21.25 KA-037 283 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 23.73 KA-038 283 2.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 25.25 KA-040 283 3.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 26.88 KA-025 254 5.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 28.09 KA-022 240 4.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 29.20 KA-023 240 3.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 32.00 KA-158 508 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D8 KE-048 12.03 KA-077 326 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D8 KE-048 14.63 KA-041 284 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 5 of 10 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D9 KE-074 14.91 KA-148 450 1.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D9 KE-074 15.96 KA-153 464 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D10 K003-89 KA-064 312 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D11 K005-92G [**] 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 11.96 KA-061 302 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 18.56 KA-094 358 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 19.21 KA-052 298 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 23.75 KA-043 284 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 24.85 KA-035 282 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 25.84 KA-021 240 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 26.78 KA-025 254 2.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 28.06 KA-022 240 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 29.23 KA-023 240 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 7.86 KA-058 302 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 12.11 KA-061 302 1.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 14.68 KA-049 291 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 14.90 KA-097 365 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 18.60 KA-136 411 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 19.13 KA-052 298 5.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 19.43 KA-036 283 7.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 21.25 KA-037 283 4.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 23.77 KA-038 283 4.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 24.90 KA-078 330 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 25.41 KA-040 283 3.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 26.80 KA-025 254 2.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 28.00 KA-022 240 1.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 29.00 KA-023 240 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E4 KE-019 7.91 KA-058 302 2.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E4 KE-019 11.80 KA-060 302 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E4 KE-019 12.19 KA-061 302 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E4 KE-019 14.96 KA-042 284 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 9.80 KA-116 384 1.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 11.85 KA-098 366 2.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 12.16 KA-061 302 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 12.73 KA-117 384 2.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 13.23 KA-066 314 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E6 KE-035 9.93 KA-115 384 4.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 6 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E7 KE-043 22.45 KA-082 340 2.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E7 KE-043 26.83 KA-025 254 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E8 KE-049 12.92 KA-102 368 14.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E8 KE-049 16.08 KA-105 370 2.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E8 KE-049 16.83 KA-106 370 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E8 KE-049 21.50 KA-089 350 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E9 KE-077 14.85 KA-148 450 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E9 KE-077 16.23 KA-153 464 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E10 K005-82 9.80 [**] 457 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E11 K005-92H [**] 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 7.88 KA-058 302 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 11.38 KA-059 302 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 12.1 KA-061 302 2.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 14.9 KA-042 284 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 19.2 KA-052 298 3.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 19.55 KA-036 283 2.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 21.35 KA-037 283 1.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 22.85 KA-121 386 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 23.75 KA-038 283 2.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 25.43 KA-040 283 2.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 26.73 KA-025 254 6.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 28.06 KA-022 240 1.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 29.23 KA-023 240 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 17.08 KA-159 512 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 19.22 KA-048 290 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 21.00 KA-062 304 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 22.40 KA-082 340 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 23.05 KA-157 500 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 24.60 KA-035 282 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 26.76 KA-162 531 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F4 KE-020 7.94 KA-058 302 5.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F4 KE-020 11.75 KA-060 302 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F4 KE-020 12.15 KA-061 302 5.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F4 KE-020 14.96 KA-042 284 3.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F5 KE-027 9.93 KA-116 384 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F5 KE-027 11.90 KA-098 366 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F5 KE-027 12.83 KA-117 384 1.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F5 KE-027 13.31 KA-073 322 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 7 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F6 KE-036 9.83 KA-115 384 1.4 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F6 KE-036 17.70 KA-111 380 0.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 7.26 KA-034 280 0.7 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 9.18 KA-028 260 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 12.91 KA-085 346 0.6 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 16.50 KA-063 310 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 18.68 KA-094 358 0,2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 20.15 KA-045 288 2.