10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-33489

ZYMOGENETICS, INC.

(exact name of registrant as specified in its charter)

Washington	91-1144498
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1201 Eastlake Avenue East, Seattle, WA 98102

(Address of principal executive offices)

Registrant’s telephone number, including area code (206) 442-6600

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x  No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  x  No  ¨

The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2004 was: $529,867,136.

Common stock outstanding at March 1, 2005: 57,703,808 shares.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Company’s definitive Proxy Statement for the annual meeting of shareholders to be held on June 10, 2005, are incorporated by reference in Part III.

ZYMOGENETICS, INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2004

TABLE OF CONTENTS

		Page No.
	PART I
Item 1.	Business	3
Item 2.	Properties	35
Item 3.	Legal Proceedings	36
Item 4.	Submission of Matters to a Vote of Securities Holders	36
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	36
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 7A.	Qualitative and Quantitative Disclosures About Market Risk	45
Item 8.	Financial Statements and Supplementary Data	46
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	69
Item 9A.	Controls and Procedures	69
Item 9B.	Other Information	69
	PART III
Item 10.	Directors and Executive Officers of the Registrant	69
Item 11.	Executive Compensation	69
Item 12.	Security Ownership of Beneficial Owners and Management and Related Shareholder Matters	70
Item 13.	Certain Relationships and Related Transactions	70
Item 14.	Principal Accountant Fees and Services	70
	PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	70
	Signatures	74

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PART I

Item 1.    Business

This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Annual Report on Form 10-K are forward looking. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,”, “intend,” “may,” “potential,” “seek,” “should,” “target” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations, plans or projections and are inherently uncertain. Our actual results could differ significantly from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Factors that could cause or contribute to such differences include those discussed in “Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission.

Overview

Our company is focused on the discovery, development and commercialization of therapeutic proteins for the treatment of human disease. We have a growing pipeline of potential products that we expect to develop on our own or in collaboration with partners. Our most advanced internal product candidate is recombinant human thrombin (rhThrombin). It is a recombinant version of a blood-clotting protein that is currently marketed as a stand-alone product in a form derived from bovine (cow) plasma. Our intent is to provide an attractive, and potentially safer, alternative to the currently marketed version, building on our established expertise in recombinant protein production methods. rhThrombin is a topical hemostatic agent intended for the control of moderate bleeding during surgical procedures. We have retained worldwide rights to rhThrombin. In early 2005, we successfully completed Phase 2 clinical trials of rhThrombin in four surgical indications and plan to begin Phase 3 trials in the second half of 2005.

Our bioinformatics efforts, in combination with our biology expertise, have yielded numerous novel proteins with potential medical relevance. Our most advanced bioinformatics-derived product candidates are TACI-Ig and interleukin-21 (IL-21). TACI-Ig is a soluble receptor with potential applications for the treatment of cancer and autoimmune diseases. It is being developed in collaboration with Serono S.A., a leading global biotechnology company. IL-21 is a protein with potential applications for the treatment of cancer, which we are developing in North America, and which Novo Nordisk A/S is concurrently developing in the rest of the world. We began Phase 1b clinical trials of TACI-Ig in patients with SLE and rheumatoid arthritis in the middle of 2004. We also recently initiated Phase 1b clinical trials of TACI-Ig in multiple myeloma and non-Hodgkin’s lymphoma. For IL-21, we began a Phase 1 clinical trial in June 2004 in the United States, while Novo Nordisk began their Phase 1 clinical trial in September 2004 in Australia. We have established a clinical data sharing agreement with Novo Nordisk.

We have been active in the area of therapeutic proteins since our incorporation in the state of Washington in 1981. For 12 years we were a wholly owned subsidiary of Novo Nordisk, one of the world’s largest producers of therapeutic proteins. We have contributed to the discovery or development of five recombinant protein products

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currently on the market, which had aggregate sales in 2004 in excess of $2 billion. In November 2000, as part of a restructuring by Novo Nordisk, we became an independent company in a transaction that included a $150 million private placement. In February 2002, we completed our initial public offering.

Early in our history, we focused on protein chemistry and molecular and cellular biology. In the mid-1990’s, we developed an advanced bioinformatics program that now represents the foundation of our discovery efforts. We were early to recognize the opportunity of genomics and were a pioneer in the use of bioinformatics tools to mine genomic databases. We focus our bioinformatics-based discovery efforts on the relatively small subset of genes that we believe have the highest probability of coding for proteins with therapeutic potential. Specifically, we focus on key protein categories that have members with proven therapeutic value or potent biological activity. We believe this approach increases our research efficiency and maximizes our chances of commercial success.

Our expertise in biology and protein chemistry strengthens our ability to determine the biological function and potential therapeutic utility of our protein candidates early in the discovery process. Determining biological function and therapeutic utility at an early stage improves our prospects of establishing patent priority by enabling us to file detailed patent applications covering both composition of matter and method of use claims. We have issued patents covering all three of our product candidates under internal development. In total, we have more than 290 unexpired issued or allowed United States patents and over 250 United States patent applications pending.

In October 2004, we established a five-year strategic alliance with Serono S.A. to research, develop and commercialize novel protein and antibody therapeutics derived from our proprietary portfolio of genes and proteins. We received over $80 million in cash upon execution of the agreement, which included a $50 million equity investment, and may receive future upfront fees, milestone payments and royalties based on product sales. In October 2004, we licensed recombinant Factor XIII (rFactor XIII) to Novo Nordisk. rFactor XIII is a protein involved in blood clotting that, previously, we had been developing for the treatment of bleeding complications associated with congenital and acquired Factor XIII deficiencies. We received a $15 million upfront payment from Novo Nordisk and may receive future milestone payments and royalties based on sales of any products containing recombinant Factor XIII.

Business Strategy

Our corporate objective is to discover, develop and commercialize novel therapeutic proteins and other protein-based products for the treatment of human disease. To achieve this objective, we are pursuing the following key strategies:

• Establish a robust portfolio of proprietary therapeutic proteins.    We focus our discovery efforts exclusively on therapeutic proteins. Using our unique genomics-based discovery platform, we have identified many novel proteins with potential as therapeutics. We believe that this approach, combined with strong patent and other intellectual property protections, will ultimately result in proprietary product opportunities, providing potential market exclusivity for our product candidates.

• Balance product portfolio risk.    Our goal is to develop a broad portfolio of product candidates that includes lower-risk, recombinant proteins as replacements for plasma-derived protein products and novel, higher-risk proteins that have blockbuster potential. Our most advanced internal product development candidate, rhThrombin, is a recombinant version of a currently marketed bovine plasma-derived protein. Two other of our product development candidates, TACI-Ig and IL-21, are novel proteins that could have broad therapeutic potential in cancer and autoimmunity.

• Leverage our development resources through partnerships.    We have established successful partnerships that will allow us to further diversify our product development risks, reduce costs, and access complementary skills and infrastructure possessed by our partners. With this strategy we should be able to pursue more opportunities than working alone.

• Focus on North America.    We retain all or a significant percentage of commercial rights to our product candidates in North America, and license commercial rights in the rest of the world. We intend to

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actively participate in the sales and marketing activities while maintaining our flexibility in establishing commercial infrastructure: building our own, renting it or relying on our partners’ infrastructure.

• Licensing non-core proteins.    We intend to continue out-licensing unencumbered proteins that lie outside our areas of interest. We use near-term cash from these transactions to support our internal development efforts. We believe that by out-licensing non-core proteins to licensees with extensive expertise in related areas, we maximize chances of commercial success and ultimately the long-term value that we expect to receive in the form of future milestone payments and royalties.

Products and Product Pipeline

Our track record in the field of therapeutic proteins includes contributions to the discovery or development of five recombinant protein products currently being marketed by Novo Nordisk or other companies. Our current focus is the development of a pipeline of internal product candidates. We also have out-licensed several product candidates outside our areas of interest. The following table summarizes our product candidates for internal development or co-development, as well as out-licensed product candidates and marketed products.

Product/Product Candidate Indication or Intended Use Stage of Development Development/Commercial Rights

Internal Candidates

rhThrombin	General surgical hemostat Line extensions	Phase 2 Preclinical	Internal development
TACI-Ig	Systemic lupus erythematosus Rheumatoid arthritis Multiple myeloma Non-Hodgkin’s lymphoma/chronic lymphocytic leukemia Multiple sclerosis	Phase 1 Phase 1 Phase 1 Phase 1 Research	Co-development with Serono in North America; Serono development outside North America
IL-21	Metastatic melanoma/ metastatic renal cell carcinoma Combination with anti-cancer monoclonal antibodies	Phase 1 Preclinical	Internal development in North America; Novo Nordisk development outside North America
IL-29	Hepatitis C virus infection Other viral diseases	Preclinical Research	Internal development in North America; Novo Nordisk development outside North America
IL-31	Inflammatory diseases	Preclinical	Co-development with Serono in U.S.; Novo Nordisk development outside North America

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Product/Product Candidate Indication or Intended Use Stage of Development Development/Commercial Rights

Out-Licensed Candidates

Platelet-derived Growth Factor	Periodontal disease Orthopedic fracture and other bone defects	Pre-approval Preclinical	Out-licensed to BioMimetic Pharmaceuticals, Inc.
Alpha 1-antitrypsin	Hereditary emphysema Other respiratory diseases	Phase 2 Preclinical	Out-licensed to Arriva Pharmaceuticals, Inc.
IL-20	Psoriasis	Preclinical	Out-licensed to Novo Nordisk
rFactor XIII	Congenital Factor XIII deficiency Cardiac surgery Cancer treatment	Phase 1 Preclinical Preclinical	Out-licensed to Novo Nordisk
IL-13 receptor	Asthma	Preclinical	Out-licensed to Wyeth
FGF-18	Cartilage repair	Preclinical	Out-licensed to Serono
IL-22 receptor	Psoriasis	Preclinical	Out-licensed to Serono

Marketed Products

Novolin® and NovoRapid® (Insulin)	Diabetes	Marketed	Out-licensed to Novo Nordisk
NovoSeven® (Factor VIIa)	Hemophilia	Marketed	Out-licensed to Novo Nordisk
Regranex® (Platelet-derived Growth Factor)	Wound healing	Marketed	Out-licensed to Johnson & Johnson
GlucaGen® (Glucagon)	Hypoglycemia; gastrointestinal motility inhibition	Marketed	Out-licensed to Novo Nordisk
Cleactor™ (tPA Analog)	Myocardial infarction	Marketed	Out-licensed to Eisai Co., Ltd.

In the table above, pre-approval refers to the stage in which a license application has been filed with regulatory agencies and awaits regulatory approval. Phase 1 refers to clinical trials designed primarily to determine safety and pharmacokinetics in human beings. Phase 2 refers to clinical trials in a limited patient population to evaluate preliminary efficacy, dosing and side effects. Preclinical refers to the stage in which safety, pharmacology and proof of efficacy in non-human animal models of specific human disease are being evaluated. Research refers to the stage in which we conduct analysis of therapeutic potential using a variety of laboratory methods.

Internal Product Candidates

We are developing several product candidates to treat a variety of serious diseases and medical conditions. We intend to develop and commercialize these product candidates on our own or in collaboration with other biotechnology or pharmaceutical companies.

rhThrombin

Thrombin is a specific blood-clotting enzyme that converts fibrinogen to fibrin. Fibrin is the primary protein contained in newly formed blood clots. Thrombin also promotes clot formation by activating Factor XIII, which cross-links the fibrin molecules and strengthens the newly forming clot.

Serious bleeding can be caused by trauma or surgery. Surgeons try to limit bleeding to maintain visibility in the operating field, limit the use of transfused blood products and minimize peri- and post-operative complications.

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In situations where direct pressure, ligation, or cautery are not possible or unsuccessful, topical hemostatic agents are needed to achieve hemostasis. Thrombin is widely used to stop diffuse bleeding occurring during surgical procedures. It is generally sold as a freeze-dried powder, which is dissolved and absorbed onto a surgical sponge, embedded onto a hemostatic pad or sprayed directly for topical application to wounds. Only bovine (cow) plasma-derived thrombin, Thrombin JMI^®, is available in the United States as a stand-alone product. The market for thrombin has grown rapidly since 2000, with Thrombin JMI net sales totaling $123.9 million during the first nine months of 2004, which implies annualized sales of approximately $165 million. It has been estimated that bovine plasma-derived thrombin is used in more than 500,000 surgical procedures annually in the United States.

We believe that there are several potentially important advantages to a recombinant human form of thrombin. Some patients may experience allergic reactions to plasma-derived products or develop antibodies to bovine plasma-derived thrombin or to Factor V or other protein impurities in the bovine plasma-derived product. In some cases, these antibodies can cross-react with analogous human proteins, creating a bleeding condition that can be difficult to manage and which may be fatal in patients who develop the most severe cases. Use of bovine plasma-derived thrombin in patients with pre-existing antibodies to bovine clotting factors may cause abnormal clotting times or other post-operative complications, which can result in increased treatment costs. The FDA-approved package insert for bovine plasma-derived thrombin contains a black box warning describing these potential risks. A recombinant human form of thrombin would alleviate these potential risks as well as the risk for viral contamination with plasma-derived products, including contamination with the pathogen that causes the human form of “mad cow” disease (vCJD).

We intend to develop rhThrombin as a preferred alternative to the currently marketed plasma-derived thrombin products. As with plasma-derived thrombin, rhThrombin would be used in the surgical setting to control bleeding. Primary applications could include a wide range of surgeries as well as the treatment of bleeding from trauma and burn injuries. We believe the market for rhThrombin could be further expanded by developing line extensions in which rhThrombin is combined with other passive or active hemostatic materials. We began research efforts in 2004 for evaluating potential line extension product prototypes.

We have developed a patent-protected method that we believe will enable us to cost-effectively manufacture rhThrombin in a two-step process. First, recombinant human prethrombin-1 (“rhPrethrombin-1”) is produced in mammalian cells. Then, using an enzyme activation step, rhPrethrombin-1 is converted to rhThrombin. A commercial scale manufacturing process has been developed in collaboration with Abbott Laboratories, our commercial manufacturer, and we have recently completed a full-scale GMP manufacturing campaign for supplying Phase 3 clinical trial materials.

In late 2004, we completed enrollment in Phase 2 clinical trials for rhThrombin in four surgical indications: spinal surgery, hepatic resection, peripheral bypass surgery and AV graft formation for dialysis access. In February 2005, we announced summary results of these studies. Both the primary endpoint of safety and secondary endpoints of evaluating immunogenicity and developing point estimates of time to hemostasis were met. We intend to initiate a Phase 3 pivotal study in multiple surgical indications in the second half of 2005 following discussions with the FDA.

We have obtained issuance of United States and foreign patents directed to certain recombinant human thrombin, methods of producing recombinant human thrombin from a genetically engineered precursor termed “prethrombin-1,” and therapeutic use of the protein. The first patent expiration in our rhThrombin patent portfolio will occur in December 2012.

TACI-Ig

TACI is a member of the tumor necrosis factor receptor family of proteins. TACI-Ig is a soluble form of the TACI receptor that binds to two ligands, BLyS and APRIL, that are implicated in mounting B-cell mediated immune responses. When over-produced in transgenic animals, BLyS has been shown to lead to the development

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of autoimmune disease with symptoms resembling systemic lupus erythematosus and Sjogren’s syndrome. Although less is known about the role of APRIL in this process, there is emerging evidence suggesting APRIL’s involvement in B-cell mediated autoimmunity. The aim of treatment with TACI-Ig is to neutralize the overactivity of these immune-stimulating ligands to prevent the activation of B cells and thus the production of harmful autoantibodies, which are antibodies to one’s own cells.

We believe that TACI-Ig could represent a less toxic and more specific immunosuppressive agent than current therapies for the treatment of autoimmune diseases. Such diseases include systemic lupus erythematosus (SLE), rheumatoid arthritis, myasthenia gravis and multiple sclerosis. In an animal model of SLE, TACI-Ig has been shown to specifically inhibit the development of mature B cells and the development of antigen-induced antibody production. It has also been shown to inhibit the development of proteinuria, an indicator of kidney malfunction, and to prolong survival of the animals. In a collagen-induced model of rheumatoid arthritis, TACI-Ig has been shown to inhibit the incidence of disease. Taken together, these data indicate that TACI-Ig acts by inhibiting the production of mature B cells and decreasing autoantibody levels.

In addition to its potential in autoimmunity, an expanding body of literature suggests that TACI-Ig may prove to be an effective treatment for a variety of B-cell cancers. Researchers from multiple labs have shown that malignant B-cells from essentially all patients examined to date express one or more of the three known receptors for BLyS and APRIL (TACI, BCMA and BAFF-R). Furthermore, these malignant B-cells also often abnormally express BLyS and APRIL proteins themselves, while normal B-cells do not. These findings seem to suggest that malignant B-cells can both produce and consume the BLyS and APRIL growth factors, leading to their autonomous survival in patients. In fact, BLyS and APRIL levels are usually elevated in the serum of patients bearing these B-cell tumors. Studies from Mayo Clinic suggest that lymphoma patients in whom high levels of BLyS are present in blood samples fare worse than those in whom levels are lower. Thus, BLyS and/or APRIL appear to enhance the survival of malignant B-cells. In support of this theory, scientists have shown that the addition of BLyS or APRIL to cultured cells from non-Hodgkin’s lymphoma and multiple myeloma patients enables these cancer cells to survive for extended periods of time. Inhibition of BLyS and APRIL using TACI-Ig causes the cultured malignant B-cells to die rapidly. These results suggest that TACI-Ig might represent an important new cancer therapeutic, specifically targeting malignant B-cells.

In August 2001, we entered into a collaborative development and marketing agreement with Serono relating to TACI-Ig. Under our agreement, we will develop TACI-Ig jointly with Serono pursuant to a worldwide development plan. Serono has manufactured clinical-grade materials in quantities adequate to supply initial clinical trials. Together with Serono, we completed a Phase 1 clinical trial of TACI-Ig in healthy volunteers in early 2004, in which we demonstrated that TACI-Ig was well tolerated at all studied doses. In addition, patients receiving TACI-Ig at the three highest dose levels showed a reduction in IgM levels, one of the markers of TACI-Ig biological activity. The median half-life of TACI-Ig was approximately 12.5 days, indicating that intermittent dosing should be possible.

Based on positive data from animal models, SLE was selected as the initial clinical indication for TACI-Ig. The cause of this disease remains unknown, but there is substantial evidence suggesting that B-cell hyperactivity resulting in the secretion of autoantibodies is fundamental to its development. Although estimates on prevalence vary widely, there are believed to be approximately 430,000 patients diagnosed with SLE in major markets. Of these, there are an estimated 135,000 such patients in the United States and a roughly equivalent number in major European countries. No new FDA-approved treatments for SLE have been introduced in the last 40 years. Current therapies, including immunosuppressive agents and corticosteroids, are not very effective and can have severe side effects. We believe that patients diagnosed with severe SLE would be candidates for treatment with TACI-Ig. Together with our partner, Serono, we began a Phase 1b clinical trial of TACI-Ig in SLE patients in June of 2004.

Rheumatoid arthritis has been selected as another autoimmune clinical indication for TACI-Ig. Rheumatoid arthritis is one of the most prevalent chronic inflammatory diseases, afflicting an estimated 1% of the population in industrialized countries, including over five million patients in North America, Europe and Japan. Although

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the underlying cause of rheumatoid arthritis is unknown, considerable data indicate a major role of B cells in this disease. Rheumatoid arthritis has been an attractive therapeutic area for drug development because of its large market size. As a consequence, a very large number of drugs are currently being developed. However, we believe that few of these product candidates target B cells specifically. Thus, TACI-Ig represents a novel mode of treatment that could alleviate the symptoms of rheumatoid arthritis associated with pathogenic B cells. Moreover, the specificity and mode of action of TACI-Ig strengthens its potential as an add-on therapy to existing drugs. Together with our partner, Serono, we began a Phase 1b clinical trial of TACI-Ig in rheumatoid arthritis patients in July 2004.

Because of the recent data implicating both BLyS and APRIL in the growth and survival of B-cell cancer, we have expanded our clinical program to include this area of oncology. B-cell cancer includes B-cell chronic lymphocytic leukemia, multiple myeloma, and B-cell non-Hodgkin’s lymphoma. In the United States, over 320,000 people are estimated to have some form of these B-cell cancers and each year, approximately 55,000 new cases and 20,000 deaths occur from these cancers. Between 80% and 85% of non-Hodgkin’s lymphomas are of B-cell origin. Despite the introduction of new therapies, there is still a clear need for agents that improve clinical response and survival. With Serono, we initiated Phase 1b clinical studies in multiple myeloma in November 2004 and in non-Hodgkin’s lymphoma in the first quarter of 2005.

We own or have exclusively in-licensed worldwide patents and patent applications for TACI-Ig, methods of using TACI-Ig and related technology. Our license with St. Jude’s Children’s Hospital of Memphis, Tennessee is central to our patent portfolio for TACI-Ig. St. Jude’s owns the patents covering the TACI protein, related polypeptides, methods of production and antibodies. In addition, we have sole ownership of patents and patent applications that include claims to expression vectors, transformed cells used to produce TACI-Ig and methods of using TACI-Ig to treat various diseases and medical conditions. The first patent expiration in our TACI-Ig patent portfolio will occur in March 2017.

IL-21

IL-21 is a protein belonging to a family of cytokines that modify the function of cells in the immune system. IL-21 shares overall protein structural and distant genetic sequence similarity with interleukin-2 (IL-2), a cytokine approved as a therapy for metastatic melanoma and metastatic renal cell carcinoma. We have shown that IL-21 regulates the proliferation and functional activity of several populations of immune cells, including cytotoxic T cells (CTL) and natural killer (NK) cells, both of which are thought to be critical in eliminating malignant or virally infected cells from the body.

Preclinical studies have indicated that our recombinant version of IL-21 is an effective therapy in a number of animal models of cancer. In an animal model of metastatic melanoma, IL-21 exhibited a high rate of tumor suppression. Animals in this model develop aggressive metastases to the lung, which can be readily measured. Treatment with IL-21 led to a significant reduction in the number of lung metastases relative to controls. IL-21 also was found to have potent inhibitory activity in other animal models of cancer. These models demonstrated that the in vivo effects of IL-21 were mediated through the activation of CTL and NK cells, which led to rejection of the tumors in the animal models.

In clinical practice, IL-2 is an effective therapy producing durable responses in approximately 5% to 8% of patients with metastatic melanoma. Accompanying this relatively low level of efficacy is a significant side effect profile, including vascular leak and the release of pro-inflammatory cytokines, which profoundly limits the utility of IL-2 in treating disease. These side effects can be so severe that many patients are either hospitalized or stop the therapy before completion of the treatment program. Therefore, it has been a high priority to assess the possible side effects of IL-21. We evaluated the safety of IL-21 in both cynomolgus and rhesus monkeys to support initiation of the clinical program. We observed a dose-dependent activation of the immune system and a reversible reduction in circulating red blood cells and platelets consistent with the expected pharmacology of IL-21. No evidence of vascular leak was observed in these studies over the evaluated dose range.

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We intend to pursue metastatic melanoma and metastatic renal cell carcinoma, the two approved indications for IL-2, as initial indications for IL-21. There are an estimated 55,000 new cases of melanoma per year and 30,000 new cases of renal cell carcinoma per year in the United States. Currently, metastatic melanoma and renal cell carcinoma are essentially incurable cancers with no established standard of care. Subject to the outcome of the initial clinical studies, we intend to expand the IL-21 clinical program into additional cancer indications.

We have retained all rights to IL-21 within North America and, pursuant to an option and license agreement, Novo Nordisk has licensed the rights to IL-21 outside North America. We began a Phase 1 clinical trial in patients with metastatic melanoma and metastatic renal cell carcinoma in June 2004 in the United States. The study involves two parts: Part A is a dose escalation to establish the maximum tolerated dose; Part B involves treatment of additional patients at the established dose. We expect the study to continue throughout 2005 and to have final data available by early 2006. Novo Nordisk began their Phase 1 clinical trial in patients with metastatic melanoma in September 2004 in Australia. We have an agreement with Novo Nordisk that enables the companies to access each other’s clinical trial data.

We are exploring additional uses for IL-21 in combination with monoclonal antibodies, particularly those like Rituxan^® that function via antibody-dependent cellular cytotoxicity, a process enhanced by IL-21. We anticipate filing an IND application in late 2005 to test the use of IL-21 in combination with Rituxan and initiating a clinical trial in early 2006. Other monoclonal antibodies are also under consideration.

We own issued patents for IL-21 polypeptides, polynucleotides and methods of using IL-21 to stimulate immune responses, particularly in tumor-bearing subjects. We have filed patent applications for IL-21 antibodies, additional compositions, IL-21 fusion proteins and other methods of using IL-21 for the treatment of disease. We have also filed patent applications relating to IL-21 directed to methods for expressing and purifying recombinant IL-21, methods of treating specific cancers and viral diseases, combination therapies using IL-21 and monoclonal antibodies, and antagonist ligands. The first patent expiration in our IL-21 patent portfolio will occur in March 2020.

IL-29

IL-29 is a member of the Interleukin 28 family, which is comprised of three novel 4-helical-bundle cytokines — IL-28a, IL-28b and IL-29 — that are related to type-I interferons and to IL-10. Members of the IL-28 family are generated in response to a viral infection. We have found that they exhibit anti-viral activity in in vitro assay systems that is comparable in potency to alpha-interferon. It should be noted, however, that members of the IL-28 family signal through a receptor that is distinct from that used by the type-I interferons, suggesting that these proteins may serve as an alternative to interferons in providing a therapy for viral infection. We selected IL-29 as our lead candidate from the IL-28 family to be evaluated as an antiviral agent.