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 21.10 KA-062 304 0.4 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 22.45 KA-082 340 1.7 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 10.05 KA-115 384 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 12.95 KA-102 368 9.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 13.38 KA-103 368 0.6 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 16.06 KA-105 370 1.6 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 16.83 KA-106 370 0.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 26.36 KA-114 382 1.5 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F9 KE-055 none 0.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F10 K005-92A 14.80 [**] 527 1.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F11 K005-92J [**] 1.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 5.95 KA-016 234 0.5 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 6.95 KA-084 344 0.4 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 12.08 KA-090 352 0.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 18.60 KA-047 290 0.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 19.33 KA-052 298 0.7 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 21.01 KA-062 304 0.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 22.36 KA-082 340 0.8 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 26,76 KA-025 254 1.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 19.30 KA-052 298 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 22.43 KA-082 340 1.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 24.58 KA-076 325 0.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 25.03 KA-110 378 0.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 26.78 KA-025 254 0.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 10.38 KA-100 368 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 15.23 KA-119 386 3.5 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 15.78 KA-120 386 0.9 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 23.58 KA-014 222 1.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 25.01 KA-074 322 3.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- Page 8 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 3.18 KA-006 194 2.9 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 9.96 KA-116 384 1.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 11.20 KA-098 366 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 12.86 KA-117 384 2.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 13.36 KA-066 314 0.6 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 14.76 KA-046 290 1.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 25.00 KA-107 370 1.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G6 KE-037 15.26 KA-119 386 1.9 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G6 KE-037 15.76 KA-120 386 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G6 KE-037 25.06 KA-107 370 1.3 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G7 KE-069 28.28 KA-092 354 0.8 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 6.01 KA-032 276 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 10.20 KA-124 388 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 12.76 KA-027 258 1.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 14.80 KA-046 290 1.8 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 18.66 KA-136 411 0.7 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 21.63 KA-155 464 1.3 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 7.05 KA-011 207 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 9.31 KA-130 398 0.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 10.23 KA-015 232 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 12.76 KA-156 486 0.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 16.16 KA-008 196 0.3 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 17.90 KA-147 448 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 21.56 KA-144 446 0.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 22.51 KA-033 276 0.3 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 23.45 KA-KA-145 446 0.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 25.00 KA-123 386 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G10 K005-92B 24.15 [**] 1183 1.0 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G11 K005-92K [**] 848 1.0 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 5.87 KA-096 362 2.0 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 6.85 KA-084 344 2.8 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 14.53 KA-019 240 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 19.28 KA-048 290 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 23.12 KA-043 284 0.6 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 28.20 KA-091 354 1.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H3 KE-013 12.83 KA-102 368 5.5 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H3 KE-013 22.95 KA-113 382 1.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ Page 9 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 10.40 KA-100 368 0.7 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 11.95 KA-118 386 0.7 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 13.03 KA-102 368 1.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 15.21 KA-119 386 4.0 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 15.78 KA-120 386 2.0 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 16.90 KA-104 368 1.0 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 18.73 KA-094 358 1.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 19.21 KA-099 366 1.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 5.28 KA-067 318 0.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 9.56 KA-003 168 0.5 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 11.63 KA-098 366 2.6 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 12.56 KA-117 384 1.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 18.56 KA-094 358 0.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 9.77 KA-115 384 6.8 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 14.75 KA-046 290 0.4 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 17.73 KA-111 380 0.4 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 19.38 KA-112 380 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 26.30 KA-114 382 0.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 16.53 KA-063 310 0.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 19.43 KA-081 340 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 23.24 KA-043 284 2.6 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 24.22 [**] 1183 1.9 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 27.50 KA-007 194 0.7 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 29.75 KA-131 398 1.