In vitro studies have shown that IL-29 has antiviral activity against human hepatitis C virus (HCV) in the sub-genomic HCV replicon model. Additionally, we have demonstrated that IL-29 induces antiviral gene expression in primary human hepatocytes. Combined with the significant expression of the receptor for IL-29 seen in liver samples from HCV positive individuals, this data provides the rationale for selecting HCV infection as our first potential clinical indication.

Pursuant to an option and license agreement, Novo Nordisk has licensed the rights to IL-29 outside North America and we have retained all rights within North America. We plan to begin a GLP toxicology study in 2005, and file an IND application for clinical testing of IL-29 in 2006.

We have filed several patent applications relating to IL-29 on a worldwide basis and will continue to file new patent applications as new uses are discovered.

IL-31

IL-31 is a cytokine derived from T cells, which we discovered through our bioinformatics-driven strategy. Analysis of IL-31 and IL-31 receptor levels in human and murine disease tissues suggests that IL-31 could play a

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role in asthma, psoriasis, Crohn’s disease or atopic dermatitis. Transgenic animals expressing the IL-31 gene develop a severe skin phenotype that resembles human atopic dermatitis. Additionally, analysis of peripheral blood T cells from human atopic dermatitis patients provides an association between IL-31 and skin homing T cells, suggesting that cutaneous diseases should be considered as a leading therapeutic area for IL-31.

Under our strategic alliance with Serono, we entered into a co-development and co-promotion agreement for IL-31 within the United States and granted Serono an exclusive license to IL-31 in Mexico and Canada. Novo Nordisk has licensed the rights to IL-31 outside North America pursuant to an option and license agreement. We plan to continue our joint IL-31 research and development efforts in 2005 with Serono.

We have filed several patent applications relating to IL-31 on a worldwide basis and will continue to file new patent applications as new uses are discovered.

Discovery and Research Process

We have developed fully integrated therapeutic protein discovery, research and development infrastructure that draws upon a broad range of skills and technologies, including DNA sequencing, bioinformatics, molecular and cellular biology, animal biology, protein chemistry, intellectual property protection, pharmacology, medical and regulatory affairs, drug formulation, manufacturing and strategic market research. We believe that this comprehensive program gives us a competitive advantage. While a number of competing companies were founded on the use of high-throughput DNA sequencing and bioinformatics to identify gene sequences of interest, we built our bioinformatics capabilities on top of our pre-existing strengths in molecular biology, protein chemistry and animal biology. As a result, we have been successful in characterizing important biological properties of our lead product candidates.

Bioinformatics

We have focused our discovery efforts on identifying the relatively small subset of genes that we believe have the highest probability of coding for proteins with therapeutic potential. We have defined what we consider to be the key protein categories according to structural similarity, sequence similarity and functional activity. These categories have known members with demonstrated therapeutic potential or potent biological activity, and most recombinant human proteins currently marketed as drugs are members of these categories. We believe that newly discovered proteins within these categories are likely to have important novel biological activity, and therefore may have potential as therapeutic products.

The foundation of our bioinformatics platform is our DNA sequence databases of millions of EST sequence entries and billions of nucleotide sequences derived from genomic sequences. In 1995, we became the first subscriber to gain direct in-house access to Incyte Genomics’ LifeSeq database of ESTs. Since that time, we have built our internal sequence database from a number of sources, including:

• private databases, including Incyte Genomics’ LifeSeq database;

• public EST and DNA sequences;

• our own internal EST sequences, where we have eliminated transcripts of highly expressed genes to concentrate on sequences of rarely expressed genes; and

• genomic sequences published by the Human Genome Project.

To discover novel gene sequences within the sequence databases, we have developed sensitive proprietary search algorithms based on protein motifs, which can include sequence homologies and predicted protein structure similarities. We have developed sophisticated threading algorithms that allow us to use distant and apparently unrelated elements in sequences to identify pre-defined three-dimensional structures contained within certain key protein categories. These algorithms are tailored to the specific category of proteins under consideration, as the optimal search strategy for novel gene sequences depends on characteristics unique to each protein category.

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Exploratory Biology

We use a diverse set of tools to identify the biological functions of the genes and proteins we discover. Throughout our exploratory biology effort, we use a variety of in-house approaches, including physiological screens of mice in which the gene of interest has either been genetically over-expressed from birth, otherwise known as transgenic mice, or temporarily over-expressed in adult mice using an adenovirus containing the gene. We also conduct screens of mice in which the gene of interest has been eliminated from birth, otherwise known as knockout mice. In addition, we conduct analyses of disease models using a variety of laboratory tests, or assays, to detect changes in behavior, physiology and biochemistry. We use hundreds of in-house assays to investigate biological activities of our novel proteins. To obtain additional information, our scientists either adapt or create in vivo laboratory models that mimic human diseases to determine the cause of disease and response to treatment. For certain ligands, we can also apply laboratory techniques to clone the receptors for the ligand present in a tissue or cell. In addition to providing a marker for tissues that should respond to the protein, the receptors themselves can have therapeutic potential. We also rely on an external network of collaborators to investigate biology and conduct additional tests that we do not perform in-house.

Within our exploratory biology operation, there are several stages of activity through which we identify a protein’s function, determine whether the protein plays a role in disease and determine whether it has commercial potential. A protein begins in the exploratory stage, in which experiments are performed to support the development of a biological hypothesis as to the protein’s function. Once a biological hypothesis is developed, the protein moves to the validation stage, in which more extensive experiments are performed to confirm the biological hypothesis for the protein and to establish a medical hypothesis. A medical hypothesis involves the identification of specific diseases or conditions for which we believe the protein would have therapeutic importance. In cases where a protein demonstrates beneficial biological effects, it becomes a product candidate. Where a protein has been found to have detrimental effects, we attempt to generate a monoclonal antibody or soluble receptor to inhibit the activity of the protein. In those cases, a resulting monoclonal antibody or soluble receptor becomes the product candidate. Once a product candidate is identified, it moves to the pre-development stage, at which time it is tested in specific animal models of diseases. At the pre-development stage, we not only learn which diseases or conditions show promise for treatment, but also obtain information about dosing and systemic effects of the product candidate. Assuming positive results, both in terms of efficacy and toxicology, we may develop a commercial hypothesis for the product candidate. A commercial hypothesis requires the identification of a market opportunity and a preliminary determination that it will be economically feasible to manufacture the product candidate and administer it to patients.

Collaborative Relationships

Novo Nordisk Option and License Agreement

As part of our separation from Novo Nordisk, we granted Novo Nordisk options to license certain rights to potential therapeutic proteins pursuant to an option and license agreement. Under this agreement, we retained exclusive rights to these proteins in North America, and Novo Nordisk could obtain exclusive rights in the rest of the world. However, Novo Nordisk maintained the option to obtain exclusive worldwide rights to any licensed protein that acts to generate, expand or prevent the death of insulin-producing beta cells, which are involved in diabetes, a core business focus of Novo Nordisk. The option agreement also provides that:

• over a four-year period beginning November 10, 2000, Novo Nordisk paid us a fee of $7.5 million per year for the option rights under the agreement;

• during this four-year period, Novo Nordisk had the right, for specified license payments, to license up to the greater of eight proteins or 25% of all proteins discovered by us after August 25, 1995 and for which a hypothesis as to medical utility is generated, except for beta-cell-related proteins, of which Novo Nordisk could license an unlimited number; and

• Novo Nordisk could extend the option agreement for two years, during which time it is required to pay us a fee of $7.5 million per year for the right to license four additional proteins. In June 2004, Novo Nordisk exercised its extension rights, extending the agreement through November 2006.

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Under the option agreement, we must promptly disclose to Novo Nordisk each protein for which we develop a hypothesis as to medical utility, together with information known to us about the protein, such as gene sequence and similarity, exploratory data and relevant patent filings. Novo Nordisk then has 60 days to decide on three possible courses of action:

• exercise one of its options to license the protein;

• decline to exercise one of its options, thereby forgoing any and all future rights to the protein; or

• extend its option on the particular protein by paying a $500,000 extension fee and agreeing to pay half of the research and development costs under a North America research plan to advance the protein to the status of a preclinical lead.

Upon the exercise of an option by Novo Nordisk, we negotiate an exclusive license agreement to commercialize the protein containing certain predetermined terms, including up-front payments, milestone payments and royalty terms. The option agreement provides that up-front and development milestone payments for each non-beta-cell-related protein licensed will total up to approximately $20 million, regardless of the point at which the protein is licensed. Up-front and milestone payments for beta-cell proteins licensed will total up to approximately $28 million. Royalty rates are lowest if an option to license a protein is exercised at the medical utility hypothesis stage and increase substantially each time the option is extended. Royalty obligations end on the expiration date of the last-to-expire patent on the licensed protein or, if the product is not based on a patented protein, 12 years from the date of the first sale of the product. Royalty obligations may be reduced if Novo Nordisk is required to license third-party patented technology to utilize the licensed protein or if a generic product that is identical to a patented product achieves certain levels of market share.

If Novo Nordisk extends its option on a protein, then when the protein reaches the status of a preclinical lead meeting certain criteria, Novo Nordisk may exercise the option, extend the option or decline to exercise the option, in which case it forgoes any and all future rights to the protein. If Novo Nordisk elects to extend the option at the preclinical lead stage, it must pay us a $1.0 million extension fee and agree to pay two-thirds of the research and development costs under a North America research and development plan to advance the protein through the completion of Phase 2 clinical trials. Upon completion of Phase 2 clinical trials, Novo Nordisk has one final opportunity to license the protein.

If, at any of Novo Nordisk’s decision points, we decide that we do not wish to move forward in the development of a particular protein, then we have the right to terminate our participation in the development of the protein. In that case Novo Nordisk has the right to continue the research and development on its own, and maintains its right to license the protein under the option agreement.

To date, Novo Nordisk has licensed the rights to develop IL-20, IL-21, IL-28a, IL-29 and IL-31 outside North America pursuant to this agreement.

In December 2002, we announced that we had signed a collaborative agreement with Novo Nordisk for the preclinical development of IL-21. Under the terms of the agreement, we and Novo Nordisk collaborated on all research and development activities leading up to the filing of an IND application in the United States. Novo Nordisk reimbursed us for a portion of our costs incurred prior to the agreement, and the two companies equally shared all costs of the program going forward through filing of the IND application in early 2004. We received a total of $8.9 million under the agreement.

In March 2004, we signed a license agreement with Novo Nordisk for exclusive rights to IL-20 in North America, effectively giving them worldwide rights under our intellectual property in this protein. Under the agreement, we received a $4.0 million initial license fee and have the potential to receive future milestone payments of $38 million and royalties based on sales.

Serono Strategic Alliance Agreement

On October 12, 2004, we executed a strategic alliance agreement with Serono S.A. to research, develop and commercialize novel protein and antibody therapeutics derived from our proprietary gene and protein portfolio.

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The strategic alliance agreement has a five-year term, with a maximum three-year research period for each candidate that may extend beyond the five-year term on a candidate-by-candidate basis.

As part of the strategic alliance, Serono receives:

• An exclusive option, subordinated to the Novo Nordisk option agreement discussed above, to acquire rights to product development candidates resulting from research under the strategic alliance. The number of candidates within our core research areas to which Serono may obtain rights is limited to twelve, while for candidates in our non-core areas the number is unlimited.

• Exclusive worldwide licenses to our two preclinical stage candidates, FGF-18 and IL-22RA.

• An agreement for our preclinical stage candidate, IL-31 in North America that provides for co-development and co-promotion for any products based on IL-31 within the United States and an exclusive license to Serono in Mexico and Canada.

In return, we receive:

• A $20 million upfront option fee.

• $11.25 million in license fees for FGF-18, IL-22RA and IL-31, as well as potential future milestone payments of $99.5 million and royalties based on product sales.

• An equal share of the profit from the co-commercialization of any product within the United States.

• Upfront fees and potential milestone payments related to development progress, regulatory submissions and approvals for every candidate exclusively licensed or co-developed by Serono.

• Royalties on product sales outside the United States for co-developed products, and on worldwide product sales for licensed products. Royalties rates for candidates in our core areas are higher than for candidates in our non-core areas. Similarly, royalty rates for protein therapeutics are higher than for antibody therapeutics.

In addition, Serono purchased 3.2 million shares of our common stock for a total of $50 million, also entering into a lockup agreement and a standstill agreement.

During the research stage of the collaboration, the two companies will work together for five years to identify new development candidates from our proprietary portfolio of genes and proteins. Each company may at its own expense work with non-core genes, while we will have exclusive rights to evaluate genes within our core research areas. Upon the generation of a medical hypothesis by either company for a candidate derived from a core or non-core gene, Serono has a specified amount of time to make a decision whether or not to co-fund continued research on the candidate. If Serono declines to continue, all rights to the candidate will revert to us. If Serono decides to collaborate, it will fund the majority of the research costs if we decide to participate, or 100% of the costs if we decline.

The research collaboration for a candidate can continue for up to three years or until the candidate reaches the point of being designated a product development candidate. At this time, Serono has an option to obtain rights to the candidate. If we collaborated and co-funded research on the candidate, we can choose whether or not to co-develop and co-promote in the United States but, if Serono funded 100% of the research costs, Serono’s rights to the candidate will be exclusive. Serono has a specified amount of time in which to exercise this option.

For any candidate that is co-developed, the two companies will work together on the clinical development in the United States and European Union and commercialization of related product candidates within the United States. These activities will be governed by a steering committee with equal representation from the two companies. The majority of the development costs will be paid by Serono. The expenses of commercialization and the profit from selling any resulting products in the United States will be split evenly between the two

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companies. Outside the United States, Serono will pay us a royalty on product sales. At any point in time during the development period, we have an option to stop our contributions and convert a co-development relationship to a license.

Serono Development and Marketing Agreement for TACI-Ig

In August 2001, we entered into a collaborative development and marketing agreement with Ares Trading S.A., a wholly owned subsidiary of Serono S.A., focused on product candidates derived from two cellular receptors, designated TACI and BCMA, that are involved in the regulation of the human immune system. During the term of the agreement, we and Serono will work together exclusively to develop biopharmaceutical products based on the two receptors. The ongoing co-development of TACI-Ig in autoimmune diseases and cancer is pursuant to this agreement.

We share research and development expenses worldwide with the exception of Japan, where Serono covers all expenses. The research and development activities are governed by a steering committee made up of an equal number of representatives from each company. Serono is responsible for manufacturing all products for both clinical trials and commercial sale. We retain an option to co-promote the sale of products with Serono in North America, which we can exercise provided that we fund our share of the research and development expenses and meet certain sales force and marketing requirements. If we exercise the co-promotion option, we will share commercialization expenses and profits in North America equally with Serono and Serono will have exclusive rights to market and sell products in the rest of the world, for which we will be entitled to receive royalties. In the event of certain changes in control of our company, we could lose our right to co-promote products in North America.

Either company may terminate its co-development and co-funding obligations upon 90 days’ notice until the start of Phase 2 clinical trials, after which time 180 days’ notice is required. If we were to terminate our co-development and co-funding obligations, Serono would take control of all research and development, we would forgo our co-promotion rights in North America, we would be entitled to receive royalties on any product sales in North America in lieu of sharing in the profits from the sale of products and Serono would continue to be obligated to make any milestone payments. If Serono were to terminate its co-development and co-funding obligations, all rights in any products would revert to us, and we could take control and fund all costs of the research and development, subject to negotiation of commercially reasonable financial consideration to be paid to Serono. Furthermore, if clinical trials had begun prior to Serono’s termination, Serono would be obligated to manufacture product for use in clinical testing for up to one year from the termination date.

We granted Serono an exclusive license to our intellectual property relating to TACI, BCMA and certain other related technologies to make, use, have made, sell, offer to sell and import products based on TACI and BCMA. Serono is required to pay royalties on sales, which may vary based on annual sales volume and the degree of patent protection provided by the licensed intellectual property. Royalty payments may be reduced if Serono is required to license additional intellectual property from one or more third parties in order to commercialize a product or, in certain circumstances, if a product suffers from competition. Royalty obligations under the agreement continue on a country-by-country basis until the date on which no valid patent claims relating to a product exist or, if the product is not covered by a valid patent claim, 15 years from the date of first sale of the product.

The term of the agreement began on August 30, 2001 and will continue for as long as a TACI or BCMA product is the subject of an active development project or there is an obligation to pay royalties under the agreement. The agreement provides for an initial fee and milestone payments to be paid by Serono in connection with the development and approval of products, up to an aggregate of $52.5 million.

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Other Out-licensed Product Candidates

In addition to the products we are developing internally or with co-development partners, we have out-licensed several product candidates to third parties in return for milestone payments and royalties:

• Platelet-derived growth factor, a growth factor that stimulates the growth of a variety of cell types. We have out-licensed this protein to BioMimetic Pharmaceuticals, Inc. (BMPI), originally for the treatment of periodontal disease and bone defects of the head and face, and more recently for the treatment of all other bone defects. BMPI has completed a pivotal study of platelet derived growth factor in periodontal disease and filed for regulatory approval in the United States and in Europe. In July 2004, BMPI received a unanimous recommendation for approval from the Dental Products Advisory Panel. Regulatory approval is currently expected in 2005. BMPI is expected to initiate a clinical study in the first orthopedic indication in 2005.

• Alpha 1-antitrypsin (AAT) is a protease inhibitor, which is being developed for the treatment of hereditary emphysema, a genetically determined condition that may result in serious lung and/or liver disease, and other respiratory diseases. We have out-licensed this product candidate to Arriva Pharmaceuticals, Inc. Aerosolized AAT is being studied in a Phase 2 clinical trial in patients with hereditary emphysema. In late 2004, Arriva successfully completed a preclinical study of AAT for preventing lung damage caused by smoking.

• IL-20 is a new member of the IL-10 cytokine family. Novo Nordisk licensed the ex-North American rights to IL-20 in September 2001 pursuant to the option and license agreement and the North American rights in March 2004 under a separate agreement. Our preclinical data suggest that IL-20 may play an important role in the regulation of cutaneous inflammation and the pathology of psoriasis, and therefore is a potential target for the treatment of psoriasis.

• rFactor XIII is a recombinant version of a protein that is involved in blood clotting, and is being developed for the treatment of bleeding disorders. Novo Nordisk acquired rights to this protein in October 2004 after we completed several Phase 1 clinical trials in healthy volunteers and in patients with congenital Factor XIII deficiency. Novo Nordisk plans to study rFactor XIII, both alone and in combination with Factor VIIa, in patients with congenital Factor XIII deficiency and in patients undergoing cardiac surgery or cancer treatment.

• IL-13 receptor subunit alpha2 (IL-13R) is a novel cytokine receptor which is closely related to other receptors involved in the regulation of the human immune system. A soluble form of IL-13R alpha2 may have use as a potential therapeutic antagonist to inhibit IL-13 mediated activities. IL-13 has been implicated in a number of immunological diseases including asthma and hay fever. We out-licensed this receptor to Wyeth in September 2001.

• Fibroblast growth factor-18 (FGF-18) is a novel member of the fibroblast growth factor family of proteins. Our preclinical data suggest that FGF-18 may be useful for healing cartilage damaged by injury or disease. We out-licensed this protein to Serono in September 2004 as part of the strategic alliance.

• IL-22 receptor subunit alpha (IL-22RA) is a cytokine receptor that neutralizes both IL-20 and IL-22 activities and which is a target for development of a treatment for psoriasis. We have out-licensed this protein to Serono in September 2004 as part of the strategic alliance.

Currently Marketed Products

We have participated in the discovery or development of five recombinant protein products marketed by other companies.

• Novolin^® and NovoRapid^® (insulin), recombinant human insulin products marketed by Novo Nordisk worldwide for the treatment of diabetes. In collaboration with Novo Nordisk, we developed a process for the production of recombinant human insulin in yeast that is used by Novo Nordisk.

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• NovoSeven^® (Factor VIIa), a protein involved in the generation of blood clots, marketed worldwide by Novo Nordisk for the treatment of hemophilia patients. We cloned the gene that codes for human Factor VII and developed a process for the production of activated recombinant human Factor VII, or Factor VIIa, which led to the establishment of the manufacturing process that Novo Nordisk currently uses to produce this protein.

• Regranex^® (platelet-derived growth factor), a growth factor marketed by Ortho-McNeil Pharmaceuticals, Inc., a Johnson & Johnson company, for the treatment of non-healing diabetic ulcers. We cloned the gene that codes for platelet-derived growth factor and demonstrated the importance of this protein in stimulating wound healing.

• GlucaGen^® (glucagon), a protein marketed by Novo Nordisk, Bedford Laboratories and Eisai Co., Ltd. for use as an aid for gastrointestinal motility inhibition and for the treatment of severe hypoglycemia in diabetic patients treated with insulin. In collaboration with Novo Nordisk, we developed a process for the production of this protein that is currently used by Novo Nordisk in the manufacture of GlucaGen.

• Cleactor^™ (tPA analog), a modified form of the protein tissue plasminogen activator, marketed in Japan by Eisai for the treatment of myocardial infarction, or heart attacks. In collaboration with Eisai, we developed this modified protein, which has enhanced properties that allow it to be given as a single injection.

We earn royalties on sales of all these products except for NovoSeven and NovoRapid, for which we received a one-time payment to satisfy future royalty obligations. In the aggregate, we earned royalties of $11.3 million for the year ended December 31, 2004.

Other Collaborations

We recognize external collaborations as an important aspect of our success in analyzing and characterizing protein function. Where possible, we establish collaborations with experts in the field who have a depth of knowledge on a select protein, protein category or disease state that is related to the understanding of our gene and protein discoveries. These collaborations serve to accelerate the rate at which we can assess the biological functions of proteins and confirm medical hypotheses. In addition, throughout our history, we have collaborated actively with the University of Washington, a leading biomedical research institution, to explore the biological function of proteins. The University’s significant resources and expertise, together with its geographic proximity to us, have made it a valuable partner on a number of our projects.

Manufacturing

In 2004, we completed construction of an expanded research and development facility, which includes a pilot-scale GMP manufacturing facility to be used to supply products for toxicology studies and clinical trials. This facility gives us the capability to manufacture products at up to 100-liter scale using bacterial production systems, and up to 500-liter scale using mammalian cell production systems. We expect to begin production in this facility by mid 2005.

We have entered into a contract manufacturing agreement with Abbott Laboratories for the commercial scale production of rhThrombin, which is made in mammalian cells. Under the terms of our collaborative development and marketing agreement, Serono will manufacture TACI-Ig, which is made in mammalian cells. Avecia Limited has manufactured our initial clinical supply of IL-21, which is manufactured in E. coli.

Some of the inventions licensed to us were initially developed at universities or other not-for-profit institutions with funding support from an agency of the United States government. In accordance with federal law, we or our licensees may be required to manufacture products covered by patents in those inventions in the United States, unless we can obtain a waiver from the government on the basis that such domestic manufacture is not commercially feasible.

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Commercialization

We have developed the following three-pronged strategy for the development and commercialization of our product candidates:

Internal development.    We intend to independently develop products for North America that we believe can be successfully developed with our current infrastructure, as well as additions made to our infrastructure over the next few years. To qualify for internal development, product candidates must satisfy a number of criteria. Formulation, development and manufacturing of these products must initially be feasible through the use of contract providers. The anticipated clinical trials must be of a reasonable size and with fairly well-defined endpoints and guidelines. Finally, the clinical indication and target market must be accessible with a relatively small sales force. We believe that certain of our product candidates, including rhThrombin and IL-21, meet these criteria.

Co-development.    We intend to develop certain product candidates jointly with other companies. In these arrangements, we would expect to pay a share of the research and development costs, retain rights to co-promote or co-market the potential products, and share in the profits from selling the potential products. Our criteria for selecting product candidates for co-development include our level of internal expertise related to the field, manufacturing requirements, clinical trial size and complexity, target market size and investment considerations. If we determine that it is desirable to invest our capital in a development program for a product candidate, but we do not believe that we can internally meet the development requirements, we will seek a co-development partner. TACI-Ig meets the criteria for co-development, and we have entered into a collaborative development and marketing agreement with Serono to co-develop this product candidate.

Out-licensing.    We intend to derive value from other product candidates through out-licensing to biotechnology or pharmaceutical companies. From out-licensing transactions, we would expect to earn up-front license fees, milestone payments and royalties on sales. We also would expect no ongoing participation, financial or otherwise, in development activities of these out-licensed products. In 2004, we out-licensed rFactor XIII and IL-20 to Novo Nordisk, and FGF-18 and IL-22RA to Serono. We believe that both of these companies have the infrastructure and expertise to capture and maximize the market value of these product candidates.

Patents and Proprietary Rights

We seek appropriate patent protection for our proprietary technologies by filing patent applications in the United States. We have more than 290 unexpired issued or allowed United States patents, and over 250 pending United States patent applications. When appropriate, we also seek foreign patent protection and to date have more than 700 issued or allowed foreign patents.

Our success will depend in large part on our ability to:

• obtain patent and other proprietary protection for the genes, proteins and other inventions that we discover;

• enforce and defend patents once obtained;

• operate without infringing the patents and proprietary rights of third parties; and

• preserve our trade secrets and confidential information.

Our patents and patent applications are directed to composition of matter, methods of use and enabling technologies. Although we believe our patents and patent applications provide a competitive advantage, the patent protection available for genes and therapeutic protein-based products is highly uncertain and involves complex legal and factual questions. No clear policy has emerged regarding the breadth of patents in this area. The law is evolving concerning the scope of patent protection for partial gene sequences, full-length genes and their corresponding proteins. Also, there is substantial uncertainty regarding patent protection for genes without

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known function or correlation with specific diseases. Social and political opposition to patents on genes may lead to narrower patent protection, or narrower claim interpretation, for genes, their corresponding proteins and inventions related to their use and manufacture. Patent protection relating to genes and therapeutic protein-based products is also subject to a great deal of uncertainty outside the United States, and patent laws are currently evolving in many countries. Changes in, or different interpretations of, patent laws in the United States and other countries may result in our inability to obtain patents covering the genes or proteins we discover or to enforce patents that have been issued to us, and may allow others to use our discoveries to develop and commercialize therapeutic protein-based products.

We apply for patents covering our discoveries and technologies as we deem appropriate. However, we may fail to apply for patents on important discoveries or technologies in a timely fashion or at all. Also, our pending patent applications may not result in the issuance of any patents. These applications may not be sufficient to meet the statutory requirements for patentability, and therefore we may be unable to obtain enforceable patents covering the related discoveries or technologies we may want to commercialize. In addition, because patent applications in the United States are generally maintained in secrecy for eighteen months after they are filed, we may learn that other parties may have filed patent applications on genes or their corresponding proteins before we filed applications covering the same genes or proteins, and we may not be the first to discover these genes or proteins. Any patent applications filed by third parties may prevail over our patent applications or may result in patents that issue alongside patents issued to us, leading to uncertainty over the scope of the patents or the freedom to practice the claimed inventions.

Although we have a number of issued patents, the discoveries or technologies covered by these patents may not have any therapeutic or commercial value. Also, issued patents may not provide commercially meaningful protection against competitors. Other parties may be able to design around our issued patents or independently develop products having effects similar or identical to our patented product candidates. Some companies are currently attempting to develop therapeutic protein-based products substantially equivalent to products patented by other parties by altering the amino acid sequence within the therapeutic protein-based product and declaring the altered product a new product. It may be easier to develop substantially equivalent versions of therapeutic protein-based products such as monoclonal antibodies and soluble receptors than it is to develop substantially equivalent versions of the proteins with which they interact because there is often more than one antibody or receptor that has the same therapeutic effect. Consequently, any existing or future patents we have that cover monoclonal antibodies or soluble receptors may not provide any meaningful protection against competitors. In addition, the scope of our patents is subject to considerable uncertainty and competitors or other parties may obtain similar patents of uncertain scope. For example, other parties may discover uses for genes or proteins different from the uses covered in our patents, and these other uses may be separately patentable. If another party holds a patent on the use of a gene or protein, then even if we hold the patent covering the composition of matter of the gene or protein itself, that other party could prevent us from promoting and selling any product directed to such use. Also, other parties may have patents covering the composition of matter of genes or proteins for which we have patents covering only methods of use or methods of manufacture of these genes or proteins. Furthermore, the patents we hold relating to recombinant human proteins, such as our patents covering rhThrombin, may not prevent competitors from developing, manufacturing or selling other versions of these proteins. Moreover, although we hold patents relating to the manufacture of recombinant human thrombin, we have limited composition of matter patent protection covering thrombin. Accordingly, we may not be able to prevent other parties from commercializing competing forms of recombinant human thrombin or from manufacturing thrombin using a different method.

Third parties may infringe our patents or may initiate proceedings challenging the validity or enforceability of our patents. The issuance of a patent is not conclusive as to its validity or enforceability. Challenges raised in patent infringement litigation we initiate or in proceedings initiated by third parties may result in determinations that our patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations. In the event of any such determinations, third parties may be able to use the discoveries or technologies claimed in our patents without paying licensing fees or royalties to us, which could significantly diminish the value of

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these discoveries or technologies. Because third parties may have patents that block or dominate our commercialization activities, we may be enjoined from pursuing research, development or commercialization of potential products or may be required to obtain licenses, if available, to the third-party patents or to develop or obtain alternative technology. Responding to challenges initiated by third parties may require significant expenditures and divert the attention of our management and key personnel from other business concerns. In addition, enforcing our patents against third parties may require significant expenditures regardless of the outcome of such efforts.

In addition, third parties may independently develop intellectual property similar to our patented intellectual property, which could result in, among other things, interference proceedings in the United States Patent and Trademark Office to determine priority of invention. An interference proceeding is an administrative proceeding to determine which party was first to invent the contested subject matter. Responding to interference proceedings or other challenges initiated by third parties may require significant expenditures and divert the attention of our management and key personnel from other business concerns.

Third parties may claim that our potential products, processes or related technologies infringe their patents. Patent litigation is very common in the biopharmaceutical industry, and the risk of infringement claims is likely to increase as the industry continues to expand and as other companies obtain more patents and increase their efforts to discover genes and to develop proteins. Any patent infringement claims that might be brought against us may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, if successfully asserted against us, require us to pay substantial damages. In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a patent covering a third party’s intellectual property unless that party grants us rights to use its intellectual property. We may be unable to obtain these rights on terms acceptable to us, if at all. Even if we are able to obtain rights to a third party’s patented intellectual property, these rights may be nonexclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize our potential products or may have to cease some of our business operations as a result of patent infringement claims.

In addition to our patented intellectual property, we also rely on unpatented technology, trade secrets and confidential information, including our genetic sequence database and our bioinformatics algorithms. Our policy is to require our employees, consultants and advisors to execute a confidentiality and proprietary information agreement before beginning their employment, consulting or advisory relationship with us. These agreements generally provide that the individual must keep confidential and not disclose to other parties any confidential information developed or learned by the individual during the course of the individual’s relationship with us except in limited circumstances. These agreements also generally provide that we shall own all inventions conceived by the individual in the course of rendering services to us. The agreements may not provide effective protection of our technology or confidential information or, in the event of unauthorized use or disclosure, may not provide adequate remedies.

As part of our business strategy, we work with third parties in our research and development activities. Accordingly, disputes may arise about inventorship and corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensors, scientific collaborators and consultants. In addition, other parties may circumvent any proprietary protection we do have. These parties may independently develop equivalent technologies or independently gain access to and disclose substantially equivalent information, and confidentially agreements and material transfer agreements we have entered into with them may not provide us with effective protection.

Government Regulation

Regulation by government authorities in the United States, Europe, Japan and other countries is a significant consideration in our ongoing research and product development activities and in the manufacture and marketing of our potential products. The FDA and comparable regulatory bodies in other countries currently regulate

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therapeutic proteins and related pharmaceutical products as biologics. Biologics are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the collection, testing, manufacture, safety, efficacy, potency, labeling, storage, record keeping, advertising, promotion, sale and distribution of the products. The time required for completing testing and obtaining approvals of our product candidates is uncertain but will take several years. Any delay in testing may hinder product development. In addition, we may encounter delays in product development or rejections of product applications due to changes in FDA or foreign regulatory policies during the period of product development and testing. Failure to comply with regulatory requirements may subject us to, among other things, civil penalties and criminal prosecution; restrictions on product development and production; suspension, delay or withdrawal of approvals; and the seizure or recall of products. The lengthy process of obtaining regulatory approvals and ensuring compliance with appropriate statutes and regulations requires the expenditure of substantial resources. Any delay or failure, by us or our corporate partners, to obtain regulatory approvals could adversely affect our ability to commercialize product candidates, receive royalty payments and generate sales revenue.

The nature and extent of the governmental pre-market review process for our potential products will vary, depending on the regulatory categorization of particular products. The necessary steps before a new biological product may be marketed in the United States ordinarily include:

• nonclinical laboratory and animal tests;

• compliance with product manufacturing requirements including, but not limited to, current GMP regulations;

• submission to the FDA of an investigational new drug (IND) application, which must become effective before clinical trials may commence;

• completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use;

• submission to the FDA of a biologics license application; and

• FDA review and approval of the biologics license application prior to any commercial sale or shipment of the product.

Nonclinical tests include laboratory evaluation of the product, as well as animal studies to assess the potential safety concerns and efficacy of the product. Nonclinical safety tests must be conducted by laboratories that comply with current Good Laboratory Practices regulations. The results of nonclinical tests, together with extensive manufacturing information, analytical data and proposed clinical trial protocols, are submitted to the FDA as part of an IND application, which must become effective before the initiation of clinical trials. The IND application will automatically become effective 30 days after receipt by the FDA unless the FDA indicates prior to the end of such 30-day period that the application does not contain sufficient information to permit initiation of the clinical studies. If the FDA raises any concerns related to the clinical program, it is possible that these concerns will not be resolved quickly, if at all. In addition, the FDA may impose a clinical hold on a proposed or ongoing clinical trial if, for example, safety concerns arise, in which case the trial cannot commence or recommence without FDA authorization under terms sanctioned by the agency.

Clinical trials involve the administration of the product to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with current Good Clinical Practices regulations under protocols that detail the objectives of the trial, inclusion and exclusion criteria, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Protocols for each phase of the clinical trials are submitted to the FDA as an amendment to the IND application. Further, each clinical trial must be reviewed and approved by an independent institutional review board at each institution. The institutional review board will consider, among other things, ethical factors, the safety of human subjects and the possibility of liability of the institution conducting the trial. An institutional review board may require changes in a protocol, and the submission of an IND application does not guarantee that a trial will be initiated or completed.

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Clinical trials generally are conducted in three sequential phases that may overlap. In Phase 1, the initial product is administered to healthy human subjects or patients, or both, to assess safety, metabolism, pharmacokinetics and pharmacological actions associated with increasing doses. Phase 2 usually involves trials in a limited patient population to evaluate the efficacy of the potential product for specific, targeted indications, to determine dosage tolerance and optimum dosage, and to further identify possible adverse reactions and safety risks. If a compound appears to be effective and to have an acceptable safety profile in Phase 2 evaluations, Phase 3 trials may be undertaken to evaluate further clinical efficacy in comparison to standard therapies, generally within a broader patient population at geographically dispersed clinical sites. Phase 3 protocols are reviewed with the FDA to establish endpoints and data handling parameters. Phase 1, Phase 2 or Phase 3 testing may not be completed successfully within any specific period of time, if at all, with respect to any of our potential products. Furthermore, we, an institutional review board, the FDA or other regulatory bodies may suspend a clinical trial at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of pharmaceutical development, nonclinical studies and clinical trials are submitted to the FDA in the form of a biologics license application for approval of the manufacture, marketing and commercial shipment of the biological product. The biologics license application contains extensive manufacturing information, and each manufacturing facility must be inspected and approved by the FDA before a biologics license application can be approved. The testing and approval process is likely to require substantial time, effort and resources, and necessary approvals may not be granted on a timely basis, if at all. The FDA may deny a biologics license application if applicable regulatory criteria or clinical endpoints have not been met. The FDA may also require additional testing of the product or other information, or require post-market testing and surveillance to monitor the safety or efficacy of the product. In addition, after marketing approval is granted, the FDA may require post-marketing clinical trials, which typically entail extensive patient monitoring and may result in restricted marketing of an approved product for an extended period of time.

Some of our product candidates may qualify as orphan drugs under the Orphan Drug Act of 1983. This act generally provides incentives to manufacturers who undertake development and marketing of products to treat relatively rare diseases, defined as those diseases that affect fewer than 200,000 persons annually in the United States. A drug that receives orphan drug designation by the FDA and is the first product to receive FDA marketing approval for its product claim is entitled to various advantages, including a seven-year exclusive marketing period in the United States for that product claim. However, any new orphan drug that is under review by the FDA for the same or similar product claim will not be precluded from sale in the United States during the seven-year exclusivity period of the approved orphan drug, if the new product is significantly different or clinically superior to the approved orphan drug. It is possible that none of our product candidates will be designated as an orphan drug by the FDA. Also, if one of our products receives orphan drug designation, that may not have a positive effect on our revenues.

To manufacture and sell our potential products, a domestic or foreign drug manufacturing facility must pass an FDA inspection of the facility. The facilities are inspected for compliance with applicable requirements, including current Good Manufacturing Practice (cGMP) guidelines and must submit to continued periodic inspection by the FDA. In addition, the FDA imposes a number of complex regulations on entities that advertise and promote biologics, including, among others, standards and regulations for direct-to-consumer advertising, off-label promotions, industry-sponsored scientific and educational activities, and promotional activities involving the Internet. The FDA has very broad enforcement authority under the Federal Food, Drug and Cosmetic Act, and failure to abide by these regulations can result in penalties, including the issuance of a warning letter directing us to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, and civil and criminal penalties.

FDA marketing approval is only applicable in the United States. Marketing approval in foreign countries is subject to the regulations of those countries. The approval procedures vary among countries and can involve additional testing. The time required to obtain approval may differ from that required for FDA approval.

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Although there are some centralized procedures for filings in the European Union countries, in general each country has its own procedures and requirements, and compliance with these procedures and requirements may be expensive and time-consuming. Accordingly, there may be substantial delays in obtaining required approvals from foreign regulatory authorities after the relevant applications are filed, if approvals are ultimately received at all.

We are also subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals, and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our work. Government regulations that might result from future legislation or administrative action, including additions or changes to environmental laws, may materially affect our business operations and revenues.

Competition

We compete with others to identify, establish uses for and patent as many genes and their corresponding proteins as possible and to commercialize the products we develop from these genes and proteins. We face competition from other entities using sophisticated bioinformatics technologies to discover genes, including Genentech, Inc., Human Genome Sciences, Inc., Curagen, Inc. and Amgen Inc. We also face competition from entities using more traditional methods to discover genes related to particular diseases, including other large biotechnology and pharmaceutical companies. We expect that competition in our field will continue to be intense.

Research to identify genes is also being conducted by various institutes and government-financed entities in the United States and in foreign countries, including France, Germany, Japan and the United Kingdom, as well as by numerous smaller laboratories associated with universities or other not-for-profit entities. In addition, a number of pharmaceutical and biotechnology companies and government-financed programs are engaged or have announced their intention to engage in areas of research similar to or competitive with our focus on gene discovery, and other entities are likely to enter the field.

We believe the principal competitive factors affecting our markets are:

• rights to develop and commercialize therapeutic protein-based products, including appropriate patent and proprietary rights;

• safety and effectiveness of therapeutic protein-based products;

• the timing and scope of regulatory approvals;

• the cost and availability of these products;

• the availability of appropriate third-party reimbursement programs; and

• the availability of alternative therapeutic products or treatments.

Although we believe that we are well positioned to compete adequately with respect to these factors in the future, our future success is currently difficult to predict because we are an early stage company; our internal product candidates are in early-stage clinical trials. Also, although we believe that our bioinformatics technologies and exploratory biology capabilities provide us with a competitive advantage, any of the companies or other entities we compete with may discover and establish a patent position in one or more genes or proteins that we have identified and designated or considered designating as a product candidate. In addition, any potential products based on genes or proteins we identify will face competition both from companies developing gene- or protein-based products and from companies developing other forms of treatment for diseases that may be caused by, or related to, the genes or proteins we identify. Furthermore, our potential products, if approved and commercialized, may compete against well-established existing therapeutic protein-based products, many of

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which may be currently reimbursed by government health administration authorities, private health insurers and health maintenance organizations. Also, health care professionals and consumers may prefer existing or newly developed products to any product we develop.

There has been much recent public discussion regarding the creation of laws permitting “generic” or “follow on” versions of biologics. The FDA is studying the issue and there is increasing interest from lawmakers and the public. It is possible that laws will change to permit the approval of “generic” biologics requiring less than full clinical trials. As a result, we could face greater competition in the marketplace.

Employees

As of December 31, 2004, we had 410 full-time employees, approximately 310 of whom are dedicated to research and development. Each of our employees has signed a confidentiality agreement, and no employees are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be good.

Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price

Risks Related to Our Business

We have limited experience in developing products.

We have not yet developed or commercialized any products on our own. Our contributions to the discovery or development of certain therapeutic proteins currently on the market do not indicate that we will be able to successfully develop products alone. Our work relating to these marketed products generally did not include clinical trials or manufacturing, and we did not participate in marketing or other late-stage development or commercialization activities. We have limited experience with product development activities and may not be successful in developing or commercializing any products.

Any failure or delay in commencing or completing clinical trials for product candidates could severely harm our business.

The successful commercialization of any product candidates will depend on regulatory approval in each market in which our collaborators, our licensees or we intend to market the product candidates. Each of our product candidates must undergo extensive nonclinical studies and clinical trials as a condition to regulatory approval. Nonclinical studies and clinical trials are time-consuming and expensive and together take several years to complete, and to date we have not completed the clinical testing of any product candidate on our own. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:

• our inability or the inability of our collaborators or licensees to manufacture or obtain from third parties materials sufficient for use in nonclinical studies and clinical trials;

• delays in patient enrollment and variability in the number and types of patients available for clinical trials;

• difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

• ineffectiveness of product candidates during the clinical trials;

• unforeseen safety issues or side effects; and

• governmental or regulatory delays.

It is possible that none of our product candidates, whether developed on our own, with collaborators or by licensees, will complete clinical trials in any of the markets in which we, our collaborators or licensees intend to sell those product candidates. Accordingly, our collaborators, our licensees or we may not receive the regulatory

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approvals needed to market our product candidates in any markets. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for our product candidates could severely harm our business.

Clinical trials may fail to demonstrate the safety and effectiveness of our product candidates, which could prevent or significantly delay their regulatory approval.

Clinical trials involving our product candidates may reveal that those candidates are ineffective, have unacceptable toxicity or have other unacceptable side effects. In addition, data obtained from tests are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. Likewise, the results of preliminary studies do not predict clinical success, and larger and later-stage clinical trials may not produce the same results as earlier-stage trials. Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials. In addition, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts for these product candidates. For example, in 2004, Celltech Group plc discontinued development of platelet-derived growth factor receptor antibody, a product candidate that Celltech licensed from us. Celltech concluded that the Phase 2 clinical trial results did not justify further development of the product candidate.

We may be unable to satisfy the rigorous government regulations relating to the development and commercialization of our product candidates.

Any failure to receive the regulatory approvals necessary to commercialize our product candidates could severely harm our business. Our product candidates are subject to extensive and rigorous government regulation. The FDA regulates, among other things, the collection, testing, manufacturing, safety, efficacy, potency, labeling, storage, record keeping, advertising, promotion, sale and distribution of therapeutic products. If our potential products are marketed abroad, they will also be subject to extensive regulation by foreign governments. None of our product candidates has been approved for sale in the United States or any foreign market, and we have only limited experience in filing and pursuing applications necessary to gain regulatory approvals.

The regulatory review and approval process, which includes nonclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain. Securing FDA approval requires the submission of extensive nonclinical and clinical data and supporting information to the FDA for each indication to establish the product candidate’s safety and effectiveness. The approval process typically takes many years to complete and may involve ongoing requirements for post-marketing studies. In addition, we may not achieve FDA approval of a product candidate even if we have met our internal safety and efficacy criteria and completed clinical trials. Also, any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn. Government regulation may result in:

• prohibitions or significant delays in the marketing of potential products;

• discontinuation of marketing of potential products; and

• limitations of the indicated uses for which potential products may be marketed.

If we fail to comply with the laws and regulations pertaining to our business, we may be subject to sanctions, including the temporary or permanent suspension of operations, product recalls, marketing restrictions and civil and criminal penalties.

Because we currently have only limited capabilities to manufacture materials for clinical trials and no capability for commercial scale manufacturing, we will have to rely on third parties to manufacture our potential products, and we may be unable to obtain required quantities in a timely manner or on acceptable terms, if at all.

We currently do not have the manufacturing facilities necessary to produce materials for commercial sale, and we have only limited capabilities to produce materials for clinical trials. We intend to rely on collaborators

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and third-party contract manufacturers and suppliers to produce or provide the quantities of drug materials needed for some of our clinical trials and commercialization of our potential products. We will have to rely on these manufacturers and suppliers to deliver materials on a timely basis and to comply with regulatory requirements, including current GMP regulations enforced by the FDA through its facilities inspection program. These manufacturers and suppliers may not be able to meet our needs with respect to timing, quantity or quality of materials, and may fail to satisfy applicable regulatory requirements with respect to the manufacturing of these materials. In addition, agreements that we have entered into with third-party contract manufacturers in the past contain, and any contracts that we enter into with third-party contract manufacturers in the future may contain, limitations on the quantities of drug materials that such manufacturers will produce, and we may not be able to increase or decrease the supply of drug materials based on unanticipated changes in demand. If we are unable to contract for a sufficient supply of needed materials on acceptable terms, or if we encounter delays in the delivery of materials from, or difficulties in our relationships with, manufacturers, our IND-enabling nonclinical studies and clinical trials may be delayed. Delays in nonclinical studies could postpone the filing of IND applications or the initiation of clinical trials, and delays in clinical trials could postpone the subsequent submission of product candidates for regulatory approval and market introduction.

We may not be successful in developing internal manufacturing capabilities or complying with applicable manufacturing regulations.

We completed construction in 2004 of an expanded research and development facility that includes dedicated pilot-scale GMP manufacturing suites for the production of therapeutic proteins for use in nonclinical and clinical testing. We may be unable to establish the internal manufacturing capabilities necessary to develop our potential products. Therapeutic proteins are often more difficult and expensive to manufacture than other classes of drugs, and the manufacture of therapeutic proteins may not be commercially feasible. Also, we will be required to adhere to rigorous GMP regulations in the manufacture of therapeutic proteins. We will need to hire and train employees to staff our pilot-scale GMP manufacturing suites. These initial manufacturing suites will not provide us with the capability to produce drug materials for commercial sale. To develop this capability we would need to acquire larger manufacturing facilities. If any of our future facilities cannot pass a pre-approval plant inspection, the FDA marketing approval of our product candidates may not be granted. In complying with these regulations and any applicable foreign regulatory requirements, we will be obligated to expend time, money and effort in production, record keeping and quality assurance to assure that our potential products meet applicable specifications and other requirements. Any failure to comply with these requirements may subject us to regulatory sanctions and delay or interrupt our development and commercialization efforts.

In addition, some of the inventions licensed to us were initially developed at universities or other not-for-profit institutions with funding support from an agency of the United States government. In accordance with federal law, our licensees or we may be required to manufacture products covered by patents in those inventions in the United States, unless we can obtain a waiver from the government on the basis that such domestic manufacture is not commercially feasible. We have not attempted to secure any such waivers from the government, and do not know if they would be available if sought. If we are not able to obtain such waivers on a timely basis, we might be forced to seek manufacturing arrangements at higher prices, or on otherwise less favorable terms, than might be available to us in the absence of this domestic manufacturing requirement.

Because we will depend on third parties to conduct laboratory tests and clinical trials, we may encounter delays in or lose some control over our efforts to develop product candidates.

We will rely on third parties to design and conduct laboratory tests and clinical trials for us. If we are unable to obtain these services on acceptable terms, we may not be able to complete our product development efforts in a timely manner. Also, because we will rely on third parties for laboratory tests and clinical trials, we may lose some control over these activities or be unable to manage them appropriately, or may become too dependent on these parties. These third parties may not complete the tests or trials on schedule or when we request, and the tests or trials may be methodologically flawed or otherwise defective. Any delays or difficulties associated with third-party laboratory tests or clinical trials may delay the development of our product candidates.

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Because we currently have no sales capabilities and limited marketing capabilities, we may be unable to successfully commercialize our potential products.

We currently have no direct sales capabilities and limited marketing capabilities. We expect that in the future we will rely on collaborators or other third parties to market products that we may develop. These third parties may not be successful in marketing our potential products, and we will have little or no control over their marketing efforts. In addition, we may co-promote our potential products or retain marketing rights in North America to these products. If we decide to market products directly, we will need to incur significant additional expenses and commit significant additional management resources to develop effective sales and marketing capabilities. We may not be able to establish these capabilities despite these additional expenditures. In addition, co-promotion or other marketing arrangements with third parties to commercialize potential products could significantly limit the revenues we derive from these products.

Our bioinformatics-based discovery strategy is unproven, and genes or proteins we have discovered may have no commercial value.

We do not know whether our bioinformatics-based therapeutic protein discovery strategy will yield commercially valuable products because we are in the early stages of development. For most of our corporate existence, we relied on exploratory biology to study particular diseases and medical conditions and to find potential treatments. We shifted our emphasis to bioinformatics-based discovery in the mid 1990s. Bioinformatics is the use of high-powered computers, software and analytical tools to interpret DNA sequence data and to assist in identifying those genes and proteins that are likely to play a meaningful role in human health. We use bioinformatics to discover genes and their corresponding proteins in genomic databases, with the goal of developing therapeutic protein-based products based on these discoveries. We have focused our efforts on certain key protein categories, some of which have yielded successful products in the past. Prior successes of other companies in commercializing protein-based products derived from these categories provide no indication that we will be able to establish the medical utility of any therapeutic proteins within these categories beyond those that have already been identified. In addition, some of the protein categories on which we concentrate have not yielded any successful therapeutic protein products or late-stage clinical trial candidates. Research and development efforts we expend on these categories may prove ineffective and may detract from our efforts to discover and develop therapeutic proteins within those categories that have shown more promise. Also, by focusing on specific categories of proteins, we may overlook other therapeutic proteins not contained in these categories that ultimately will be successfully commercialized by others. We have only recently begun clinical testing of our first product candidates discovered through our bioinformatics-based efforts, and we are not aware of any other company that has successfully commercialized products derived from bioinformatics-based research. Our bioinformatics-based strategy may not result in the successful development or commercialization of any products.

The availability of novel genomic data continues to decrease, which negatively affects our ability to discover entirely novel therapeutic proteins.