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 9.25 KA-134 410 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 11.43 KA-101 368 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 13.36 KA-029 260 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 16.18 KA-008 196 0.9 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 18.16 KA-149 452 0.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 21.23 KA-129 392 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 23.65 KA-004 176 0.6 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 25.05 KA-109 374 1.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 26.56 KA-088 348 0.8 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H9 KE-054 15.20 [**] 444 1.6 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H9 KE-054 18.96 unknown 444 0.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H10 K005-92C [**] 1.0 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H11 K005-92L [**] 318 1.0 - --------------- --------------- ------------- -------------------- ------------ ------------ -----------
Page 10 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT C KOSAN PATENT RIGHTS [**] Confidential Information Page 1 of 2 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT C (CONT) KOSAN PATENT RIGHTS [**] Confidential Information Page 2 of 2 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.12 9 a2026613zex-10_12.txt EXHIBIT 10.12 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 10.12 AMENDMENT NUMBER 1 TO RESEARCH AND LICENSE AGREEMENT BY AND BETWEEN KOSAN BIOSCIENCES AND R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE This Amendment dated MAR 17, 2000 is made to the RESEARCH AND LICENSE AGREEMENT (hereinafter called the "AGREEMENT"), made as of September 28, 1998 by and between KOSAN BIOSCIENCES, INC., a corporation organized under California law having its principal office at 3832 Bay Center Place, Hayward, California 94545 (hereinafter called "KOSAN"); ON THE ONE HAND, AND: ORTHO MCNEIL PHARMACEUTICAL, INCORPORATED (hereinafter called "ORTHO"), a company organized under Delaware law, having its principal office at U.S. Route 202, Raritan, New Jersey 08869; and the R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE (hereinafter called "RWJPRI"), a division of Ortho McNeil Pharmaceutical, Incorporated, having its principal office at U.S. Route 202, Raritan, New Jersey 08869 (ORTHO and RWJPRI hereinafter collectively called "LICENSEE") ON THE OTHER HAND, WITNESSETH: A. WHEREAS, KOSAN and LICENSEE have entered into the AGREEMENT providing for a collaborative research drug discovery program as generally described in the RESEARCH PLAN attached thereto as Appendix A; B. WHEREAS, the RESEARCH PLAN provided for two projects to be conducted by the parties, a Fast Track Project to be conducted over the first twelve months, and an SAR Project to be conducted over the first twenty-four months, each with a provision for additional CONTINGENT WORK, to be performed in the event a GO DECISION was made for the Project; C. WHEREAS, having completed the first twelve months of the RESEARCH PROGRAM, the parties wish to fund the CONTINGENT WORK on the Fast Track PROJECT and to reserve the rights to [**] under provisions of the AGREEMENT: NOW, THEREFORE, in consideration of the premises and the performance of covenants herein contained, the parties agree to amend the AGREEMENT as follows: 1. Unless otherwise defined herein, all capitalized terms used herein shall have the same meaning as set forth in the AGREEMENT. [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2. In accordance with the terms of the AGREEMENT, for Year 2 of the RESEARCH PROGRAM, RWJPRI shall fund [**] for the CONTINGENT WORK on the Fast Track Project and [**] for the SAR PROJECT. RWJPRI acknowledges that one of the [**] has already been provided in Year 1 with payment therefor deferred until Year 2. Thus, RWJPRI shall provide funding for [**] for the combined programs for Year 2 in accordance with the terms of the AGREEMENT. 3. [**] shall be deemed an [**] and RWJPRI has made the $[**] ([**] Dollar) payment due under Section 6.2.1. [**] shall be a reserved Compound under the provisions Section 3.5.6 until such time as it is designated a Licensed Compound under the Agreement or the end of the NON-EXCLUSIVE SCREENING PERIOD, whichever shall first occur. 4. Except as amended herein, all of the terms and conditions of the AGREEMENT shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and duly executed this Amendment AGREEMENT on the date(s) indicated below, to be effective the day and year first above written. For and on Behalf of KOSAN BIOSCIENCES, INC. By: /s/ Daniel V. Sant ----------------------------------------- Name: DANIEL V. SANT --------------------------------------- Title: Chief Executive Date: 17 MARCH 2000 --------------------------------------- For and on Behalf of THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE By: /s/ P.A. Peterson ----------------------------------------- Name: P.A. PETERSON, MD, PhD --------------------------------------- Title: President Date: MARCH 17, 2000 --------------------------------------- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.35 10 a2026613zex-10_35.txt EXHIBIT 10.35 Exhibit 10.35 KOSAN BIOSCIENCES, INC. 3832 Bay Center Place Hayward, CA 94545 Tel: 510-732-8400 Fax: 510-732-8401 _______________________________________________________________________________ September 5, 2000 By facsimile: Robert G. Johnson, Jr., M.D., Ph. D. 3656 Happy Valley Rd. Lafayette, CA 94549-3040 Dear Robert: On behalf of Kosan Biosciences, I am pleased to extend to you a revised offer for the position of Vice President, Medical Affairs and Corporate Development, reporting to me. Your principal responsibilities will be to direct and manage our pre-clinical and clinical development efforts, including design and execution of all necessary studies, and our efforts to identify and implement appropriate product development strategies and business relationships, particularly with pharmaceutical companies. We also expect that you will participate as a member of our senior management team. This letter sets forth some important terms and conditions of your employment at Kosan. Please read it carefully. Your monthly salary will be $19,166.66 ($230,000 on an annualized basis). You also will be entitled to receive a sign-on bonus of $50,000 after your first week of employment. Your personal coverage under Kosan's current benefit plans will become effective on your date of hire. Your start date will be as soon as practicable. In addition, we will recommend to the Board of Directors that you be granted an option to purchase 64,000 shares of Kosan Common Stock under the Kosan Stock