We have relied on the generation of new genomic data for the discovery of novel genes and proteins. Because the flow of genomic data has slowed, it has become increasingly difficult for us to discover novel genes through the analysis of this data. This decrease in the rate of generation of novel sequence data has impaired our ability to discover entirely novel therapeutic proteins, and we will need to continue to develop approaches to maintain the flow of genes and proteins into our research and development pipeline.

Our patent applications may not result in issued patents, and our competitors may commercialize the discoveries we attempt to patent.

Our pending patent applications covering genes and their corresponding proteins may not result in the issuance of any patents. These applications may not be sufficient to meet the statutory requirements for patentability, and therefore we may be unable to obtain enforceable patents covering the related therapeutic

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protein-based product candidates we may want to commercialize. In addition, other parties have filed or may file patent applications that cover genes, proteins or related discoveries or technologies similar or identical to those covered in our patent applications. Because patent applications in the United States until recently have been maintained in secrecy until a patent issues, other parties may have filed patent applications on genes or their corresponding proteins before we filed applications covering the same genes or proteins, and we may not be the first to discover these genes or proteins. Any patent applications filed by third parties may prevail over our patent applications or may result in patents that issue alongside patents issued to us, leading to uncertainty over the scope of the patents or the freedom to practice with respect to the claimed inventions.

Third parties may infringe our patents or challenge their validity or enforceability.

Third parties may infringe our patents or may initiate proceedings challenging the scope, validity or enforceability of our patents. The issuance of a patent is not conclusive as to its scope, validity or enforceability. Challenges raised in patent infringement litigation we initiate or in proceedings initiated by third parties may result in determinations that our patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations. In the event of any such determinations, third parties may be able to use the discoveries or technologies claimed or described in our patents without paying licensing fees or royalties to us, which could significantly diminish the value of our intellectual property. In addition, enforcing our patents against third parties may require significant expenditures regardless of the outcome of such efforts.

Furthermore, third parties may independently develop intellectual property similar to our patented intellectual property, which could result in, among other things, interference proceedings in the United States Patent and Trademark Office to determine priority of discovery or invention. Interference proceedings could result in the loss of or significant limitations on patent protection for our discoveries or technologies. Responding to interference proceedings or other challenges initiated by third parties may require significant expenditures and divert the attention of our management and key personnel from other business concerns.

We may be subject to patent infringement claims, which could result in substantial costs and liability and prevent us from commercializing our potential products.

Third parties may claim that our potential products or related technologies infringe their patents. Patent litigation is very common in the biopharmaceutical industry, and the risk of infringement claims is likely to increase as the industry continues to expand and as other companies obtain more patents and increase their efforts to discover genes and to develop proteins. Any patent infringement claims or similar legal impediments that might be brought against us may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, if successfully asserted against us, require us to pay substantial damages. In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a patent covering a third party’s intellectual property unless that party grants us rights to use its intellectual property. We may be unable to obtain these rights on terms acceptable to us, if at all. Even if we are able to obtain rights to a third party’s patented intellectual property, these rights may be non-exclusive, and therefore our competitors may be able to obtain access to the same intellectual property. Ultimately, we may be unable to commercialize our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.

Issued patents may not provide us with any competitive advantage or provide meaningful protection against competitors.

Issued patents may not provide us with any competitive advantage. Although we have a number of issued patents, the discoveries or technologies covered by these patents may not have any value. In addition, issued patents may not provide commercially meaningful protection against competitors. Other parties may be able to design around our issued patents or independently develop products having effects similar or identical to our patented product candidates. Some companies are currently attempting to develop therapeutic protein-based

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products substantially equivalent to products patented by other parties by altering the amino acid sequence within the therapeutic protein-based product and declaring the altered product a new product. It may be easier to develop substantially equivalent versions of therapeutic protein-based products such as monoclonal antibodies and soluble receptors than it is to develop substantially equivalent versions of the proteins with which they interact because there is often more than one antibody or receptor that has the same therapeutic effect. Consequently, any existing or future patents we have that cover monoclonal antibodies or soluble receptors may not provide any meaningful protection against competitors. In addition, the scope of our patents is subject to considerable uncertainty and competitors or other parties may obtain similar patents of uncertain scope. For example, other parties may discover uses for genes or proteins different from the uses covered in our patents, and these other uses may be separately patentable. If another party holds a patent on the use or manufacture of a gene or protein, then even if we hold the patent covering the composition of matter of the gene or protein itself, that other party could prevent us from selling any product directed to such use or using the manufacturing method covered by the other party’s patent. Also, other parties may have patents covering the composition of matter of genes or proteins for which we have patents covering only methods of use or methods of manufacture of these genes or proteins. Furthermore, the patents we hold relating to recombinant human proteins, such as our patents covering rhThrombin, may not prevent competitors from developing, manufacturing or selling other versions of these proteins. Moreover, although we hold patents relating to the manufacture of recombinant human thrombin, we have limited composition of matter patent protection covering thrombin. Accordingly, we may not be able to prevent other parties from commercializing competing forms of recombinant human thrombin or thrombin made through different manufacturing methods.

The patent field relating to therapeutic protein-based products is subject to a great deal of uncertainty, and if patent laws or the interpretation of patent laws change, our competitors may be able to develop and commercialize products based on proteins that we discovered.

The patent protection available for genes, proteins and therapeutic protein-based products is highly uncertain and involves complex legal and factual questions that determine who has the right to develop a particular product. No consistent case law has emerged regarding the breadth of patents in this area. There have been, and continue to be, policy discussions concerning the scope of patent protection that should be awarded to genes and their corresponding proteins. Social and political opposition to patents on genes may lead to narrower patent protection for genes and their corresponding proteins. Patent protection relating to genes and therapeutic protein-based products is also subject to a great deal of uncertainty outside the United States, and patent laws are evolving and undergoing revision in many countries. Changes in, or different interpretations of, patent laws in the United States and other countries may result in our inability to obtain patent protection for genes or proteins we discover or to enforce patents that have been issued to us, and may allow others to use our discoveries to develop and commercialize therapeutic protein-based products.

We expect to incur significant expenses in applying for patent protection and prosecuting our patent applications.

We may fail to secure meaningful patent protection relating to any of our existing or future product candidates, discoveries or technologies despite the expenditure of considerable resources. Our success depends significantly on the establishment of patent protection for the genes, proteins and related technologies we discover or invent. Consequently, we intend to continue our substantial efforts in applying for patent protection and prosecuting pending and future patent applications. These efforts have historically required the expenditure of considerable time and money, and we expect that they will continue to require significant expenditures. If future changes in United States or foreign patent laws complicate or hinder our efforts to obtain patent protection, the costs associated with patent prosecution may increase significantly.

We may be unable to protect our unpatented proprietary technology and information.

In addition to our patented intellectual property, we also rely on unpatented technology, trade secrets and confidential information. We may not be able to effectively protect our rights to this technology or information.

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Other parties may independently develop equivalent technologies or independently gain access to and disclose substantially equivalent information. Disputes may arise about inventorship and corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensees, scientific and academic collaborators and consultants. In addition, confidentiality agreements and material transfer agreements we have entered into with these parties and with employees and advisors may not provide effective protection of our technology or information or, in the event of unauthorized use or disclosure, may not provide adequate remedies.

Our plan to use collaborations to leverage our capabilities may not be successful.

As part of our business strategy, we have entered into collaboration arrangements with strategic partners to co-develop product candidates and will continue to evaluate similar opportunities. For our collaboration efforts to be successful, we must identify partners whose competencies complement ours. We must also successfully enter into collaboration agreements with them on terms attractive to us and integrate and coordinate their resources and capabilities with our own. We may be unsuccessful in entering into collaboration agreements with acceptable partners or negotiating favorable terms in these agreements. Also, we may be unsuccessful in integrating the resources or capabilities of these collaborators. In addition, our collaborators may prove difficult to work with or less skilled than we originally expected. If we are unsuccessful in our collaborative efforts, our ability to develop and market product candidates could be severely limited.

We may not be able to generate any revenue from product candidates developed by collaborators or licensees if they are unable to successfully develop those candidates.

We may be unable to derive any value from product candidates developed by collaborators or licensees. Our ability to generate revenues from existing or future collaborations and license arrangements is subject to numerous risks, including:

• the possibility that our collaborators or licensees lack sufficient financial, technical or other capabilities to develop these product candidates;

• the length of time that it takes for our collaborators or licensees to achieve various clinical development and regulatory approval milestones;

• the inability of collaborators or licensees to successfully address any regulatory or technical challenges they may encounter; and

• the possibility that these product candidates may not be effective or may prove to have undesirable side effects, unacceptable toxicities or other characteristics that preclude regulatory approval or prevent or limit commercial use.

Novo Nordisk and Serono have substantial rights to license proteins we discover, which may limit our ability to pursue other collaboration or licensing arrangements or maximize the benefit from our discoveries.

As part of our separation from Novo Nordisk, we granted Novo Nordisk options to license certain rights to several of our potential therapeutic proteins under an option agreement. Although we generally retain North American rights to the proteins licensed by Novo Nordisk pursuant to this agreement, Novo Nordisk has rights to these proteins in the rest of the world. In addition, under this agreement Novo Nordisk has worldwide rights, including rights in North America, to any licensed proteins that act to generate, expand or prevent the death of insulin-producing beta cells. Novo Nordisk has already licensed five proteins, and it may license other proteins in the future pursuant to this agreement.

In 2004 we entered into a strategic alliance agreement with Serono, pursuant to which we granted Serono options to license certain rights to proteins in our research pipeline. Although we retained the rights to co-develop and co-commercialize the licensed proteins in the United States, Serono has at least half interest in

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the United States rights and full rights to these proteins outside the United States, subject to the rights of Novo Nordisk under the above described option agreement. Serono has already licensed three proteins as part of the strategic alliance, for which one we elected to pursue co-development, and it may license other proteins in the future pursuant to this agreement.

Our agreements with Novo Nordisk and Serono may:

• preclude or delay opportunities to seek other collaborators for our product candidates, due to the fact that we cannot explore other collaboration opportunities relating to proteins subject to the agreements until after Novo Nordisk and/or Serono has decided not to exercise an option with respect to the protein;

• limit the financial benefits we may derive from product candidates by allowing Novo Nordisk and/or Serono to license proteins in exchange for predetermined payments and royalties and with predetermined cost-sharing arrangements, which payments and royalty rates may be less than, and which cost-sharing arrangements may be less favorable to us than, terms we might otherwise obtain in collaborative or licensing arrangements with other parties;

• result in Novo Nordisk and/or Serono licensing proteins with the most therapeutic and commercial potential, leaving us with fewer or less desirable product candidates to develop on our own or with other potential collaborators; and

• prevent us from collaborating with or licensing a product candidate to another company that, by virtue of its particular skills and capabilities, may be a more desirable collaborator or licensing partner for that particular product candidate than Novo Nordisk or Serono.

Environmental and health and safety laws may result in liabilities, expenses and restrictions on our operations.

State and federal laws regarding environmental protection, hazardous substances and human health and safety may adversely affect our business. The use of hazardous substances in our operations exposes us to the risk of accidental releases. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines. Future changes to environmental and health and safety laws could cause us to incur additional expenses or restrict our operations. In addition, the site where our principal headquarters and facilities are located has been listed as a contaminated property by the State of Washington due to its previous use by the City of Seattle as an electricity generating plant. The City of Seattle has agreed to defend us against and indemnify us for any claims that arise from this pre-existing contamination, except to the extent that we caused the claim through our negligence or intentional fault, or to the extent that we contributed to the contamination that is the subject of the claim, caused an increase in the clean-up costs or failed to comply with our obligations under our agreement with the City of Seattle. This indemnity may be insufficient and we may be subject to environmental liabilities or be prohibited from using or occupying some or all of the property as a result of environmental claims.

Financial and Market Risks

We anticipate incurring additional losses and may not achieve profitability.

As of December 31, 2004, we had an accumulated deficit of $289.8 million. We expect to continue to incur increasing losses over the next several years, and we may never become profitable. We are in the early stages of development as an independent company, and it will be a number of years, if ever, before we generate any revenues from our own product sales. Our revenues from existing collaborative and licensing arrangements are insufficient to cover our operating expenses, and we may never generate revenues from these or any future arrangements sufficient to cover these expenses. In addition, we will continue to incur substantial expenses relating to our research and development efforts. We anticipate that these expenses will increase as we focus on the laboratory tests and clinical trials required to obtain the regulatory approvals necessary for the sale of any

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products. The development of our product candidates will require significant further research, development, testing and regulatory approvals. We may not be able to complete such development or succeed in developing products that will generate revenues that will justify the costs of development.

If we do not obtain substantial additional funding on acceptable terms, we may not be able to continue to grow our business or generate enough revenue to recover our investment in research and development.

Our business does not currently generate the cash needed to finance our operations. We anticipate that we will continue to expend substantial funds on our research and development programs. We expect that these expenditures will increase significantly over the next several years as we continue to hire additional employees and expand our clinical development activities. We will need to seek additional funding through public or private financings, including equity financings, and through other arrangements, including collaborative and licensing arrangements. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements sooner than we expect. However, financing may be unavailable when we need it or may not be available on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders will be diluted, and these securities may have rights superior to those of our common stock. If we are unable to raise additional funds when we need them, we may be required to delay, scale back or eliminate expenditures for some of our research or development programs. We may also be required to grant rights to third parties to develop and market product candidates that we would prefer to develop and market internally, and such rights may be granted on terms that are not favorable to us. If we were required to grant such rights, the ultimate value of these product candidates to us would be reduced.

Our operating results are subject to fluctuations that may cause our stock price to decline.

Our operating results have fluctuated in the past and are likely to continue to do so in the future. Our revenues are unpredictable and may fluctuate due to the timing of licensing fees or the achievement of milestones under new or existing licensing and collaborative arrangements. In addition, our expenses may fluctuate from quarter to quarter due to the timing of expenses, particularly with respect to contract manufacturing and clinical and nonclinical testing. We believe that period-to-period comparisons of our past operating results are not good indicators of our future performance and should not be relied on to predict our future operating results. For example, for periods prior to 2000, most of our revenues represented payments received from Novo Nordisk for research and development activities we conducted on its behalf. This arrangement terminated in 2000 in connection with our separation from Novo Nordisk. It is possible that in the future our operating results in a particular quarter or quarters will not meet the expectations of securities analysts or investors, causing the market price of our common stock to decline.

Risks Related to Our Industry

Many of our competitors have substantially greater capabilities and resources than we do and may be able to develop and commercialize products before we do.

We may be unable to compete successfully against our current or future competitors. We expect that competition in our field will continue to be intense. We face competition from other entities involved in the research and development of therapeutic proteins, including Genentech, Inc., Human Genome Sciences, Inc., Curagen, Inc. and Amgen Inc. We also face competition from entities developing other types of products related to particular diseases, including other biotechnology and pharmaceutical companies. Furthermore, our potential products, if approved and commercialized, may compete against well-established existing therapeutic protein-based products, many of which may be currently reimbursed by government health administration authorities, private health insurers and health maintenance organizations.

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Many of our existing and potential competitors have substantially greater research and product development capabilities and financial, scientific, marketing and human resources than we do. As a result, these competitors may:

• succeed in identifying genes or proteins, or developing therapeutic protein-based products, earlier than we do;

• obtain approvals for products from the FDA or other regulatory agencies more rapidly than we do;

• obtain patents that block or otherwise inhibit our ability to develop and commercialize our product candidates;

• develop treatments or cures that are safer or more effective than those we propose to develop;

• devote greater resources to marketing or selling their products;

• introduce or adapt more quickly to new technologies or scientific advances, which could render our discovery technologies obsolete;

• introduce products that make the continued development of our potential products uneconomical;

• withstand price competition more successfully than we can;

• more effectively negotiate third-party collaborative or licensing arrangements; and

• take advantage of acquisition or other opportunities more readily than we can.

Our product candidates, even if approved by the FDA or foreign regulatory agencies, may not achieve market acceptance among hospitals, insurers or patients.

Our product candidates, even if approved by the FDA or foreign regulatory agencies, may fail to achieve market acceptance, which would impair our ability to become profitable. We believe that market acceptance of our potential products will depend on our ability to provide acceptable evidence of safety, efficacy and limited side effects, our ability to provide these potential products at reasonable prices and the availability of third-party reimbursement for these potential products. In addition, market acceptance depends on the effectiveness of our sales and marketing capabilities. To date, we have no direct sales capabilities and limited marketing capabilities.

If the health care system, reimbursement policies or any other health care related regulations change, the prices of our potential products may fall or our potential sales may decline.

In recent years, officials have made numerous proposals to change the health care system in the United States. These proposals include measures that would limit or prohibit payments for certain medical procedures and treatments or subject the pricing of pharmaceuticals to government control. Government and other third-party payors increasingly have attempted to contain health care costs by limiting both coverage and the level of reimbursement of newly approved health care products. They may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted marketing approval. Governments may adopt future legislative proposals and federal, state or private payors for health care goods and services may take further action to limit payments for health care products and services. In addition, in certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. Any of these factors could limit our ability to successfully commercialize our potential products.

Another factor that may affect the pricing of drugs is the Medicare Prescription Drug Plan legislation—a proposed Congressional action concerning drug reimportation into the United States. This legislation gives additional discretion to the Secretary of Health and Human Services in regards to drug reimportation from foreign countries, including those where drugs are sold at a lower price. If legislation or regulations were passed allowing the reimportation of drugs, a decrease in price for any products we develop may result, leading to a negative impact upon our revenues and prospects for profitability.

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Negative public opinion and increased regulatory scrutiny of genetic and clinical research may limit our ability to conduct our business.

Ethical, social and legal concerns about genetic and clinical research could result in additional regulations restricting or prohibiting some of our activities or the activities of our suppliers and collaborators. In recent years, federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating the biotechnology industry. More restrictive regulations could delay nonclinical studies or future clinical trials, or prevent us from obtaining regulatory approvals or commercializing any products. In addition, animal rights activists may protest our use of animals in research and development and may attempt to disrupt our operations, which could cause us to incur significant expenses and distract our management’s attention from other business concerns.

The failure to attract or retain key management or other personnel could decrease our ability to discover, develop and commercialize potential products.

We depend on our senior executive officers as well as key scientific, management and other personnel. Only a few of our key personnel are bound by employment agreements, and those with employment agreements are bound only for a limited period of time. Further, we have not purchased key-person life insurance policies for any of our executive officers or key personnel. Competition for scientists and other qualified employees is intense among pharmaceutical and biotechnology companies, and the loss of qualified employees, or an inability to attract, retain and motivate the additional highly skilled employees required for the expansion of our activities, could hinder our ability to discover, develop and commercialize potential products.

We may be required to defend lawsuits or pay damages in connection with alleged or actual harm caused by our product candidates.

We face an inherent business risk of exposure to product liability claims in the event that the use of our product candidates is alleged to have resulted in harm to others. This risk exists in clinical trials as well as in commercial distribution. We may incur significant expenses if product liability lawsuits against us are successful. Although we maintain product liability insurance, our coverage may not be adequate to cover such claims.

Risks Related to Ownership of Our Stock

Our stock price may be volatile.

The market price of our common stock may fluctuate significantly in response to many factors beyond our control, including:

• changes in the recommendations of securities analysts or changes in their financial estimates of our operating results;

• failures in meeting performance expectations of securities analysts or investors;

• fluctuations in the valuations of companies perceived by securities analysts or investors to be comparable to us; and

• share price and volume fluctuations attributable to inconsistent trading volume levels of our shares.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In particular, there have been high levels of volatility in the market prices of securities of biotechnology companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to

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securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Certain of our shareholders have significant control of our management and affairs, which they could exercise against other shareholders’ best interests.

Novo Nordisk, together with Warburg Pincus Equity Partners, L.P., beneficially owned an aggregate of approximately 50% of our outstanding common stock as of December 31, 2004. Representatives of these shareholders hold four out of eight seats on our board of directors pursuant to contractual obligations. These shareholders, acting together, have the ability to significantly influence our management and affairs and matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, these shareholders, acting together, may be able to cause a change in control, as well as delay or prevent a change in control. They may also discourage a potential acquirer from making a tender offer or otherwise attempting to effect a change in control, even if such a change in control would benefit our other shareholders.

Provisions in our charter documents could prevent or frustrate any attempts to replace our current board of directors or management by shareholders.

Our articles of incorporation and bylaws contain provisions, such as undesignated preferred stock and prohibitions on cumulative voting in the election of directors, which could make it more difficult for a third party to acquire us without the consent of our board of directors. Also, our articles of incorporation provide for a staggered board, removal of directors only for cause and certain requirements for calling special shareholder meetings. In addition, our bylaws require advance notice of shareholder proposals and nominations and impose restrictions on the persons who may call special shareholder meetings. These provisions may have the effect of preventing or hindering any attempts by our shareholders to replace our current board of directors or management.

Website Access to Our SEC Reports

Our Internet address is www.zymogenetics.com. We make our periodic SEC reports (Form 10-Q and Form 10-K), current reports (Form 8-K) and amendments to these reports available free of charge through our website as soon as reasonably practicable after they are filed electronically with the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by SEC rules.

Item 2.    Properties

We are headquartered in Seattle, Washington, where we lease space in several buildings in close proximity to one another. We lease a total of approximately 235,000 square feet in these buildings, as shown in the following table.

Property	Square Feet	Use	Lease Expiration Dates
Lake Union Steam Plant	106,000	Laboratories and offices	May 2019
Earl Davie Building	98,000	Laboratories, manufacturing and offices	May 2019
1144 Eastlake Building	31,000	Offices	January 2012

In 2004, we completed an expansion of the Earl Davie Building, adding approximately 45,000 square feet of additional laboratory, manufacturing and office space. We own land adjacent to one of the existing buildings,

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which we are holding for potential expansion in the future. In addition, we are aware of available office space in several nearby buildings. We believe that our existing facilities, together with available, planned and potential expansion space, will be adequate to fulfill our needs for the foreseeable future.

Item 3.    Legal Proceedings

None.

Item 4.    Submission Of Matters To A Vote Of Security Holders

No matters were submitted to a vote of our shareholders during the fourth quarter of our fiscal year ended December 31, 2004.

PART II

Item 5.    Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Our common stock began trading on the Nasdaq Stock Market under the symbol ZGEN on February 1, 2002. As of March 1, 2005, we had approximately 50 shareholders of record and 3,500 beneficial holders of our stock. We have never paid cash dividends and do not anticipate paying them in the foreseeable future.

The following table sets forth, for the fiscal periods indicated, the range of high and low closing sales prices of our common stock as quoted on the Nasdaq Stock Market:

	High		Low
Year Ended December 31, 2004
1st Quarter	$	19.02	$	14.52
2nd Quarter		19.00		15.45
3rd Quarter		19.29		12.80
4th Quarter		24.48		17.03
Year Ended December 31, 2003
1st Quarter	$	10.18	$	8.03
2nd Quarter		16.98		9.00
3rd Quarter		16.20		11.36
4th Quarter		16.07		12.10

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Item 6.    Selected Financial Data

The following selected financial data should be read in conjunction with the financial statements and notes to the financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this Form 10-K. The selected Statement of Operations Data for the years ended December 31, 2004, 2003 and 2002 and Balance Sheet Data as of December 31, 2004 and 2003 have been derived from our audited financial statements appearing elsewhere in this Form 10-K. The selected Statement of Operations Data for the years ended December 31, 2001 and 2000 and Balance Sheet Data as of December 31, 2002, 2001, and 2000 have been derived from our audited financial statements that are not included in this Form 10-K. Historical results are not necessarily indicative of future results.

	Years Ended December 31,
	2004			2003			2002			2001			2000
	(in thousands, except per share data)
Statement of Operations Data:
Revenues	$	35,694		$	25,957		$	52,775		$	17,828		$	32,464
Operating expenses:
Research and development(1)		94,287			63,464			61,735			42,557			45,422
General and administrative(2)		19,007			15,843			20,458			15,970			15,984
Noncash stock-based compensation expense		9,295			7,054			7,188			3,507			—
Total operating expenses		122,589			86,361			89,381			62,034			61,406
Loss from operations		(86,895	)		(60,404	)		(36,606	)		(44,206	)		(28,942	)
Other income (expense):
Investment income		4,944			6,519			7,354			7,250			5,417
Interest expense		(6,869	)		(5,622	)		(904	)		(13	)		(848	)
Other, net		64			(64	)		(187	)		—			(111	)
Total other income (expenses)		(1,861	)		833			6,263			7,237			4,458
Loss before provision for income taxes		(88,756	)		(59,571	)		(30,343	)		(36,969	)		(24,484	)
Benefit (provision) for income taxes		—			—			—			90			(5,893	)
Net loss		(88,756	)		(59,571	)		(30,343	)		(36,879	)		(30,377	)
Preferred stock dividend and accretion		—			—			(1,718	)		(20,610	)		(2,903	)
Net loss attributable to common shareholders	$	(88,756	)	$	(59,571	)	$	(32,061	)	$	(57,489	)	$	(33,280	)
Basic and diluted net loss per share	$	(1.64	)	$	(1.26	)	$	(0.75	)	$	(4.85	)	$	(3.38	)
Weighted-average shares used in computing basic and diluted net loss per share		54,157			47,317			42,578			11,846			9,846
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	324,998		$	299,892		$	285,438		$	147,077		$	172,976
Working capital		297,361			287,413			272,236			138,493			166,245
Total assets		412,184			375,909			347,934			205,435			228,637
Mandatorily redeemable convertible preferred stock		—			—			—			260,540			239,930
Total shareholders’ equity (deficit)		278,550			287,915			269,341			(79,402	)		(27,269	)

(1) The years ended December 31, 2004, 2003, 2002, and 2001 exclude noncash stock-based compensation expense of $4,802, $4,284, $4,318, and $2,028, respectively.