Option Plan. These options will be incentive stock options to the maximum extent permitted, and the remainder will nonqualified stock options. The options will vest over four years, with one-fourth of the options vesting after one year of employment and the remainder vesting in equal monthly increments over the remaining three years. This offer of options is subject to the approval of the Board of Directors and your execution of our standard Stock Option Agreement. The exercise price will be equal to the fair market value of the stock on the date the Board or the Compensation Committee approves the stock options on or following your first day of employment. The shares subject to the option shall become fully vested immediately prior to the consummation of a Change in Control. You will be entitled to a housing loan of $150,000 in connection with refinancing your permanent residence in the Bay Area. The interest rate will be the lowest annual interest rate necessary to avoid imputed income under the Tax Code (Applicable Federal Rate). The loan will have a term of four years (with the due date for full repayment of principal and accrued interest accelerated to the date of termination if you voluntary terminate your employment), with interest compounded annually and becoming due when the principal is due. Fifty percent of the principal and accrued interest will be forgiven upon the completion of three years of continuous employment by Kosan and the remaining principal and interest will be forgiven upon the completion of four years of continuous employment. If amounts are forgiven, Kosan will provide appropriate gross-up payments up to sixty percent of the amount forgiven, to help defray the tax impact of the foregiveness. The loan will be secured by a second mortgage on your primary residence. You shall be entitled to a monthly mortgage assistance payment of $1,000 during the first three years of employment. Such payments shall end at the termination of your employment at the Company. The Immigration Reform and Control Act of 1986 requires that every person present to potential employers proof of identity and eligibility or authorization to accept employment in the United States. In order to comply with this law, and before you can become a Kosan employee, you must provide appropriate documentation to prove both your identity and legal eligibility to be employed by Kosan. Acceptable forms of documentation are described on the attachment to this offer letter. Please be sure to bring this documentation with you to orientation. If you are working in this country on a Visa, you will need to provide copies of this documentation at orientation. Your employment with the Company is for no specified period and constitutes at will employment. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause, and with or without notice. In the event of the involuntary termination of your employment other than for "Cause," (a) you will receive separation pay in the form of a continuation of your base salary, in regular payroll installments (less withholdings and deductions required by law) for a period of six months following the effective date of the termination of employment and (b) six months of vesting of your original 64,000 share option grant will be added to any amount already vested at the date of termination. The Company's obligation to continue to pay such base salary shall cease as of the date you commence full-time employment with another business entity (and you agree to provide notice of such employment within three business days of accepting such an offer). You will be required to sign a general release in order to receive these payments and acceleration. No separation pay or additional vesting will be provided in the event of a termination of employment for "Cause" or if termination is due to death, disability, retirement or voluntary resignation. As used in this letter agreement, "Change in Control" shall mean (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors. As used in this letter agreement "Cause" shall mean (i) any breach by you of this agreement or your other obligations to the Company under the Employee Proprietary Information and Invention Assignment Agreement which is not cured within 30 days after written notice of breach is provided to you by the Company, (ii) your conviction of a felony or crime involving moral turpitude, (iii) theft, dishonesty or willful neglect, misconduct or misrepresentation in connection with, or in the course of, carrying out your duties and responsibilities, or (iv) gross insubordination or gross refusal to perform reasonable and lawful directives from your superiors, which you fail to correct within 30 day after written notice. In the event of any dispute or claim relating to or arising out of our employment relationship, you and the Company agree that all such disputes shall be fully and finally resolved by binding arbitration conducted by the American Arbitation Association in San Francisco, California. However, this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's trade secrets or proprietary information. You agree that while you are an employee you will not engage in any activities that conflict with your obligations to the Company and that you will abide by company rules and regulations. You will also be required to sign our Employee Proprietary Information and Invention Assignment Agreement on your first day of employment. This letter, along with any agreements relating to proprietary rights or stock purchase between you and Kosan, set forth the terms of your employment with Kosan and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by Kosan and by you. We are very excited at the prospect of your joining Kosan Biosciences and becoming a key contributor to our efforts. Please do not hesitate to contact me if you have any questions. This offer will remain open until the end of the day September 5, 2000 at which time it will expire if not previously accepted in writing. To indicate your acceptance of our offer, please sign and date one copy of this letter in the space provided below and return it to me. Sincerely, Kosan Biosciences, Inc. AGREED AND ACCEPTED: By ___________________________ ______________________________ Daniel V. Santi, M.D., Ph.D Robert Johnson Chief Executive Officer Date: Date your employment begins: EX-23.2 11 a2024793zex-23_2.txt EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated March 10, 2000, except for the first paragraph of Note 9 as to which the date is September 28, 2000, in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-33732) and related Prospectus of Kosan Biosciences Incorporated for the registration of 5,750,000 shares of its common stock. /s/ ERNST & YOUNG LLP Palo Alto, California September 28, 2000 -----END PRIVACY-ENHANCED MESSAGE-----