(2) The years ended December 31, 2004, 2003, 2002, and 2001 exclude noncash stock-based compensation expense of $4,493, $2,770, $2,870, and $1,479, respectively.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a biopharmaceutical company focused on discovering, developing and commercializing therapeutic protein based products for the treatment of human diseases. The process for taking one of our discoveries to the marketplace is long, complex and very costly. It is difficult to predict the time it will take to commercialize any given product candidate, but it would not be unusual to span ten years or more and cost hundreds of millions of dollars. It is also a business of attrition; it is expected that less than 20% of the proteins entering human clinical trials will actually make it to the marketplace. For the products that do make it, particularly for those that address previously unmet medical needs, the markets can be significant, with a number of successful products selling in excess of $1 billion per year.

An important element of our strategy is that we intend to maintain all or a significant share of the commercial rights to our products in North American markets. As a result, we will be required to pay a significant portion of the development costs for our product candidates. A second important element of our strategy is that we are developing a broad portfolio of product candidates to give our company more opportunities to be successful. We currently have three product candidates in clinical development and expect to add additional proteins to this portfolio in the future. Thus, we are paying a significant portion of development costs for several potential products. Assuming these product candidates progress through clinical development successfully, the cost of clinical trials are expected to increase significantly.

Our most significant financial challenges are to obtain adequate funding to cover the cost of product development, and to control spending and direct it toward product candidates that will create the most value for the Company’s shareholders over the long term. It can be a complex and highly subjective process to establish the appropriate balance between cash conservation and value generation. There are a number of important factors that we consider in addressing these challenges, including the following:

• the nature, timing and magnitude of financing transactions, which would typically involve issuance of equity or equity-based securities;

• the nature and timing of product development collaborations, which would typically provide for funding of a portion of the respective product development costs, as well as bring in near-term potential revenues in the form of upfront fees and milestone payments;

• the breadth of product development programs, i.e., the number of potential disease indications for which a product candidate is tested in clinical trials;

• the number of products in our development portfolio and the decision to move new product candidates into clinical development; and

• periodic assessments of the relative capital requirements, risk and value of each of our product candidates.

We expect that it will be at least four to five years before we can generate enough product-related revenues to reach cash flow breakeven. In the interim, revenues from existing relationships will help to defray our expenses, but additional funding will be required, the amount of which could be significant. We may decide to enter into additional product development collaborations, which would reduce our funding requirements. We may also generate funding through licensing of patents that are not relevant to our product development programs.

It is likely that we will continue to look for opportunities to raise equity capital as a primary means of funding our company over the next several years. The equity markets for biotechnology stocks have tended to experience long cycles during which the sale of equity securities has been extremely difficult. It is not possible to predict the timing or length of these cycles. As a result, most biotechnology companies, including ours, have adopted an opportunistic strategy of raising equity capital when it is available. We believe this strategy is important to minimizing the financial risks to our company and our shareholders.

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Results of Operations

Revenues

Royalties.    We earn royalties on sales of certain products subject to license agreements with Novo Nordisk, our former parent and current owner of approximately 38% of our outstanding common stock, and several other companies. Royalties increased in 2004 and 2003 primarily due to the weakening of the U.S. Dollar versus foreign currencies prominent in certain royalty calculations. We expect underlying sales figures to decrease slightly in 2005 due to patent expiration in certain countries; however royalty revenue for 2005 is expected to be comparable to 2004 as a result of the favorable effect of foreign exchange rate differences. In 2004 and 2003, insulin royalties represented 59% of our total royalty revenues. We have opportunities to earn royalties in the future under other existing license agreements, but we cannot be certain when, or if, products will be sold subject to those licenses.

Option fees.    In all three years presented, we earned an annual option fee of $7.5 million from Novo Nordisk under an option and license agreement, pursuant to which we have given Novo Nordisk an option to license certain rights to proteins that we discover. The initial term of this agreement expired in November 2004; however, Novo Nordisk exercised its right to extend the agreement in 2004 and will pay $7.5 million per year for two additional years. In November 2004 we received the first of the two annual payments, of which $6.5 million is recorded as deferred revenue at December 31, 2004. We will receive the final payment under the agreement in November 2005.

In September 2004, we signed a five-year strategic alliance agreement with Serono under which Serono may acquire rights and licenses to certain leads and targets from our research and development pipeline. We recorded revenue of $683,000 from this agreement in 2004, and $15.0 million was recorded as deferred revenue, which we expect will be recognized at a rate of $3.1 million per year.

Ig-fusion protein license fee.    In 2002, as part of a lawsuit settlement, we earned a $30.0 million license fee related to the granting of a license to our Ig-fusion protein patents. This was a one-time payment for a fully paid-up license and, therefore, we will not earn any future revenues with respect to this agreement.

License fees and milestones payments.    Revenues from license fees and other up-front payments are recognized over the period we are contractually required to provide other rights or services that represent continuing obligations. Revenue from license fees and milestone payments increased 79% from 2003 to 2004. This was primarily due to the license fees and milestones earned from Novo Nordisk related to rFactor XIII, IL-20 and three licenses granted under the Option and License Agreement. Revenues from license fees and milestone payments increased 24% from 2002 to 2003. This was primarily due to revenues earned related to an IL-21 development collaboration with Novo Nordisk. During the fourth quarter of 2004, we signed a license agreement for rFactor XIII with Novo Nordisk and several license and collaborative development agreements with Serono related to the strategic alliance, with substantial upfront payments received from each company. At December 31, 2004, $21.2 million related to these agreements was recorded as deferred revenue. Together with amounts deferred under previous license and collaboration agreements, we currently expect the following amounts of deferred revenue to be recognized as license fee revenue in future periods (in thousands):

2005	$	12,582
2006		6,277
2007		2,527
2008		2,527
2009		2,147
Thereafter		1,143
Total	$	27,203

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For certain license agreements that require no continuing performance of us, we record license fees as revenue upon execution of the agreement. We recognize revenues from milestone payments that represent completion of separate and substantive earnings processes when the milestone is achieved and amounts are due and payable. From year to year, this revenue item can fluctuate substantially based on the completion of new licensing or collaborative agreements and the achievement of development related milestones. Although this revenue item increased both in 2003 and 2004 due to an increasing number of transactions and milestone payments, we cannot be certain this trend will continue in 2005 and beyond due to the uncertain nature of the events generating the revenue.

Operating Expenses

Research and development expense.    Research and development expense has been our most significant expense to date, consisting primarily of salaries and benefit expenses, costs of consumables, facility costs and external costs. Research and development expense increased in each of the past two years, by 49% in 2004 and by 3% in 2003. Increases over the periods reported largely resulted from significantly increased activities for the development of our current product candidates, rhThrombin, TACI-Ig and IL-21. Over the past three years, we have experienced a substantial increase in external costs for contract manufacturing, clinical trials and payments to Serono related to our TACI-Ig collaboration. In addition, salaries and benefits have increased primarily due to the addition of approximately 70 employees who are focused on product development. Our expense in 2003 reflects an offset of $4.9 million from costs reimbursed by Novo Nordisk under an IL-21 preclinical collaboration agreement, which ended in early 2004. Without the impact of this reimbursement, research and development expense would have increased by 11% in 2003. These trends are shown in the following table (in thousands).

	2004			2003			2002
Salaries and benefits	$	38,496		$	32,679		$	27,920
Consumables		9,681			8,601			9,082
Facility costs		5,687			4,551			3,923
External costs		35,809			17,956			15,741
Depreciation and amortization		4,652			4,564			5,069
Subtotal		94,325			68,351			61,735
IL-21 cost reimbursement from Novo Nordisk		(38	)		(4,887	)		—
Net research and development expense	$	94,287		$	63,464		$	61,735

We anticipate that research and development expense will continue to increase in the foreseeable future as we continue to advance, and potentially expand, our internal product development programs. In 2005, we expect that a number of factors, including the following, will contribute to an increase in research and development expense:

• costs of expanded clinical trial activity for ongoing product development programs;

• increased staffing to support expanded and advancing product development programs, particularly in the clinical, medical, regulatory, manufacturing and quality areas; and

• costs of operating our new pilot-scale manufacturing facility.

Partially offsetting these factors, we have shifted the manufacture of rhThrombin registration lots from late 2005 to early 2006, thus deferring significant contract expenses. As a result, we estimate that research and development expense will increase by less than 10% in 2005.

General and administrative expense.    General and administrative expense consists primarily of salaries and benefit expenses, professional fees and other corporate costs. In 2004, we reclassified all patent related costs to

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general and administrative expenses from research and development expenses in accordance with Statement of Financial Accounting Standards No. 2, Accounting for Research and Development Costs. The amounts reclassified were $4.3 million, $4.4 million and $3.8 million for the years 2004, 2003 and 2002, respectively.

In 2004, general and administrative expense increased 20% over 2003 primarily due to:

• an increase in headcount related costs, including recruiting;

• an increase in state and local taxes related to transaction fees received;

• legal costs related to business development activities; and

• strategic marketing costs in support of planning for rhThrombin commercialization.

In 2003, this expense decreased 23% versus 2002 primarily due to:

• a decrease in legal costs related to a patent infringement lawsuit settled in late 2002;

• a decrease in external costs related to the write-off in 2002 of design and engineering costs for a terminated construction project; and

• cost control initiatives undertaken by the company in late 2002 and early 2003.

We anticipate that our general and administrative requirements will increase to support our development programs as they advance towards commercialization. We estimate that general and administrative expense may increase by up to 25% in 2005 as compared to 2004 expense.

Noncash stock-based compensation expense.    In 2001 and early 2002, prior to the completion of our initial public offering, stock options were granted to employees and directors at exercise prices below the estimated fair value of the common stock on the date of grant. As a result, we recorded total deferred stock-based compensation of $29.2 million. Deferred stock-based compensation is being amortized to expense over the vesting periods of the underlying options, generally four years, using the straight-line method. The expense declined from 2002 to 2003 due to cancellation of unvested options held by employees who terminated their employment with the Company. In 2004, the expense increased due to a one-time compensation charge of $3.2 million related to the repayment of loans by certain executives with shares of common stock originally purchased with the loan proceeds. The compensation expense equaled the difference between the estimated fair value of the shares on the date of the loan payment less the exercise price or the value of the shares previously used as the basis for recording compensation expense. This increase was partially offset by the cancellation of unvested options held by employees who terminated their employment with the Company.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R) (SFAS 123(R)), Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Statement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires instead that such transactions be accounted for using a fair-value-based method. Disclosure of the effect of expensing the fair value of equity compensation is currently required under existing literature (see Note 1 to the financial statements). SFAS 123(R) will become effective for periods beginning after June 15, 2005, which will be in our third fiscal quarter in 2005. At that time, we will begin expensing amounts related to employee stock options. The adoption of SFAS 123(R) will have a material impact on our results of operations. We have begun, but not completed, the process of evaluating the option valuation methods and adoption transition alternatives available under SFAS 123(R). Accordingly, we are not able to provide an estimate of the amount by which our net loss will increase after SFAS 123(R) is adopted.

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Other Income (Expense)

Other income (expense) consists primarily of investment income and interest expense. Investment income is generated primarily from investment of our cash reserves in investment grade, fixed-income securities. There are three primary factors affecting the amount of investment income that we report: amount of cash reserves invested, the effective interest rate, and the amount of gains or losses recognized. The following table shows how each of these factors affected investment income for the three years reported (in thousands).

	2004			2003			2002
Weighted average amount of cash reserves	$	284,948		$	256,471		$	219,321
Effective interest rate		1.79	%		2.16	%		3.09	%
Investment income before gains and losses		5,102			5,535			6,772
Net gains (losses) on sales of investments		(158	)		984			582
Investment income, as reported	$	4,944		$	6,519		$	7,354

We have accounted for the sale-leaseback transaction completed in October 2002 as a financing transaction. Under this method of accounting, an amount equal to the net proceeds of the sale is considered a long-term interest bearing liability. Rent payments under the leases are considered to be payments toward the liability and are allocated to principal and interest. We recorded interest of $6.9 million, $5.6 million, $896,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Liquidity and Capital Resources

As of December 31, 2004, we had cash, cash equivalents and short-term investments of $325.0 million, which we intend to use to fund our operations and capital expenditures over the next several years. These cash reserves are held in a variety of investment-grade, fixed-income securities, including corporate bonds, commercial paper and money market instruments. We believe that our existing cash resources should provide sufficient funding for approximately three years.

Cash flows from operating activities.    The amount of cash used to fund our operating activities generally tracks our net losses, with the following exceptions:

• noncash expenses, such as depreciation and amortization, gains or losses on sale or disposal of assets, and noncash stock-based compensation, which do not result in uses of cash;

• net realized gains and losses, and amortization of premium on short-term investments, which are reflected as sources of cash from investing activities upon maturity or sale of the respective investments;

• changes in receivables, which generally represent temporary timing differences between the recognition of certain revenues and the subsequent receipt of cash payments;

• changes in deferred revenue, which reflect the difference in timing between the receipt of cash from option fees, license fees and other upfront payments and the subsequent recognition of these amounts as revenue over the period we are contractually required to provide other rights or services that represent continuing obligations; and

• changes in other assets and liabilities, which generally represent temporary timing differences between the recognition of certain expenses and their payment.

Generally, with the exception of changes in deferred revenue, we do not expect these items to generate material year-to-year fluctuations in the relationship between our net loss and the amount of net cash used in operating activities. Substantial license or upfront fees may be received upon the date we enter into new licensing or collaborative agreements and be recorded as deferred revenue. For example, in 2004 upon the execution of a strategic alliance agreement with Serono and a license agreement with Novo Nordisk, we recorded $36.2 million

42

of deferred revenue, which will be recognized as revenue over the next approximately five years. The timing of these types of transactions is irregular and, thus, has the potential to create fluctuations in the relationship between our net loss and the amount of cash used in operating activities.

Cash flows from investing activities.    Our most significant use of cash in investing activities is for capital expenditures. We expend a certain amount each year on routine items to maintain the effectiveness of our business, e.g., to adopt newly developed technologies, expand into new functional areas, adapt our facilities to changing needs, and/or replace obsolete assets. In addition, we have used cash to purchase land and expand our facilities. The following table shows the amount of cash going toward each of these types of capital expenditures (in thousands):

	2004		2003		2002
Routine equipment/facility expenditures	$	3,364	$	2,390	$	5,923
Purchases of land for future expansion		—		—		2,975
Expansion of R&D facility, including pilot scale manufacturing plant		13,605		10,172		1,045
Total	$	16,969	$	12,562	$	9,943

The R&D facility expansion project had an approved total budget of approximately $26 million including all related equipment costs. The project was partially funded by an allowance from our landlord, which totaled $14.9 million and is reflected as cash flow from financing activities. The project began in April 2003 and was completed in mid-2004. We expect to spend approximately $6 million to $8 million in 2005 on capital equipment.

Cash flows from investing activities also reflect large amounts of cash used to purchase short-term investments and received from the sale and maturity of short-term investments. These amounts primarily relate to shifts between cash and cash equivalents and short-term investments. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider these cash flows to be important to an understanding of our liquidity and capital resources.

Cash flows from financing activities.    Net proceeds from common stock offerings constitute by far the largest element of financing cash flows. We received $110.7 million in net proceeds from our initial public offering in 2002, $71.3 million from an underwritten follow-on offering completed in October 2003, and $66.8 million from the sale of common stock to both Amgen and Serono in 2004. In 2002, we received $50.5 million of net proceeds from the completion of a sale and leaseback of our headquarter buildings, which has been accounted for as a financing transaction. Our landlord provided an allowance of $14.9 million to be applied toward the cost of the R&D facility expansion project described above. We received $7.9 million of this amount in 2003 and the remainder in 2004.

We expect to incur substantial additional costs as we continue to advance and expand our product development programs. We expect these expenditures to increase over the next several years, particularly if the outcomes of clinical trials are successful. Our plans include the internal development of selected product candidates and the co-development of product candidates with collaborators where we would assume a percentage of the overall product development costs. If, at any time, our prospects for financing these programs decline, we may decide to reduce our ongoing investment in our development programs. We could reduce our investment by discontinuing our funding under existing co-development arrangements, establishing new co-development arrangements for other product candidates to provide additional funding sources or out-licensing product candidates that we might otherwise develop internally. Additionally, we could consider delaying or discontinuing development of product candidates to reduce the level of our related expenditures.

Our long-term capital requirements and the adequacy of our available funds will depend on several factors, many of which may not be in our control, including:

• results of research and development programs;

43

• cash flows under existing and potential future arrangements with licensees, collaborators and other parties;

• costs involved in filing, prosecuting, enforcing and defending patent claims; and

• costs associated with the expansion of our facilities.

Over the next several years we will need to seek additional funding through public or private financings, including equity financings, and through other arrangements, including collaborative arrangements. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements sooner than we expect. However, financing may be unavailable when we need it or may not be available on acceptable terms. If we raise additional funds by issuing equity or equity-based securities, the percentage ownership of our existing shareholders would be reduced, and these securities could have rights superior to those of our common stock. If we are unable to raise additional funds when we need them, we could be required to delay, scale back or eliminate expenditures for some of our development programs or expansion plans, or grant rights to third parties to develop and market product candidates that we would prefer to develop and market internally, with license terms that are not favorable to us.

Contractual Obligations

At December 31, 2004 we are contractually obligated to make payments as follows (in thousands):

	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		4-5 Years		More than 5 Years
Building lease obligations	$	130,186	$	7,104	$	14,963	$	16,028	$	92,091
Operating leases		8,835		1,180		2,435		2,506		2,714
Development contracts		17,764		11,062		6,702		—		—
Total	$	156,785	$	19,346	$	24,100	$	18,534	$	94,805

The building lease obligations, which resulted from the sale-leaseback financing transaction, reflect the reset of the lease terms to 15 years beginning May 2004. Operating lease terms range from one to ten years. We have certain renewal provisions at our option, which are not reflected in the above table, for the building leases and the operating leases. The development contracts include the production of Phase 3 supply and registration lots of rhThrombin, which may also be used for commercial purposes.

Critical Accounting Estimates

Royalty revenue.    We earn royalties on two proteins marketed and sold by Novo Nordisk, insulin and glucagon, which represented 70% of our royalty revenue in 2004. Royalties are received from Novo Nordisk quarterly within 60 days after the end of the calendar quarter. For insulin, the royalties are based on manufacturing costs for the quantity of insulin sold during the quarter. These costs are calculated in Danish Kroner, and then converted to U.S. Dollars based on the exchange rate at the end of the quarter. Royalties earned on sales of glucagon are calculated as a percentage of net sales. We accrue estimated royalties at the end of each quarter based on historical sales data, estimates provided to us by Novo Nordisk and changes in the Danish Kroner to U.S. Dollar exchange rate. Adjustments are made in the following quarter reflecting the difference between our estimates and actual reported royalties and, to date, have not been significant.

We also earn royalties on several products marketed by other companies. Royalties on these products are received within 30 to 60 days after the end of each calendar quarter. We accrue estimated royalties at the end of each quarter based on historical sales data. Adjustments are made in the following quarter reflecting the difference between our estimates and actual reported royalties. To date, these adjustments have not been significant.

44

License and upfront fees.    We enter into various licensing and collaborative agreements that generate significant license or other upfront fees with subsequent milestone payments earned upon completion of development milestones. We use our best judgment to estimate the period over which we have continuing commitments to perform under these agreements. Revenue from upfront fees is recognized on a straight-line basis over this period, which has ranged in duration from six months to ten years. For certain license agreements that require no continuing performance on our part, license fee revenue is recognized immediately upon execution of the agreement.

Stock based compensation.    As permitted by the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123), we have elected to follow Accounting Principles Board No. 25, Accounting for Stock Issued to Employees (APB 25), in accounting for employee stock option grants and apply the disclosure-only provisions of SFAS 123 to account for our stock option plans. Under APB 25, compensation expense is based on the excess, if any, of the estimated fair value of our stock at the date of grant over the exercise price of the option. Prior to the completion of our initial public offering, we granted options with exercise prices that were lower than the estimated fair value of the stock on the date of grant. We used our best judgment to estimate the fair value of our stock as of the various grant dates, which resulted in share prices ranging from $9.09 to $15.11. Based on these estimated values, we recorded $29.2 million of deferred compensation, which is being amortized over the vesting period of the individual options using the straight-line method. We expect to record stock-based compensation expense of $2.2 million, pursuant to APB 25, through June 30, 2005.

Effective July 2005, we will record share-based compensation in accordance with the recently issued Statement of Financial Accounting Standards No. 123(R), Share-based Payment (SFAS 123(R). The adoption of SFAS 123(R) will have a material impact on our results of operations. We have begun, but not completed, the process of evaluating the option valuation methods and adoption transition alternatives available under SFAS 123(R). Accordingly, we are not able to provide an estimate of the amount by which our net loss will increase after SFAS 123(R) is adopted.

Item 7A.    Qualitative and Quantitative Disclosures About Market Risk

Our exposure to market risk is primarily limited to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because the majority of our investments are in short-term debt securities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our portfolio of cash, cash equivalents and short-term investments in a variety of interest-bearing instruments, including United States government and agency securities, high-grade United States corporate bonds, asset-backed securities, commercial paper and money market funds. Due to the nature of our short-term investments, all of which mature within three years, we believe that we are not subject to any material market risk exposure. We have no other material foreign currency exposure, nor do we hold derivative financial instruments.

45

Item 8.    Financial Statements and Supplementary Data

	Page in Form 10-K
Report of Independent Registered Public Accounting Firm	47 – 48
Balance Sheets	49
Statements of Operations	50
Statement of Changes in Shareholders’ Equity	51
Statements of Cash Flows	52
Notes to Financial Statements	53 – 68

46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

and Shareholders of

ZymoGenetics, Inc.

We have completed an integrated audit of ZymoGenetics, Inc.’s 2004 financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Financial statements

In our opinion, the accompanying balance sheets and the related statements of operations, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of ZymoGenetics, Inc. (the Company) at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable

47

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/    PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

March 11, 2005

48

ZYMOGENETICS, INC.

BALANCE SHEETS

(in thousands)

	December 31,
	2004			2003
Assets
Current assets
Cash and cash equivalents	$	117,308		$	97,576
Short-term investments		207,690			202,316
Receivables
Related party		2,612			3,458
Trade		2,213			1,189
Interest and other receivables		1,391			1,228
Prepaid expenses and other assets		3,296			2,777
Total current assets		334,510			308,544
Property and equipment, net		71,960			62,341
Other assets		5,714			5,024
Total assets	$	412,184		$	375,909
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	3,867		$	4,808
Accrued liabilities		11,104			8,301
Deferred revenue		22,178			8,022
Total current liabilities		37,149			21,131
Construction advance from landlord		—			7,918
Lease obligations		66,085			50,629
Deferred revenue		26,485			4,957
Other noncurrent liabilities		3,915			3,359
Commitments and contingencies
Shareholders’ equity
Common stock, no par value, 150,000 shares authorized, 57,574 and 52,494 issued and outstanding at December 31, 2004 and 2003, respectively		572,564			498,602
Non-voting common stock, no par value, 30,000 shares authorized		—			—
Notes receivable from shareholders		—			(725	)
Deferred stock compensation		(2,966	)		(9,455	)
Accumulated deficit		(289,789	)		(201,033	)
Accumulated other comprehensive income		(1,259	)		526
Total shareholders’ equity		278,550			287,915
Total liabilities and shareholders’ equity	$	412,184		$	375,909

The accompanying notes are an integral part of these financial statements.

49

ZYMOGENETICS, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Years ended December 31,
	2004			2003			2002
Revenues
Royalties
Related party	$	7,871		$	6,409		$	4,986
Other		3,417			2,988			3,010
Option fees
Related party		7,500			7,500			7,500
Other		683			—			—
Ig-fusion protein license fee		—			—			30,000
License fees and milestone payments
Related party		12,316			4,128			2,328
Other		3,907			4,932			4,951
Total revenues		35,694			25,957			52,775
Operating expenses
Research and development (excludes noncash stock-based compensation expense of $4,802 in 2004, $4,284 in 2003 and $4,318 in 2002, respectively)		94,287			63,464			61,735
General and administrative (excludes noncash stock-based compensation expense of $4,493 in 2004, $2,770 in 2003 and $2,870 in 2002, respectively)		19,007			15,843			20,458
Noncash stock-based compensation expense		9,295			7,054			7,188
Total operating expenses		122,589			86,361			89,381
Loss from operations		(86,895	)		(60,404	)		(36,606	)
Other income (expense)
Investment income		4,944			6,519			7,354
Interest expense		(6,869	)		(5,622	)		(904	)
Other, net		64			(64	)		(187	)
Total other income (expense)		(1,861	)		833			6,263
Net loss		(88,756	)		(59,571	)		(30,343	)
Preferred stock dividend and accretion on mandatorily redeemable convertible preferred stock		—			—			(1,718	)
Net loss attributable to common shareholders	$	(88,756	)	$	(59,571	)	$	(32,061	)
Net loss per share—basic and diluted	$	(1.64	)	$	(1.26	)	$	(0.75	)
Weighted-average shares—basic and diluted		54,157			47,317			42,578

The accompanying notes are an integral part of these financial statements.

50

ZYMOGENETICS, INC.

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(in thousands)

	Mandatorily redeemable convertible preferred stock					Shareholders’ equity (deficit)
						Common Stock					Notes receivable from shareholders			Deferred stock compensation			Accumulated deficit			Accumulated other comprehensive income (loss)			Total
	Shares		Amount			Shares		Amount
Balance at January 1, 2002	6,540		$	260,540		12,064		$	55,856		$	(725	)	$	(25,235	)	$	(111,119	)	$	1,821		$	(79,402	)
Comprehensive loss:
Net loss	—			—		—			—			—			—			(30,343	)		—			(30,343	)
Unrealized gains on short-term investments, net of reclassification adjustment	—			—		—			—			—			—			—			988			988
Total comprehensive loss																								(29,355	)
Common stock issued in connection with stock option exercises	—			—		208			596			—			—			—			—			596
Deferred stock compensation related to stock options:
Grants	—			—		—			484			—			(484	)		—			—			—
Forfeitures	—			—		—			(240	)		—			240			—			—			—
Amortization	—			—		—			—			—			7,188			—			—			7,188
Accretion and dividends on mandatorily redeemable convertible preferred stock	—			1,718		—			(1,718	)		—			—			—			—			(1,718	)
Conversion of Series A and B mandatorily redeemable convertible preferred stock	(6,540	)		(262,258	)	23,543			262,258			—			—			—			—			262,258
Net proceeds from issuance of common stock	—			—		10,000			109,774			—			—			—			—			109,774
Balance at December 31, 2002	—			—		45,815			427,010			(725	)		(18,291	)		(141,462	)		2,809			269,341
Comprehensive loss:
Net loss	—			—		—			—			—			—			(59,571	)		—			(59,571	)
Unrealized losses on short-term investments, net of reclassification adjustment	—			—		—			—			—			—			—			(2,283	)		(2,283	)
Total comprehensive loss																								(61,854	)
Common stock issued in connection with stock option exercises	—			—		579			2,060			—			—			—			—			2,060
Deferred stock compensation related to stock options:
Forfeitures	—			—		—			(1,782	)		—			1,782			—			—			—
Amortization	—			—		—			—			—			7,054			—			—			7,054
Net proceeds from issuance of common stock	—			—		6,100			71,314			—			—			—			—			71,314
Balance at December 31, 2003	—			—		52,494			498,602			(725	)		(9,455	)		(201,033	)		526			287,915
Comprehensive loss:
Net loss	—			—		—			—			—			—			(88,756	)		—			(88,756	)
Unrealized losses on short-term investments, net of reclassification adjustment	—			—		—			—			—			—			—			(1,785	)		(1,785	)
Total comprehensive loss																								(90,541	)
Common stock issued in connection with stock option exercises	—			—		1,322			5,142			—			—			—			—			5,142
Compensation expense related to loan repayment	—			—		—			3,226			—			—			—			—			3,226
Loan repayment	—			—		(43	)		(752	)		725			—			—			—			(27	)
Deferred stock compensation related to stock options:
Forfeitures	—			—		—			(420	)		—			420			—			—			—
Amortization	—			—		—			—			—			6,069			—			—			6,069
Net proceeds from issuance of common stock	—			—		3,801			66,766			—			—			—			—			66,766
Balance at December 31, 2004	—		$	—		57,574		$	572,564		$	—		$	(2,966	)	$	(289,789	)	$	(1,259	)	$	278,550

The accompanying notes are an integral part of these financial statements.

51

ZYMOGENETICS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

	Year ended December 31,
	2004			2003			2002
Operating activities
Net loss	$	(88,756	)	$	(59,571	)	$	(30,343	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		5,469			5,447			5,898
Net losses (gains) on disposition of property and equipment		(59	)		100			187
Noncash stock-based compensation		9,295			7,054			7,188
Net realized losses (gains) on sale of short-term investments		158			(984	)		(582	)
Amortization of premium on short-term investments		2,679			3,225			2,448
Changes in
Receivables		(368	)		(2,159	)		339
Prepaid expenses and other assets		(919	)		(1,945	)		(705	)
Accounts payable		911			(809	)		(937	)
Accrued liabilities		2,803			2,612			2,539
Deferred revenue		35,684			(3,855	)		2,680
Deferred lease obligations		598			455			28
Other noncurrent liabilities		554			636			(117	)
Net cash used in operating activities		(31,951	)		(49,794	)		(11,377	)
Investing activities
Purchase of property and equipment		(16,969	)		(12,562	)		(9,943	)
Purchase of short-term investments		(256,835	)		(288,579	)		(305,517	)
Proceeds from sale of property and equipment		88			72			31
Proceeds from sale and maturity of short-term investments		246,548			311,568			184,614
Net cash provided by (used in) investing activities		(27,168	)		10,499			(130,815	)
Financing activities
Net proceeds from issuance of common stock		66,766			71,314			110,677
Construction advance from landlord		6,943			7,918			—
Proceeds from sale-leaseback financing		—			—			50,489
Principal payments on lease obligation		—			—			(385	)
Proceeds from exercise of stock options		5,142			2,060			596
Net cash provided by financing activities		78,851			81,292			161,377
Net increase in cash and cash equivalents		19,732			41,997			19,185
Cash and cash equivalents at beginning of period		97,576			55,579			36,394
Cash and cash equivalents at end of period	$	117,308		$	97,576		$	55,579
Supplemental disclosures
Cash paid for interest	$	6,869		$	5,197		$	862
Noncash financing activities
Accretion on Series B mandatorily redeemable convertible preferred stock	$	—		$	—		$	88
Dividends accrued on Series A and Series B mandatorily redeemable convertible preferred stock	$	—		$	—		$	1,630
Other non-cash additions (reductions) to property and equipment,net	$	(1,852	)	$	2,445		$	—
Recognition of prepaid offering costs	$	—		$	—		$	902

The accompanying notes are an integral part of these financial statements.

52

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS

1.    Organization and summary of significant accounting policies

Nature of operations

ZymoGenetics, Inc. (the Company) was incorporated in the state of Washington in June 1981 and operated independently until it was acquired in 1988 by Novo Nordisk North America, a wholly owned subsidiary of Novo Nordisk A/S (Novo Nordisk). In November 2000, the Company became independent from Novo Nordisk upon completion of a private placement of Series B mandatorily redeemable convertible preferred stock with an investor consortium. In February 2002, the Company completed an initial public offering of common stock, at which time all Series A and B mandatorily redeemable convertible preferred stock was converted to common stock. In October 2003, the Company sold 6,100,000 shares of common stock in a follow-on public offering. At December 31, 2004, Novo Nordisk’s ownership percentage was 37.8%.

As an independent biopharmaceutical company, the Company is focused on the discovery, development and commercialization of protein therapeutics for the prevention or treatment of significant human diseases. The Company has generated a pipeline of proprietary product candidates and intends to commercialize them through internal development, collaborations with biopharmaceutical partners or out-licensing of patents.

Over the next several years the Company will need to seek additional funding through public or private financings, including equity financings, and through other arrangements, including collaborative arrangements. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements. However, financing may not be available when required, or may not be available on acceptable terms.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities; disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. The Company invests its cash and cash equivalents with major financial institutions, the amount of which exceeds federally insured limits. The Company has not experienced any losses on its cash and cash equivalents.

Short-term investments

Marketable securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of shareholders’ equity. Interest on securities classified as available-for-sale is included in investment income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income. Realized gains and losses are included in investment income. The cost of securities sold is based on the specific identification method.

Fair value of financial instruments

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values due to their relative short maturities. The carrying value of other noncurrent liabilities approximates fair value as adjustments to market are recorded each period.

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ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

Property and equipment

Property and equipment are stated at cost. Additions, betterments and improvements are capitalized and depreciated. When assets are retired or otherwise disposed of, the cost of the assets and related depreciation is eliminated from the accounts and any resulting gain or loss is reflected in the results of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which include five years for furniture and lab equipment, ten years for pilot plant equipment and 40 years for buildings. Expenditures for repairs and maintenance are charged to expense as incurred.

Leasehold improvements are amortized evenly over their estimated useful lives or the term of the lease, whichever is shorter. At December 31, 2004, the Company is amortizing its leasehold improvements over 10 and 15 years.

Impairment of long-lived assets

The Company assesses the impairment of long-lived assets whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Measurement of an impairment is required when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The amount of a recognized impairment loss is the excess of an asset’s carrying value over its fair value. The Company has not recognized any impairment losses through December 31, 2004.

Revenue recognition

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104), and Emerging Issues Task Force Issue No. 00-21, Revenue Agreements with Multiple Deliverables (EITF 00-21).

The Company earns royalties on two proteins marketed and sold by Novo Nordisk, insulin and glucagon. Royalties are received from Novo Nordisk within 60 days after the end of the calendar quarter. For insulin, the royalties are based on manufacturing costs for the quantity of insulin sold during the quarter. These costs are calculated in Danish Kroner, and then converted to U.S. Dollars based on the exchange rate at the end of each calendar quarter. Royalties earned on sales of glucagon are calculated as a percentage of net sales. The Company accrues estimated royalties at the end of each quarter based on historical sales data, estimates provided to the Company by Novo Nordisk and changes in the Danish Kroner to U.S. Dollar exchange rate. Adjustments are made in the following quarter reflecting the difference between the Company’s estimates and actual reported royalties and, to date, adjustments have not been significant.

The Company also earns royalties on several products marketed by other companies. Royalties on these products are received within 30 to 60 days after the end of each calendar quarter. The Company accrues estimated royalties at the end of each quarter based on historical sales data. Adjustments are made in the following quarter reflecting the difference between the Company’s estimates and actual reported royalties and, to date, adjustments have not been significant.

The Company enters into various licensing and collaborative agreements that generate significant license or other upfront fees with subsequent milestone payments earned upon completion of development milestones. The Company uses its best judgment to estimate the period over which there are continuing commitments to perform under these agreements. Revenue from upfront fees is recognized on a straight-line basis over this period, which

54

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

has ranged in duration from six months to ten years. For certain license agreements that require no continuing performance on the Company’s part, license fee revenue is recognized immediately upon execution of the agreement. Revenues from milestone payments representing completion of separate and substantive earnings processes are recognized when the milestone is achieved and amounts are due and payable.

Deferred revenue arises from payments received in advance of the culmination of the earnings process. Deferred revenue expected to be recognized within the next twelve months is classified as a current liability. Deferred revenue will be recognized as revenue in future periods when the applicable revenue recognition criteria have been met.

In December 2002, the Company signed an agreement granting Amgen Inc., Immunex Corporation and Wyeth a license to the Company’s Ig-fusion protein patents. As a result of this agreement, the Company, Immunex and Amgen terminated a patent infringement lawsuit filed by the Company in March 2002 against Immunex Corporation (now owned by Amgen). The Company received a one-time lump sum payment, which was recorded as license fee revenue in 2002.

Research and development costs

Research and development costs consist of salaries and benefit expenses, costs of consumables, facility costs and contracted services and are expensed as incurred. Costs to acquire technologies that are utilized in research and development and that have no future use are expensed when incurred. Reimbursement for shared expenses received from collaboration partners are recorded as reductions to research and development expenses.

Patent costs

Costs relating to filing and pursuing patent applications are expensed to general and administrative costs as incurred.

Income taxes

The Company records a provision for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), which requires the liability method of accounting for income taxes. Deferred tax assets or liabilities are recorded for all temporary differences between financial and tax reporting. Deferred tax expense (benefit) results from the net change during the period of the deferred tax assets and liabilities. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized.

Stock-based compensation

As permitted by the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123), the Company has accounted for employee stock option grants under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and applied the disclosure-only provisions of SFAS 123 to account for its stock option plans. Under APB 25, compensation expense is based on the excess, if any, of the estimated fair value of the Company’s stock at the date of grant over the exercise price of the option. Deferred compensation, relating to employee stock option grants awarded prior to the Company’s initial public offering in February 2002, is amortized over the vesting period of the individual options using the straight-line method. All employee stock option grants awarded subsequent to the Company’s initial public offering have been granted with exercise prices equal to the fair value of the Company’s common stock on the date of grant.

55

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

The following table illustrates the effect on net loss attributable to common shareholders and net loss per share as if the fair value based method had been applied to all outstanding and unvested awards for each of the years ended December 31 (in thousands, except per share data):

	2004			2003			2002
Net loss attributable to common shareholders, as reported	$	(88,756	)	$	(59,571	)	$	(32,061	)
Add: employee stock-based compensation under APB 25 included in reported net loss		6,069			7,054			7,188
Add: employee stock-based compensation related to the repayment of loans to purchase common stock included in reported net loss		3,226			—			—
Deduct: total employee stock-based compensation expense determined under the fair value method		(15,722	)		(12,610	)		(9,891	)
Net loss attributable to common shareholders, pro forma	$	(95,183	)	$	(65,127	)	$	(34,764	)
Basic and diluted net loss per share, as reported	$	(1.64	)	$	(1.26	)	$	(0.75	)
Basic and diluted net loss per share, pro forma	$	(1.76	)	$	(1.38	)	$	(0.82	)

Comprehensive income or loss

The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), which requires the disclosure of comprehensive income or loss and its components in the financial statements. Comprehensive income or loss is the change in shareholder’s equity resulting from net income or loss and unrealized gains and losses on short-term investments.

Segments

Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. The Company manages and evaluates its operations in one reportable segment.

Guarantees

In the normal course of business, the Company indemnifies other parties, including collaboration partners, lessors and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the parties harmless against losses arising from a breach of representations and covenants, or out of intellectual property infringement or other claims made against these parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. It is not possible to determine the maximum potential obligation under these indemnification agreements since any claim would be based on the facts and circumstances of the claim and the particular provisions of each agreement.

Reclassifications

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. These reclassifications had no impact on net loss, shareholders’ equity or cash flows as previously reported.

Loss per share

Basic and diluted net loss per share has been computed based on net loss attributable to common shareholders and the weighted-average number of common shares outstanding during the applicable period. The

56

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

Company has excluded all outstanding options to purchase common stock and shares subject to repurchase from the calculation of diluted net loss per share, as such shares are antidilutive for all periods presented.

The following table presents the calculation of basic and diluted net loss per share attributable to common shareholders for years ended December 31 (in thousands, except per share data):

	2004			2003			2002
Net loss attributable to common shareholders	$	(88,756	)	$	(59,571	)	$	(32,061	)
Weighted-average shares used in computing basic and diluted net loss per share		54,157			47,317			42,578
Basic and diluted net loss per share	$	(1.64	)	$	(1.26	)	$	(0.75	)
Securities not included in net loss per share attributable to common shareholders calculation:
Options to purchase common stock		10,116			9,378			8,267
Shares subject to repurchase		—			—			7
		10,116			9,378			8,274

Recent accounting pronouncements

In December 2003, the Financial Accounting Standards Board (FASB) issued a revised FASB Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. The FASB published the revision to clarify and amend some of the original provisions of FIN 46, which was issued in January 2003, and to exempt certain entities from its requirements. A variable interest entity (VIE) refers to an entity subject to consolidation according to the provisions of this Interpretation. FIN 46R applies to entities whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support provided by any parties, including equity holders, or where the equity investors (if any) do not have a controlling financial interest. FIN 46R provides that if an entity is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE must be consolidated in the entity’s financial statements. In addition, FIN 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE provide additional disclosures. The provisions of FIN 46R became effective in the first quarter of fiscal 2004. The adoption of this interpretation has not impacted the results of operations or the financial position of the Company.

In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition. SAB 104 supersedes Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The Company has applied the provisions of EITF 00-21 since July 2003 and the issuance of SAB 104 has not impacted the results of operations or the financial position of the Company.

In 2004, the Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) issued a position document on EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01), which is meant to provide clarity and consistency in the determination of an

57

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

other-than temporary impairment of investments. In September 2004, EITF 03-01-1 was issued and deferred the effective date of this position document but maintained the disclosure requirement of EITF 03-01 for paragraphs 21 and 22. The adoption of this statement has not impacted the results of operations or the financial position of the Company.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123(R) (SFAS 123(R)), Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Statement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires instead that such transactions be accounted for using a fair-value-based method. Disclosure of the effect of expensing the fair value of equity compensation is currently required under existing literature. SFAS 123(R) will become effective for periods beginning after June 15, 2005, which will be in the Company’s third fiscal quarter in 2005. At that time, the Company will begin expensing amounts related to employee stock options. The adoption of SFAS 123(R) will have a material impact on the Company’s results of operations. The Company has begun, but not completed, the process of evaluating the option valuation methods and adoption transition alternatives available under SFAS 123(R). Accordingly, no estimate is available of the amount by which the Company’s net loss will increase after SFAS 123(R) is adopted.

2.    Short-term investments

Short-term investments consisted of the following (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2004
Type of security:
Corporate debt securities	$	45,489	$	21	$	(288	)	$	45,222
Asset-backed securities		82,467		21		(548	)		81,940
U.S. government and agency securities		80,993		—		(465	)		80,528
	$	208,949	$	42	$	(1,301	)	$	207,690
Maturity date:
Less than one year	$	147,764						$	146,941
Due in 1-3 years		61,185							60,749
	$	208,949						$	207,690
December 31, 2003
Type of security:
Corporate debt securities	$	47,253	$	272	$	(26	)	$	47,499
Asset-backed securities		71,985		184		(122	)		72,047
U.S. government and agency securities		78,432		232		(37	)		78,627
Foreign government securities		4,120		23		—			4,143
	$	201,790	$	711	$	(185	)	$	202,316
Maturity date:
Less than one year	$	137,170						$	137,538
Due in 1-3 years		64,620							64,778
	$	201,790						$	202,316

58

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

The Company’s management has concluded that unrealized losses are temporary, as the duration of the decline in the value of the investments has been short; the extent of the decline, both in dollars and percentage of cost is not severe; and the Company has the ability and intent to hold the investments until at least substantially all of the cost of the investments is recovered.

At December 31, 2004, the aggregate estimated fair value of the investments with unrealized losses was as follows (in thousands):

Corporate debt securities	$	33,247
Asset-backed securities		71,006
U.S. government and agency securities		77,528
	$	181,781

Realized gains were $227,000 and $1.3 million for the years ended December 31, 2004 and 2003, respectively. Realized losses were $385,000 and $313,000 for the years ended December 31, 2004 and 2003, respectively. Reclassification adjustments reflected in other comprehensive income for net realized gains and losses were $13,000 loss and $1.0 million gain for the years ended December 31, 2004 and 2003, respectively.

3.    Property and equipment

Property and equipment consisted of the following at December 31 (in thousands):

	2004			2003
Land and buildings	$	74,288		$	52,998
Leasehold improvements		821			518
Furniture and equipment		40,888			34,506
Construction in progress		—			14,022
		115,997			102,044
Less: Accumulated depreciation and amortization		(44,037	)		(39,703	)
	$	71,960		$	62,341

Land and buildings include assets deemed owned in connection with the sale and leaseback financing transaction described in Note 5.

4.    Accrued liabilities

Accrued liabilities consisted of the following at December 31 (in thousands):

	2004		2003
Vacation pay	$	2,505	$	2,219
Incentive compensation		3,287		2,418
Contract services		4,517		3,195
City and state taxes		291		37
Severance payments		138		165
Other		366		267
	$	11,104	$	8,301

59

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

5.    Lease obligations

In October 2002, the Company completed a sale and leaseback transaction involving its headquarter buildings located in Seattle, Washington. The three buildings were sold for a total sale price of $52.3 million. Net proceeds from the transaction amounted to $50.5 million. Simultaneously, the Company agreed to lease the buildings from the purchaser for a period of 15 years, subject to four five-year renewal options. The initial rental payment of $5.1 million per year increases by 3.5% each year during the term. Rent for the renewal terms under these lease agreements will be the greater of fair market value or 90% of the rent for the last year prior to renewal. The Company has provided the lessor a security deposit in the form of pledged securities equal to two months base rent.

The Company has accounted for the transaction as a financing due to a technical provision within the leases related to condemnation, which could, under remote circumstances, result in continuing ownership involvement by the Company in the three buildings. Under this method of accounting, the net proceeds of the sale are considered to be a long-term interest bearing liability. Rent payments under the leases are considered to be payments toward the liability and are allocated to principal and interest. The Company initially recorded a liability of $50.5 million with an effective annual interest rate of approximately 11%.

In 2003, the Company exercised its option to expand one of its leased buildings and, effective May 2004, the Company assumed occupancy of the new space. The Company incurred total project costs of approximately $21 million excluding equipment and received an advance from the landlord of $14.9 million. The advance from the landlord of $14.9 million has been reclassified as an addition to the long-term lease obligations with an annual effective interest rate of approximately 12%. At the end of the lease term, the remaining balance of the liability will approximate the net book value of the buildings leased. Upon the completion of the expansion project, the lease terms for all three buildings were reset to 15 years from the date of occupancy of the expansion space.

The following table presents the Company’s scheduled payments under the lease obligations, including the additional payments related to the expansion and the reset of the lease term to 15 years (in thousands):

Year ending December 31,
2005	$	7,104
2006		7,353
2007		7,610
2008		7,876
2009		8,152
Thereafter		92,091
	$	130,186

6.    Transactions and accounts with related parties

The Company earns royalties on several products marketed and sold by Novo Nordisk, including recombinant insulin and recombinant glucagon. Royalties are based on contracts predating the Company’s acquisition by Novo Nordisk. The Company earned total royalties from Novo Nordisk of approximately $7.9 million, $6.4 million and $5.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.

On February 1, 2002, the Company completed its initial public offering. Upon the completion of the initial public offering, each share of Series A and Series B mandatorily redeemable convertible preferred stock held by

60

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

Novo Nordisk converted to 3.6 shares of non-voting and voting common stock, respectively. Effective June 24, 2002, all shares of non-voting common stock were converted into the same number of shares of voting common stock.

In December 2002, the Company completed a collaborative agreement with Novo Nordisk for the preclinical development of IL-21. Under the terms of the agreement, the Company and Novo Nordisk collaborated on all research and development activities leading up to the filing of an Investigational New Drug application (IND) in the United States, which occurred in April 2004. Upon signing, Novo Nordisk paid $4.0 million to the Company as reimbursement of a portion of the Company’s costs incurred prior to the agreement. Novo Nordisk also agreed to pay the Company up to $7.0 million for its 50% share of IL-21 development costs incurred from the date of the agreement through the filing of the IND. Through December 31, 2004, Novo Nordisk had paid a total of $8.9 million to the Company under the collaborative agreement, of which $813,000 was recorded as revenue in 2004. In the third quarter of 2004, the Company recognized milestone revenue of $1.5 million for the achievement of the IND filing pursuant to Novo Nordisk’s license of IL-21 outside North America.

In March 2004, the Company signed a license agreement with Novo Nordisk providing it exclusive license rights to commercialize the Company’s IL-20 intellectual property in North America. The license agreement included an execution fee of $4.0 million, and potential milestones and royalties. Novo Nordisk is responsible for all development activities. As of December 31, 2004, the entire execution fee had been recognized as revenue.

In June 2004, Novo Nordisk exercised its extension right under an existing option and licensing agreement with the Company. The option and licensing agreement, originally scheduled to expire in November 2004, was extended for two more years, for which Novo Nordisk will pay the Company $7.5 million each year. Revenue will be recognized ratably over the extension period, which is consistent with the revenue recognition for the existing option and licensing agreement. For each protein licensed by Novo Nordisk, the Company will receive an up-front license fee, the amount of which is dependent on the stage of the product candidate licensed. Additionally, Novo Nordisk will be obligated to make payments upon the achievement of predefined development milestones and to pay royalties on sales of resulting products.

In June 2004, the Company signed three license agreements with Novo Nordisk providing exclusive rights to commercialize the Company’s intellectual property related to IL-28a, IL-29 and IL-31, outside North America. Each of the license agreements included execution fees of $750,000 and potential milestones and royalties. Novo Nordisk is responsible for all development activities. The Company recognized the revenue associated with all three execution fees in the third quarter of 2004, when all performance obligations were satisfied.

In September 2004, Novo Nordisk provided the Company with a notice of termination for its license to IL-20 receptor outside North America. Novo Nordisk had previously licensed this protein in September 2001 together with IL-20. The agreement provided for one of the two proteins to be considered a backup, which could be removed from the license at a later date. In terminating the license to IL-20 receptor as the backup protein, Novo Nordisk agreed to pay the Company a final milestone payment and a termination fee totaling $1.5 million, which have been recorded as milestone revenue for the year ended December 31, 2004.

On October 4, 2004, the Company entered into a license agreement with Novo Nordisk, with respect to recombinant Factor XIII. The license agreement provides that Novo Nordisk will develop and commercialize recombinant Factor XIII on a worldwide basis. The Company received $15.0 million upon signing plus potential milestones and royalties. The Company is obligated to perform certain activities expected to be completed by May 2006. At December 31, 2004, the Company had recognized revenue of $2.3 million and will recognize the remainder ratably over the period of performance for its remaining transition activities.

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ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

Amounts receivable from Novo Nordisk were approximately $2.6 million and $3.5 million at December 31, 2004 and 2003, respectively.

7.    Retirement plans

Defined contribution

The Company has established a 401(k) retirement plan covering substantially all of its employees. The plan provides for matching and discretionary contributions by the Company. Such contributions were approximately $1.6 million, $1.5 million and $2.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.

Deferred compensation plan

The Company has a Deferred Compensation Plan (DCP) for key employees. Eligible plan participants are designated by the Company’s board of directors. The DCP allows participants to defer up to 15% of their annual compensation and up to 100% of any bonus. At December 31, 2004 and 2003, approximately $3.9 million and $3.4 million, respectively, was deferred under the DCP and was recorded both as a noncurrent asset and a noncurrent liability.

8.    Income taxes

At December 31, 2004, the Company had net operating loss carryforwards of approximately $192.4 million, research and development tax credit carryforwards of approximately $22.1 million, a rehabilitation tax credit carryforward of $1.5 million and alternative minimum tax credit carryforwards of $1.2 million. The carryforwards are available to offset future tax liabilities. The net operating loss, research and development tax credit and rehabilitation tax credit carryforwards will expire in the years 2005 to 2024. The alternative minimum tax credit will carry forward indefinitely. The Company completed an initial public offering on February 1, 2002 and pursuant to the provisions of Internal Revenue Code Section 382 the offering may qualify as a change in ownership. Accordingly, a portion of the net operating loss carryforwards may be limited.

Deferred tax assets and liabilities arise from temporary differences between financial and tax reporting. The Company has provided a valuation allowance at December 31, 2004 and 2003 to offset the excess of deferred tax assets over the deferred tax liabilities, due to the Company’s status as a stand-alone taxpayer and the uncertainty of realizing the benefits of the net deferred tax asset. Deferred tax assets and liabilities were as follows as of December 31 (in thousands):

	2004			2003
Deferred tax assets:
Net operating loss carryforwards	$	67,351		$	39,212
Research and development tax credit carryforwards		22,133			18,707
Alternative minimum tax credit carryforwards		1,242			1,242
Rehabilitation tax credit carryforward		1,507			1,507
Intellectual property purchased from Novo Nordisk		6,248			7,497
Deferred gain on sale of assets		6,341			4,958
Deferred revenue		9,171			2,002
Other		4,388			6,454
		118,381			81,579
Deferred tax liabilities:
Deferred revenue—option fees		(5,489	)		(6,282	)
		112,892			75,297
Less: Valuation allowance		(112,892	)		(75,297	)
Net deferred tax asset	$	—		$	—

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ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

The valuation allowance increased by $37.6 million, $23.2 million and $5.4 million in 2004, 2003 and 2002, respectively, to fully reserve the net deferred tax assets.

In October 2000, the Company entered into a tax sharing agreement with Novo Nordisk. The agreement states that all research and development tax credit carryforwards generated by the Company prior to November 9, 2000 used by the Company to generate a tax benefit in future periods shall be reimbursed to Novo Nordisk. The total amount paid shall not exceed $12.0 million.

Realization of the deferred tax asset associated with intellectual property purchased from Novo Nordisk will be reflected as increases in shareholders’ equity and will not be reflected as tax benefits in the statement of operations.

The reconciliation between the Company’s effective tax rate and the income tax rate is as follows for the years ended December 31:

	2004		2003		2002
Federal income tax rate	(35	)%	(35	)%	(35	)%
Research and development tax credits	(4	)	(6	)	(7	)
Valuation allowance	42		39		34
Other	(3	)	2		8
Effective tax rate	0	%	0	%	0	%

9.    Commitments

Operating leases

In November 2001, the Company entered into a noncancellable operating lease agreement for office space near its corporate headquarters in Seattle, Washington. The lease term for one floor of the building began on February 1, 2002. In February 2004, the Company occupied additional office space within the same building. The term of the lease runs through January 2012, with options to renew for up to two additional terms of five years each. Total annual lease payments under the lease averages approximately $1.2 million per year over their terms. The rent expense associated with this lease is being recorded on a straight-line basis over the initial term of the lease.

Gross rental expense for the years ended December 31, 2004, 2003, and 2002 was $1.1 million, $700,000, and $2.6 million, respectively. Cash received under sublease agreements was approximately $100,000 and $2.0 million for the years ended December 31, 2003 and 2002, respectively. There were no sublease agreements in 2004.

The following table presents the Company’s commitments for future minimum rental payments under noncancelable operating leases with initial or remaining terms in excess of one year (in thousands):

Year ending December 31,
2005	$	1,180
2006		1,189
2007		1,246
2008		1,248
2009		1,258
Thereafter		2,714
	$	8,835

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ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

Other

Certain key employees have employment agreements with the Company which provide for salary, health insurance and certain additional severance benefits.

10.    Serono S.A. agreements

In August 2001, the Company entered into a collaborative development and marketing agreement with Ares Trading S.A. (Serono), a wholly owned subsidiary of Serono S.A. Under the agreement, the Company is collaborating with Serono to develop biopharmaceutical products based on two receptors, TACI and BCMA. The Company could receive license fee and milestone payments of up to an aggregate of $52.5 million in connection with the development and approval of products, of which $10.5 million has been received through December 31, 2004. The Company shares research and development expenses worldwide, with the exception of Japan, where Serono covers all expenses. The Company retains an option to co-promote products with Serono in North America while Serono has exclusive rights to market products in the remainder of the world, for which the Company will receive royalties. The Company has the option of discontinuing funding of research and development and commercialization costs, and forgoing its right to co-promote products in North America. If the Company chooses to discontinue funding, Serono would have exclusive marketing rights in North America, and the Company would receive a royalty on any sales in North America in lieu of sharing in the net sales, commercialization expenses and profits from the products. Serono is responsible for manufacturing all products for both clinical trials and commercial sale. The Company received a $7.5 million payment from Serono in 2001, which is being amortized over the estimated term of the development program, approximately nine years.

In September 2004, the Company entered into a Master Agreement with Serono S.A. and Serono B.V. (together, Serono), providing for a strategic research, development and commercialization alliance with Serono. On October 12, 2004, upon closing of the transaction, the Company issued and sold to Serono 3,176,620 shares of common stock at a price per share of $15.74, for an aggregate purchase price of $50 million. The fair market value of the shares of common stock purchased on the date of the transaction exceeded the common stock purchase price by $6.7 million. This amount was deferred and will be recorded as a reduction in option fee and license fee revenue over the five-year term of the strategic alliance. Pursuant to the strategic alliance agreement and three other product-related agreements, Serono paid total upfront fees of $31.3 million plus potential milestones and royalties. Under the terms of the alliance, the companies will jointly fund and conduct research on certain protein candidates. Serono has the option to license candidates designated for development, and the Company may elect to co-develop such candidates with Serono. For each protein licensed or co-developed by Serono, the Company will receive upfront fees plus potential milestone payments, royalties and profit-sharing. The Company recorded revenue of $1.1 million at December 31, 2004 and will ratably recognize the remaining $23.4 million over the five–year term of the strategic alliance.

11.    Mandatorily redeemable convertible preferred stock

In November 2000, the Company issued 4,011,768 shares of Series B mandatorily redeemable convertible preferred stock to a group of investors at a price per share of $37.39, which provided proceeds to the Company of approximately $142.5 million, net of offering costs of approximately $7.5 million. In the same period, the Company declared a dividend on the outstanding common stock owned by Novo Nordisk, issuing 2,528,000 shares of Series A mandatorily redeemable convertible preferred stock. The holders of both Series A and B shares were entitled to receive a cumulative dividend of 8% per annum on the then current liquidation value. Each share of preferred stock was convertible into 3.6 shares of common stock.

On February 1, 2002, the Company completed its initial public offering, which resulted in the conversion of each share of Series A and Series B mandatorily redeemable convertible preferred stock to 3.6 shares of non-

64

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

voting and voting common stock, respectively. Effective June 24, 2002, all outstanding shares of non-voting common stock were converted into the same number of shares of voting common stock.

12.    Shareholders’ equity

The Company’s authorized capital stock consists of 150,000,000 shares of no par value voting common stock, 30,000,000 shares of no par value non-voting common stock and 30,000,000 shares of no par value preferred stock. On January 9, 2002, the Company effected a 3.6-for-1 stock split of its common stock in the form of a stock dividend. All common stock share and per share amounts in the financial statements have been adjusted retroactively to reflect the stock split.

Common stock

On February 1, 2002, the Company sold 10,000,000 shares of common stock in an initial public offering, raising net proceeds of $110.7 million. Upon the completion of the initial public offering the 4,011,768 shares of Series B mandatorily redeemable convertible preferred stock converted to 14,442,359 shares of voting common stock, and the 2,528,000 shares of Series A mandatorily redeemable convertible preferred stock converted to 9,100,800 shares of non-voting common stock. Effective June 24, 2002, all shares of non-voting common stock were converted into the same number of shares of voting common stock. In October 2003, the Company sold 6,100,000 shares of common stock in a public offering, raising net proceeds of $71.3 million.

In May 2004, the Company entered into a license agreement with Amgen Inc. and a related agreement pursuant to which Amgen Inc. agreed to purchase 624,337 shares of the Company’s common stock for a total purchase price of $10 million. The terms of the license agreement provide that the Company will have no performance obligations over the life of the agreement. The Company received an upfront license fee, which was recorded as revenue immediately, and is eligible to receive milestone payments upon the achievement of certain events, and royalties on product sales, if any. The fair market value of the shares of common stock purchased on the date of the transaction exceeded the common stock purchase price by $289,000. This amount was recorded as a reduction in license fee revenue.

On October 12, 2004, upon closing of the strategic alliance transaction, the Company issued and sold to Serono 3,176,620 shares of common stock at a price per share of $15.74, for an aggregate purchase price of $50 million. Additionally, the Company entered into a strategic alliance agreement and three other product-related agreements pursuant to which Serono paid total upfront fees of $31.3 million plus potential milestones and royalties. The upfront fees will be ratably recognized over the five-year term of the strategic alliance. The fair market value of the shares of common stock purchased on the date of the transaction exceeded the common stock purchase price by $6.7 million. This amount was deferred and will be recorded as a reduction in option fee and license fee revenue over the five-year term of the strategic alliance.

Stock options

In March 2000, the Company adopted the 2000 Stock Incentive Plan (the 2000 Plan). Upon completion of the Company’s initial public offering in February 2002, the 2000 Plan was suspended and the 2001 Stock Incentive Plan (the 2001 Plan) became effective. Both Plans provide for the issuance of incentive stock options and nonqualified stock options to employees, directors, consultants and other independent contractors who provide services to the Company. The Company’s board of directors is responsible for administration of the Plans and determines the term of each option, exercise price and the vesting terms. Options generally vest over a

65

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

four-year period and expire ten years from the date of grant. The 2001 Plan provides for an annual increase in authorized shares effective the first day of each year equal to the least of (i) 2,700,000 shares; (ii) 5% of the outstanding common stock as of the end of the Company’s preceding fiscal year; and (iii) a lesser amount as determined by the Board of Directors. The first annual increase under the 2001 Plan occurred upon completion of the Company’s initial public offering. Any shares from the 2000 Plan that are not actually issued shall continue to be available for issuance under the 2001 Plan. The Company has reserved a total of 14,338,650 shares of common stock for issuance under the Plans, of which 1,841,827 are available for future grant at December 31, 2004. Certain board members were granted options to purchase 144,000 shares that are immediately exercisable. Options to purchase 206,085 shares were granted in 2004, 2003 and 2002 to certain board members. These options vest and become exercisable as of the one-year anniversary of the grant date.

A summary of stock option activity under the Plans is presented below:

	Shares available for grant		Shares subject to options granted		Weighted- average exercise price per share		Weighted- average fair value at grant date
Balance, January 1, 2002	1,241,828		7,307,092		$	3.35
Additional shares reserved	603,180
Granted	(1,241,410	)	1,241,410		$	8.34	$	5.05
Exercised	—		(208,272	)	$	2.86
Canceled	72,833		(72,833	)	$	3.73
Balance, December 31, 2002	676,431		8,267,397		$	4.10
Additional shares reserved	2,290,752
Granted	(2,188,272	)	2,188,272		$	11.02	$	6.65
Exercised	—		(579,344	)	$	3.60
Canceled	498,661		(498,661	)	$	6.09
Balance, December 31, 2003	1,277,572		9,377,664		$	5.64
Additional shares reserved	2,624,718
Granted	(2,316,535	)	2,316,535		$	17.38	$	10.45
Exercised	—		(1,321,907	)	$	3.98
Canceled	256,072		(256,072	)	$	9.90
Balance, December 31, 2004	1,841,827		10,116,220		$	8.44

The exercise prices of options granted during 2001 and through January 9, 2002 were less than the estimated fair value of the Company’s shares at the date of grant. Estimated fair values during this time period ranged from $9.09 to $15.11 per share and, accordingly, the Company recorded total deferred compensation of $29.2 million. The exercise prices of options granted for the remainder of 2002 and through December 31, 2004, were equal to the fair value of the Company’s shares at the date of grant.

66

ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

The following table summarizes information about options outstanding at December 31, 2004:

	Options outstanding				Options exercisable
Exercise price	Weighted-average exercise prices		Number of shares	Weighted-average remaining contractual life (in years)	Number of shares	Weighted-average exercise prices
$  2.77 – $  3.88	$	2.78	3,287,069	5.5	3,234,457	$	2.78
$  3.89 – $  4.44	$	4.35	1,060,273	6.6	859,482	$	4.34
$  4.45 – $  8.50	$	6.36	1,429,974	7.3	930,869	$	6.19
$  8.51 – $  9.98	$	9.78	1,357,388	8.1	571,157	$	9.79
$  9.99 – $16.61	$	14.67	1,270,937	8.8	318,291	$	13.40
$16.62 – $23.00	$	17.91	1,710,579	9.4	1,250	$	18.19
$  2.77 – $23.00	$	8.44	10,116,220	7.3	5,915,506	$	4.79

Stock Options exercisable at:

December 31, 2003	5,036,853	$	3.62
December 31, 2002	3,848,876	$	3.10

Estimated fair values of stock options granted have been determined using the Black-Scholes option pricing model with the following assumptions:

	2004	2003	2002
Expected dividend yield	0%	0%	0%
Expected stock price volatility	70%	70%	70%
Risk-free interest rate	3.42%	3.17%	3.85%
Expected life of options	5 years	5 years	5 years

On September 14, 2001, the Company made loans to certain executives totaling $725,000, pursuant to promissory notes in connection with the purchase of shares of common stock upon the exercise of non-qualified stock options by the executives. In June 2004, these loans were repaid in full with shares of common stock originally purchased with the loan proceeds. The Company recorded a one-time non-cash compensation charge of $3.2 million related to the repayment.

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ZYMOGENETICS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

13.    Quarterly Financial Results (unaudited)

The following table contains selected statements of operations information, which is unaudited and should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this report. The Company believes that the following unaudited information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. Operating results for each quarter of 2004 and 2003 are summarized as follows (in thousands):

	March 31			June 30			September 30			December 31
Year ended December 31, 2004:
Revenue	$	5,689		$	8,353		$	11,936		$	9,716
Net loss	$	(18,896	)	$	(24,466	)	$	(22,002	)	$	(23,392	)
Basic and diluted net loss per common share	$	(0.36	)	$	(0.46	)	$	(0.41	)	$	(0.41	)
	March 31			June 30			September 30			December 31
Year ended December 31, 2003:
Revenue	$	6,233		$	5,721		$	8,212		$	5,791
Net loss	$	(13,471	)	$	(13,828	)	$	(14,995	)	$	(17,277	)
Basic and diluted net loss per common share	$	(0.29	)	$	(0.30	)	$	(0.32	)	$	(0.34	)

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, have concluded that as of such date our disclosure controls and procedures were effective. No change in our internal control over financial reporting occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

We, the management of ZymoGenetics, Inc., are responsible for the preparation, integrity, and fair presentation of the financial statements contained in this Annual Report on Form 10-K. Furthermore, we are responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles.

We have assessed the effectiveness of our company’s internal control over financial reporting as of December 31, 2004. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment using those criteria, we concluded that our internal control over financial reporting was effective as of December 31, 2004.

Our company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an audit report on our assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2004. This report appears on pages 47 and 48 of this Annual Report on Form 10-K.

Item 9B.    Other Information

None.

PART III

Item 10.    Directors and Executive Officers of the Registrant

(a)    The information required by this item with respect to our directors is incorporated by reference to the sections captioned “Election of Directors” and “Report by the Audit Committee” in the proxy statement for our annual meeting of shareholders to be held on June 10, 2005. We will file the proxy statement within 120 days of December 31, 2004, our fiscal year end.

(b)    The information required by this item with respect to our executive officers is incorporated by reference to the section captioned “Executive Officers” in the proxy statement for our annual meeting of shareholders to be held on June 10, 2005.

(c)    The information required by this item with respect to our code of ethics is incorporated by reference to the section captioned “Other Matters” in the proxy statement for our annual meeting of shareholders to be held on June 10, 2005.

Item 11.    Executive Compensation

The information required by this item with respect to executive compensation is incorporated by reference to the section captioned “Executive Compensation” in the proxy statement for our annual meeting of shareholders to be held on June 10, 2005.

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Item 12.    Security Ownership of Beneficial Owners and Management and Related Shareholder Matters

The information required by this item with respect to beneficial ownership is incorporated by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the proxy statement for our annual meeting of shareholders to be held on June 10, 2005.

The following table provides information regarding our equity compensation plans at December 31, 2004.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans(1)
Equity compensation plans approved by security holders	10,116,220	$	8.44	1,841,827
Equity compensation plans not approved by security holders	—		—	—
Total	10,116,220	$	8.44	1,841,827

(1) Does not include an increase of 2,700,000 shares, effective January 1, 2005, pursuant to a provision of the 2001 Plan that provides for an annual increase effective the first day of each year equal to the least of (i) 2,700,000 shares; (ii) 5% of the outstanding common stock as of the end of the Company’s preceding fiscal year; and (iii) a lesser amount as determined by the Board of Directors.

Item 13.    Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the section captioned “Certain Transactions” in the proxy statement for our annual meeting of shareholders to be held on June 10, 2005.

Item 14.    Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the section captioned “Independent Registered Public Accounting Firm” in the proxy statement for our annual meeting of shareholders to be held on June 10, 2005.

PART IV

Item 15.    Exhibits, Financial Statement Schedule and Reports on Form 8-K

(a)    The following documents are filed as part of this Form 10-K:

1.    Financial Statements.    The following financial statements are contained in Item 8 of this Annual Report on Form 10-K:

	Page in Form 10-K
Report of Independent Registered Public Accounting Firm	47 – 48
Balance Sheets	49
Statements of Operations	50
Statement of Changes in Shareholders’ Equity	51
Statements of Cash Flows	52
Notes to Financial Statements	53 – 68

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2.    Financial Statement Schedules

All financial statement schedules have been omitted because the required information is either included in the financial statements or the notes thereto or is not applicable.

3.    Exhibits

Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation of ZymoGenetics, Inc.	(D)
3.2		Amended and Restated Bylaws.	(A)
9.1		Agreement and Waiver of Co-Sale Rights, dated July 16, 2001, by and among ZymoGenetics, Inc., the holders of Series B Preferred Stock listed on the signature pages thereto and Serono B.V.	(A)
9.2		Share Transfer and Voting Agreement, dated January 2, 2001, by and between Warburg, Pincus Equity Partners, L.P. and Mount Everest Advisors, L.L.C. and acknowledged by ZymoGenetics, Inc.	(A)
10.1	†	Amended and Restated Employment Agreement, dated February 3, 2005, between ZymoGenetics, Inc. and Bruce L.A. Carter, Ph.D.	(J)
10.2	†	Employment Agreement, dated March 21, 2001, between ZymoGenetics, Inc. and Jan K. Öhrström.	(A)
10.3	†	Employment Agreement, dated April 23, 2001, between ZymoGenetics, Inc. and Frank D. Collins.	(A)
10.4	†	Employment Agreement, dated April 30, 2001, between ZymoGenetics, Inc. and James A. Johnson.	(E)
10.5	†	Employment Agreement, dated January 2, 2002, between ZymoGenetics, Inc. and Mark D. Young.	(A)
10.6	†	Employment Agreement, dated February 12, 2002, between ZymoGenetics, Inc. and Suzanne Shema.	(B)
10.7	†	Employment Agreement, dated September 17, 2003, between ZymoGenetics, Inc. and Fredrik Henell.	(F)
10.8	†	Employment Agreement, dated August 29, 2004, between ZymoGenetics, Inc. and Douglas E. Williams.	(I)
10.9	†	Amended and Restated 2000 Stock Incentive Plan.	(A)
10.10	†	2001 Stock Incentive Plan.	(A)
10.11	†	Stock Option Grant Program for Nonemployee Directors under the ZymoGenetics 2001 Stock Incentive Plan.
10.12	†	Deferred Compensation Plan for Key Employees.	(A)
10.13		Form of Promissory Note, dated September 14, 2001, between ZymoGenetics, Inc. and the executive officers listed on Schedule A thereto.	(A)
10.14		Form of Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics, Inc. and the executive officers listed on Schedule A thereto.	(A)
10.15		Pledge and Security Agreement, dated September 14, 2001, between ZymoGenetics, Inc. and Bruce L.A Carter.	(A)
10.16	*	Insulin Agreement, dated August 6, 1982, between ZymoGenetics, Inc. and Novo Industri A/S.	(A)
10.17		Amendment to Insulin Agreement, dated May 18, 2004, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(H)

71

Exhibit No.		Description
10.18	*	Addendum to Insulin Agreement, dated May 18, 2004, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(H)
10.19	*	Letter Agreement, dated March 13, 1987, between ZymoGenetics, Inc. and Novo Industri A/S.	(A)
10.20	*	Amended and Restated Human Glucagon, Analogues of Human Glucagon, Analogues of Human Insulin Letter Agreement, dated September 28, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)
10.21	*	License Agreement for Analogues of Human Insulin, dated September 28, 2000, between the registrant and Novo Nordisk Health Care AG.	(A)
10.22	*	License Agreement, dated February 23, 1989, between ZymoGenetics, Inc. and the University of Washington.	(A)
10.23	*	License Agreement, dated January 18, 1994, including Amendment No. 1, dated January 1, 1997, and Amendment No. 2, dated June 5, 2000, between and among ZymoGenetics, Inc., Novo Nordisk A/S, Johnson & Johnson and Chiron Corporation.	(A)
10.24	*	Royalty Agreement pertaining to the January 18, 1994 Agreement Relating to Platelet Derived Growth Factor, dated January 1, 2000, between ZymoGenetics, Inc. and Novo Nordisk.	(A)
10.25	*	License Agreement, dated December 31, 1998, as amended on February 4, 1999 and October 23, 2000, between ZymoGenetics, Inc. and St. Jude Children’s Research Hospital.	(A)
10.26	*	Option and License Agreement, effective November 10, 2000, as amended effective as of June 16, 2000 and October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)
10.27	*	Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S, Enzyme Business.	(A)
10.28	*	Cross-License Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)
10.29	*	Kunitz Protein Agreement, effective November 10, 2000, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(A)
10.30	*	Collaborative Development and Marketing Agreement, effective August 30, 2001 by and between ZymoGenetics, Inc. and Ares Trading S.A.	(A)
10.31	*	Collaborative Agreement for IL-21, dated December 14, 2002, between ZymoGenetics, Inc. and Novo Nordisk A/S.	(E)
10.32	*	Exclusive Patent License Agreement, effective December 18, 2002, between ZymoGenetics, Inc. and Aventis Behring GmbH.	(E)
10.33		Series B Preferred Stock Purchase Agreement, dated October 20, 2000, by and among ZymoGenetics, Inc., Novo Nordisk A/S and the other investors listed on Exhibit A thereto.	(A)
10.34		Shareholders’ Agreement by and among ZymoGenetics, Inc., Novo Nordisk A/S, Novo Nordisk Pharmaceuticals, Inc. and the investors listed on Schedule A thereto, effective as of November 10, 2000.	(A)
10.35		First Amendment to Shareholders’ Agreement by and among ZymoGenetics, Inc., Novo Nordisk A/S, Novo Nordisk Pharmaceuticals, Inc. and the investors listed on Schedule A thereto, dated as of February 4, 2002.	(C)
10.36		Investors’ Rights Agreement by and among ZymoGenetics, Inc., Novo Nordisk Pharmaceuticals, Inc. and the persons listed on Schedule A thereto, effective as of November 10, 2000.	(A)
10.37		Tax Sharing Agreement, effective October 20, 2000, between ZymoGenetics, Inc. and Novo Nordisk of North America, Inc.	(A)

72

Exhibit No.		Description
10.38		Office Lease Agreement, dated November 9, 2001, between ZymoGenetics, Inc. and 1144 Eastlake LLC.	(A)
10.39		Lease Agreement, dated October 4, 2002, between ZymoGenetics, Inc. and ARE-1201/1208 Eastlake Avenue, LLC.	(E)
10.40		Amendment No. 2 to Lease Agreement, dated July 19, 2004, between ZymoGenetics, Inc. and ARE-1201/1208 Eastlake Avenue, LLC.	(H)
10.41		Lease Agreement, dated October 4, 2002, between ZymoGenetics, Inc. and ARE-1208 Eastlake Avenue, LLC.	(E)
10.42		Amendment No. 2 to Lease Agreement, dated June 14, 2004, between ZymoGenetics, Inc. and ARE-/1208 Eastlake Avenue, LLC.	(H)
10.43	*	Development and Supply Agreement, dated October 1, 2003, between ZymoGenetics, Inc. and Abbott Laboratories.	(G)
10.44	*	Strategic Alliance Agreement, dated October 12, 2004, between ZymoGenetics, Inc. and Serono S.A.
10.45	*	License Agreement for Recombinant Factor XIII, dated October 4, 2004, among ZymoGenetics, Inc., Novo Nordisk A/S and Novo Nordisk Health Care AG.
23.1		Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
31.1		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

† Management contract or compensatory plan or arrangement.

* Portions of these exhibits have been omitted based on a grant of confidential treatment from the Securities and Exchange Commission. The omitted portions of these exhibits have been filed separately with the SEC.

(A) Incorporated by reference to ZymoGenetics Registration Statement on Form S-1 (No. 333-69190) filed on September 10, 2001, as amended.

(B) Incorporated by reference to ZymoGenetics Annual Report on Form 10-K for the year ended December 31, 2001.

(C) Incorporated by reference to ZymoGenetics Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.

(D) Incorporated by reference to ZymoGenetics Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

(E) Incorporated by reference to ZymoGenetics Annual Report on Form 10-K for the year ended December 31, 2002.

(F) Incorporated by reference to ZymoGenetics Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

(G) Incorporated by reference to ZymoGenetics Annual Report on Form 10-K for the year ended December 31, 2003.

(H) Incorporated by reference to ZymoGenetics Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

(I) Incorporated by reference to ZymoGenetics Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

(J) Incorporated by reference to ZymoGenetics Current Report on Form 8-K dated as of February 3, 2005.

(b)    The exhibits required by this item are listed under item 15(a)(3).

73

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

ZYMOGENETICS, INC.
Date: March 11, 2005	By:	/s/    BRUCE L.A. CARTER
	Bruce L.A. Carter, Ph.D. President and Chief Executive Officer

Each person whose individual signature appears below hereby authorizes and appoints Bruce L.A. Carter and James A. Johnson, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and 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, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

Signature	Title	Date
/s/    BRUCE L.A. CARTER         Bruce L.A. Carter, Ph.D.	President, Chief Executive Officer and Director (Principal Executive Officer)	March 11, 2005
/s/    JAMES A. JOHNSON         James A. Johnson	Senior Vice President, Chief Financial Officer and Treasurer (Principal Accounting and Financial Officer)	March 11, 2005
/s/    GEORGE B. RATHMANN         George B. Rathmann, Ph.D.	Chairman of the Board of Directors	March 11, 2005
/s/    DAVID I. HIRSH         David I. Hirsh, Ph.D.	Director	March 11, 2005
/s/    JONATHAN S. LEFF         Jonathan S. Leff	Director	March 11, 2005
/s/    KURT ANKER NIELSEN         Kurt Anker Nielsen	Director	March 11, 2005
/s/    EDWARD E. PENHOET         Edward E. Penhoet, Ph.D.	Director	March 11, 2005
/s/    JAMES A. HARPER         James A. Harper	Director	March 11, 2005
/s/    LARS REBIEN SØRENSEN         Lars Rebien Sørensen	Director	March 11, 2005

74

EX-10.11

Exhibit 10.11

STOCK OPTION GRANT PROGRAM

FOR

NONEMPLOYEE DIRECTORS UNDER THE

ZYMOGENETICS 2001 STOCK INCENTIVE PLAN

The following provisions set forth the terms of the stock option grant program (the “Program”) for nonemployee directors of ZymoGenetics, Inc. (the “Company”) under the Company’s 2001 Stock Incentive Plan (the “Plan”). The following terms are intended to supplement, not alter or change, the provisions of the Plan, and in the event of any inconsistency between the terms contained herein and in the Plan, the Plan shall govern. All capitalized terms that are not defined herein shall be as defined in the Plan.

1. Eligibility

Each director of the Company who is not otherwise an employee of the Company or any Related Company (an “Eligible Director”) shall be eligible to receive grants under the Plan, as discussed below.

2. Initial Grants

(a) Each Eligible Director who is first elected or appointed to the Board shall automatically be granted as of the date of such initial election or appointment a Nonqualified Stock Option to purchase 20,000 shares of Common Stock (the “Initial Grant”).

(b) Initial Grants shall vest and become exercisable at the next annual meeting of shareholders (the “Annual Meeting”), assuming continued service on the Board for such period; provided, however, that with respect to any Initial Grant made within five months before an Annual Meeting, the Option shall not become vested and exercisable until the second Annual Meeting after the date of such Initial Grant.

3. Annual Grants

(a) Immediately following each year’s Annual Meeting, each Eligible Director shall automatically receive a Nonqualified Stock Option to purchase 7,500 shares of Common Stock (each, an “Annual Grant”); provided that any Eligible Director who received an Initial Grant within five months before an Annual Meeting shall not receive an Annual Grant until immediately following the second Annual Meeting after the date of such Initial Grant.

(b) Such Annual Grants shall fully vest and become exercisable on the next Annual Meeting, assuming continued service on the Board for such period.

4. Option Exercise Price

The exercise price of an Option shall be the Fair Market Value of the Common Stock on the Grant Date.

5. Manner of Option Exercise

An Option shall be exercised by giving the required notice to the Company, stating the number of shares of Common Stock with respect to which the Option is being exercised, accompanied by payment in full for such Common Stock, which payment may be in whole or in part (a) in cash or check, (b) in shares of Common Stock, owned by the Eligible Director for at least six months (or any shorter period necessary to avoid a charge to the Company’s earnings for financial reporting purposes) having a Fair Market Value on the day prior to the exercise date equal to the aggregate Option exercise price, or (c) if and so long as the Common Stock is registered under the Exchange Act and to the extent permitted by law, by delivery of a properly executed exercise notice, together with irrevocable instructions to a broker, to properly deliver to the Company the amount proceeds to pay the exercise price, all in accordance with the regulations of the Federal Reserve Board.

6. Term of Options

Each Option shall expire ten years from the Grant Date thereof, but shall be subject to earlier termination as follows:

(a) In the event that an Eligible Director ceases to be a director of the Company for any reason other than the death of the Eligible Director, the unvested portion of any Option granted to such Eligible Director shall terminate immediately and the vested portion of the Option may be exercised by the Eligible Director only within one year after the date he or she ceases to be a director of the Company or prior to the date on which the Option expires by its terms, whichever is earlier.

(b) In the event that an Eligible Director ceases to be a director of the Company by reason of the death of the Eligible Director, the entire Option shall automatically become fully vested and must be exercised within one year after the date of death of the Eligible Director or on or prior to the date on which the Option expires by its terms, whichever is earlier, by the personal representative of the Eligible Director’s estate, the person(s) to whom the Eligible Director’s rights under the Option have passed by will or the applicable laws of descent and distribution or the beneficiary designated pursuant to Section 11 of the Plan. In the event that an Eligible Director dies following cessation of services as a director, the portion of the Option that was vested on the date of such cessation of services must be exercised on or before one year after the date of death of the former director or on or prior to the date on which the Option expires by its terms, whichever is earlier.

7. Company Transactions

In the event of any Company Transaction, other than a Related Party Transaction, each Initial and Annual Grant that is at the time outstanding shall automatically accelerate so that each such grant shall, immediately prior to the specified effective date for the Company Transaction, become fully vested and exercisable. Such Options shall terminate and no longer be exercisable to the extent that they are not exercised prior to the Company Transaction.

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8. Amendment

The Board may amend the provisions contained herein in such respects as it deems advisable. Any such amendment shall not, without the consent of the Eligible Director, impair or diminish any rights of an Eligible Director or any rights of the Company under an Option.

Provisions of the Plan (including any amendments) that were not discussed above, to the extent applicable to Eligible Directors shall continue to govern the terms and conditions of Options granted to Eligible Directors.

As amended and restated on September 16, 2004.

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EX-10.44

Exhibit 10.44

STRATEGIC ALLIANCE AGREEMENT

by and between

ZymoGenetics, Inc.

and

Serono S.A.

Effective Date: October 12, 2004

“[ * ]” = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment.

CONTENTS

ARTICLE ONE Definitions and Terminology				1
	1.1	Definitions		1
	1.2	Terminology		1
ARTICLE TWO Coordination of the Alliance				2
	2.1	Steering Committee		2
		2.1.1	Formation of Steering Committee	2
		2.1.2	Roles and Responsibilities	2
		2.1.3	Meetings and Communications	3
		2.1.4	Decision Making; Formalities	3
	2.2	Research Leaders and Research Team		3
		2.2.1	Research Leaders; Appointment; Role and Responsibilities	3
		2.2.2	Formation of Research Team	4
		2.2.3	Roles and Responsibilities	4
		2.2.4	Meetings and Communications	5
		2.2.5	Decision Making; Formalities	5
	2.3	Use of Third Party Intellectual Property; Reach Through Royalties		5
ARTICLE THREE Evaluation of Genes and Selection for Collaborative Research				5
	3.1	Evaluation prior to Medical Hypothesis		5
		3.1.1	Parties’ Rights to Independently Evaluate	5
		3.1.2	ZGEN Core Genes	6
		3.1.3	Initial Transfer	6
	3.2	Selection for Collaborative Research at Medical Hypothesis		6
		3.2.1	Notice of Medical Hypothesis to the Other Party and Novo	6
		3.2.2	Collaboration Election; Procedure	7
		3.2.3	No Collaboration Election Because ZGEN Does Not Wish to Perform Research	7
		3.2.4	No Collaboration Election Because Serono Does Not Wish to Perform Research	8
	3.3	Expiration of the Evaluation Term		8
ARTICLE FOUR Collaborative Research Following a Collaboration Election				9
	4.1	Guiding Principles		9
	4.2	Efforts; Cooperation		9
	4.3	Exchange of Technology		9
	4.4	Research Plan and Budget		9
	4.5	Shared Research Costs		9
		4.5.1	Cost Sharing Ratio	9
		4.5.2	Cap on Research Costs	10
		4.5.3	Quarterly Accounting and Reconciliation	10
	4.6	Third Party Research Fees		10
	4.7	Serono’s Right to Opt Out of Collaborative Research		11
	4.8	ZGEN's Right to Opt Out of Collaborative Research		11

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	4.9	Expiration of the Research Term		11
ARTICLE FIVE Option Rights				12
	5.1	Option Rights		12
	5.2	Procedure		12
	5.3	Licenses to Third Parties		14
	5.4	Terms of the Novo Agreement		14
	5.5	Designation of U.S.A. Vendor		14
ARTICLE SIX Right of Negotiation for an [ * ] Agreement				15
	6.1	Negotiation Right		15
	6.2	Conduct of Negotiations		15
ARTICLE SEVEN Payment				16
ARTICLE EIGHT Records, Reporting, Payment and Audits				16
	8.1	Form of Payment; Currency Conversion		16
	8.2	Late Payment		16
	8.3	Records		16
	8.4	Audits		17
	8.5	Payments Based on Audit Results		17
	8.6	Withholding		17
ARTICLE NINE Licenses				17
	9.1	License to Serono		17
	9.2	License to ZGEN		18
	9.3	Grant of Sublicenses and Use of Contractors		18
	9.4	Licenses from Third Parties		18
	9.5	[*]		19
	9.6	No Other Rights		19
	9.7	Use of Names, Trade Names and Trademarks		19
ARTICLE TEN Intellectual Property Ownership, Prosecution and Enforcement				20
	10.1	Intellectual Property Ownership		20
	10.2	Patent Contacts for Gene		20
	10.3	Prosecution and Maintenance		20
		10.3.1	ZGEN IP	20
		10.3.2	Serono IP	20
		10.3.3	Joint Project Technology	20
		10.3.4	Patent Prosecution Party’s Efforts	21
	10.4	Defense and Enforcement Actions		21
ARTICLE ELEVEN Confidentiality; Materials; Publicity				22
	11.1	Confidentiality and Non-Use		22

[ * ] Confidential Treatment Requested

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	11.2	Exceptions		22
	11.3	Permitted Disclosures		23
	11.4	Materials; Permitted Uses		23
	11.5	Publications		24
	11.6	Obligations of Confidentiality to Third Parties		24
ARTICLE TWELVE Representations, Warranties and Covenants				24
	12.1	Representations, Warranties and Covenants of Serono		24
		12.1.1	Organization and Good Standing	24
		12.1.2	Enforceability; Authority and No Current Conflicts	25
		12.1.3	Invention Agreements With Personnel	25
		12.1.4	No Future Conflicts	25
		12.1.5	Compliance With Laws	25
		12.1.6	Authority to License	25
	12.2	Representations, Warranties and Covenants of ZGEN		25
		12.2.1	Organization and Good Standing	26
		12.2.2	Enforceability; Authority and No Current Conflicts	26
		12.2.3	Invention Agreements With Personnel	26
		12.2.4	No Future Conflicts	26
		12.2.5	Compliance With Laws	26
		12.2.6	Authority to License	27
	12.3	Materials		27
	12.4	Warranty Disclaimer		27
	12.5	No Use in Humans		27
ARTICLE THIRTEEN Indemnification; Insurance				28
	13.1	Indemnification		28
		13.1.1	Matters Covered	28
		13.1.2	Exclusions	28
	13.2	Defense of Claims		28
		13.2.1	Provision of Attorney	28
		13.2.2	Notice	29
		13.2.3	Tender of Defense	29
		13.2.4	Assistance	29
	13.3	Insurance		30
ARTICLE FOURTEEN Term and Termination				30
	14.1	Term		30
	14.2	Termination for Material Breach		30
	14.3	Termination Upon Serono's Bankruptcy		30
	14.4	No Termination Upon ZGEN's Bankruptcy		30
	14.5	Termination of License With Respect to Contested Patent Rights		31
	14.6	Consequences of Expiration and Termination		31
		14.6.1	Accrued Rights	32
		14.6.2	Surviving Provisions	32
		14.6.3	Cumulative Remedies	32

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ARTICLE FIFTEEN Dispute Resolution				32
	15.1	Cooperative Decision Making		32
		15.1.1	General Rule	32
		15.1.2	Resolution by Senior Executives	32
		15.1.3	Escalation to CEOs	33
	15.2	Review by CEOs		33
		15.2.1	Matters Referred to CEOs	33
		15.2.2	Resolution by CEOs	33
		15.2.3	Escalation to Arbitration	33
	15.3	Arbitration		33
		15.3.1	Matters to be Arbitrated	33
		15.3.2	Venue, Rules and Applicable Law	33
		15.3.3	Composition of Tribunal	34
		15.3.4	Tribunal’s Jurisdiction	34
		15.3.5	Costs	34
		15.3.6	Continuing Performance	34
		15.3.7	Equitable Remedies	34
	15.4	Matters to Proceed to Court		35
ARTICLE SIXTEEN General				35
	16.1	Entire Agreement		35
	16.2	No Drafting Party; Legal Counsel		35
	16.3	Controlling Law		35
	16.4	Notices		35
	16.5	Force Majeure		36
	16.6	Assignability		37
	16.7	Amendments and Waivers		37
	16.8	Severability		37
	16.9	Counterparts		38
	16.10	Relationship		38

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LIST OF EXHIBITS

Exhibit A	Definitions
Exhibit B	Medical Hypothesis Deliverables
Exhibit C	Research Costs - Cost Accounting Principles
Exhibit D	Financial Terms of Co-Development/Co-Promotion and License Agreement for Non-Core Gene
Exhibit E	Financial Terms of Exclusive License Agreement for Non-Core Gene
Exhibit F	Financial Terms of Co-Development/Co-Promotion and License Agreement for Core Gene
Exhibit G	Financial Terms of Exclusive License Agreement for Core Gene
Exhibit H	Lead Deliverables
Exhibit I	Target Deliverables
Exhibit J	Template Co-Development/Co-Promotion and License Agreement
Exhibit K	Template Exclusive License Agreement
Exhibit L	ZGEN Core Genes
Exhibit M	Non-Core Genes
Exhibit N	Excluded Genes
Exhibit O	Encumbered Genes

-v-

STRATEGIC ALLIANCE AGREEMENT

This Strategic Alliance Agreement is made as of the Effective Date, October 12, 2004, by and between ZymoGenetics, Inc., a Washington corporation (“ZGEN”), and Serono S.A., a Swiss corporation (“Serono”).

RECITALS

A. Each party has an interest in the development of potential therapies for human diseases.

B. ZGEN has certain rights to the Genes and the Genes have potential therapeutic value.

C. ZGEN wishes to grant Serono, and Serono wishes to receive, the right, on the terms set forth herein:

(i) to evaluate the therapeutic value of proteins expressed by the Genes by performing research in pursuit of a Medical Hypothesis;

(ii) to perform research relating to a Gene for which a Medical Hypothesis is formed to gather information to support the designation of a Lead or Target related to the Gene, which research may be conducted in collaboration with ZGEN or by Serono on its own; and

(iii) to acquire rights for the development and commercialization of a Lead or Target for which Serono performed research.

AGREEMENT

NOW, THEREFORE, the parties, intending to be legally bound, agree as follows:

ARTICLE ONE

Definitions and Terminology

1.1 Definitions

In addition to other terms defined elsewhere in this Agreement, words and phrases with initial capitals shall have the meanings stated in Exhibit A.

1.2 Terminology

Where words and phrases are used herein in the singular, such usage is intended to include the plural forms where appropriate to the context, and vice versa. The words “including,” “includes” and “such as” are used in a non-limiting sense and have the same meaning as “including without limitation” and “including, but not limited to.” References to Articles, Sections, Subsections and paragraphs are to the same with all their subparts as they

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appear in this Agreement. “Herein” means anywhere in this Agreement. “Hereunder” and “hereto” mean under or pursuant to any provision of this Agreement. The Article and Section headings contained herein are for reference only and shall not be considered a part of this Agreement, nor shall they in any way affect the interpretation hereof. All references to dollars or $ are to the currency of the U.S.A. All references to time are to the time in Seattle, Washington, U.S.A.

ARTICLE TWO

Coordination of the Alliance

2.1 Steering Committee

2.1.1 Formation of Steering Committee

(a) The parties’ collaboration shall be governed by a steering committee (the “Steering Committee”). Each party shall appoint its representatives on the initial Steering Committee within thirty (30) days following the Effective Date and shall promptly thereafter notify the other party of such appointment.

(b) The Steering Committee shall have a total of six (6) members. ZGEN and Serono shall each appoint three (3) members. If at any time a vacancy occurs for any reason, the party that appointed the prior incumbent shall as soon as reasonably practicable appoint a successor. Each party shall promptly notify the other party of any substitution of another person as its appointee on the Steering Committee.

2.1.2 Roles and Responsibilities

The Steering Committee shall be responsible for:

(a) Review and approval of a Medical Hypothesis for a Gene.

(b) Review and approval of the Research Plan and Budget for a Gene.

(c) Monitoring the use of a Third Party’s intellectual property under Section 2.3.

(d) Designation of Leads and Targets and facilitating the exercise of Option Rights pursuant to Section 5.2, including determining whether a Lead or Target [ * ] licensed Lead or Target.

(e) Resolution of disputes occurring at the Research Team level or between the parties’ respective Patent Contacts.

The Steering Committee may, on its own initiative and at any time, act or reverse action, within the scope of the Research Team’s or Patent Contacts’ responsibilities.

[ * ] Confidential Treatment Requested

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2.1.3 Meetings and Communications

The Steering Committee shall meet at least semi-annually at mutually agreed upon times and locations. Unless otherwise agreed, the location of such meetings will alternate between the parties’ headquarters. Meetings shall take place in person, by videoconference or by telephone conference, as mutually agreed by the parties. There shall be an agenda for each meeting of the Steering Committee, and written minutes of each meeting shall be taken and shall include the issues discussed and action items, if any, arising from such meeting. Meeting minutes shall be submitted to the members of the Steering Committee. Each face-to-face meeting of the Steering Committee shall include a review and approval (or amendment) of minutes from the prior meeting and of all actions taken through interim communications.

2.1.4 Decision Making; Formalities

(a) All official actions, decisions or rulings of the Steering Committee under this Agreement must receive the approval of four (4) members either in writing (including by email or facsimile) or by vote at a meeting of the Steering Committee, and all significant actions, decisions or rulings shall subsequently be entered into the minutes of meetings of the Steering Committee.

(b) The parties intend that, to the maximum extent practicable, they shall reach decisions hereunder cooperatively through the deliberations of the Steering Committee. If a decision cannot be made in accordance with this Section 2.1.4, either of the parties may institute the procedure described in Article Fifteen.

2.2 Research Leaders and Research Team

2.2.1 Research Leaders; Appointment; Role and Responsibilities

(a) Each party shall appoint its initial research leader to be responsible for the day to day coordination of the parties’ efforts under this Agreement (each a “Research Leader”) within thirty (30) days following the Effective Date and shall promptly thereafter notify the other party of such appointment. If at any time a vacancy occurs for any reason, the party that appointed the prior incumbent shall as soon as reasonably practicable appoint a successor. Each party shall promptly notify the other party of any substitution of another person as its Research Leader.

(b) Subject to the Guiding Principles, the Research Leaders shall coordinate the parties’ efforts under this Agreement, including the performance of the parties’ respective Research Tasks. In particular the Research Leaders shall review and, subject to Sections 2.3 and 9.4, approve any proposed use of a Third Party’s products, materials or services in a Research Project, and the related costs and expenses as Research Costs, whether under an existing or a proposed new Third Party Agreement. The Research Leaders shall communicate with each other as often and by such media as they deem appropriate but in no case less than quarterly.

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2.2.2 Formation of Research Team

(a) The Research Leaders shall form the initial research team to manage the research to be conducted hereunder (the “Research Team”) by the thirtieth (30^th) day following their appointment as the Research Leaders.

(b) Those serving on the Research Team must be approved by the Steering Committee. The Research Team may have any number of members as may be approved by the Steering Committee. While the parties need not be equally represented in number of members on the Research Team, the Research Team will be co-led by the two (2) Research Leaders.

(c) The Research Leaders may form additional Research Teams for distinct Genes; provided that the individuals serving on the Research Team for a Gene may serve on the Research Team for one or more different Genes.

2.2.3 Roles and Responsibilities

(a) The Research Team shall coordinate the exchange of information pursuant to Section 3.1.3.

(b) The Research Team shall coordinate any interactions between the parties with respect to evaluation of Genes prior to Medical Hypothesis.

(c) Within ninety (90) days after a Collaboration Election, the Research Team shall prepare and submit to the Steering Committee for approval an initial Research Plan and Budget directed at gathering information relating to the Gene to support the designation of a Lead or Target. The initial Research Plan and Budget shall cover the remainder of the then current calendar year and the whole of the immediately following calendar year. As appropriate from time to time and not less often than annually, the Research Team shall prepare and submit to the Steering Committee for approval proposed updates and amendments to the Research Plan and Budget; provided that an update or amendment may not extend the Research Term for the Gene.

(d) Subject to the Guiding Principles, the Research Team shall under the direction of the Research Leaders plan the Research Tasks of the parties, establish and monitor timetables for the conduct of the Research Tasks, select entities or individuals, including Serono, ZGEN or Third Party contractors, to perform Research Tasks, and otherwise monitor compliance with the Research Plan and Budget.

(e) The Research Team shall periodically review the information gathered relating to a Gene to assess whether a Lead or Target may be designated and make recommendations to the Steering Committee promptly after the Research Team considers that a Lead or Target may be designated.

(f) Following a Collaboration Election with respect to a Gene, the Research Team shall submit to the Steering Committee a full written status report with respect to such Gene on a semi-annual basis during the Research Term. A status report shall cover the then-current status, the results achieved, the problems encountered and other pertinent material information relating to the designation of a Lead or Target related to such Gene.

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2.2.4 Meetings and Communications

The Research Team shall meet as often as is deemed necessary by the Research Leaders but in no case less than quarterly. Meetings shall take place in person, by videoconference or by telephone conference, as mutually agreed by the Research Leaders. There shall be an agenda for each meeting of the Research Team, and written minutes of each meeting shall be taken and shall include the issues discussed and action items, if any, arising from such meeting. Meeting minutes shall be submitted to the members of the Research Team and the Steering Committee.

2.2.5 Decision Making; Formalities

All official actions, decisions or rulings of the Research Team under this Agreement must receive the approval of the two (2) Research Leaders, either in writing (including by email or facsimile) or by vote at a meeting of the Research Team, and all significant actions, decisions or rulings shall subsequently be entered into the minutes of meetings of the Research Team. In the absence of such mutual approval, either Research Leader may by formal written notice to the Steering Committee declare the existence of a dispute at the Research Team level and thereby request that such dispute be resolved by the Steering Committee.

2.3 Use of Third Party Intellectual Property; Reach Through Royalties

Neither party shall knowingly incur a financial obligation to a Third Party payable in connection with the subsequent development or sale of a therapeutic product related to a Gene whether by using the intellectual property of a Third Party in the evaluation of the protein expressed by the Gene or as part of the Research Project or otherwise without providing the Steering Committee with prior written notice. Unless the Steering Committee decides the costs and expenses are Research Costs, all costs and expenses shall be borne by the party incurring the obligation. If a party becomes aware of a financial obligation described in this Section 2.3 as to which no notice was provided to the Steering Committee, it shall notify the Steering Committee of the event promptly after it becomes aware thereof.

ARTICLE THREE

Evaluation of Genes and Selection for Collaborative Research

3.1 Evaluation prior to Medical Hypothesis

3.1.1 Parties’ Rights to Independently Evaluate

(a) During the Evaluation Term, each party may, in accordance with this Agreement and at its own cost and expense, evaluate the therapeutic utility of the proteins expressed by each Non-Core Gene using any research methods or tools that it deems appropriate. Subject to Section 3.1.2, only ZGEN may evaluate the ZGEN Core Genes.

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(b) Subject to Section 3.2, the parties shall have no obligation to collaborate regarding the evaluation of the therapeutic utility of the protein expressed by any Gene.

(c) At least on a semi-annual basis via a meeting of the Research Leaders, each party shall keep the other apprised as to the status of its evaluation of the therapeutic utility of the proteins expressed by each Gene, in particular reporting any material results achieved, problems encountered and other pertinent material information. Such meetings shall take place by such means (in person, by videoconference or by telephone conference) and at such times and locations as mutually agreed by the Research Leaders. Written minutes of each meeting shall be taken and shall include the issues discussed and action items, if any, arising from such meeting. In calendar year 2006, one such semi-annual meeting will occur during the third quarter.

3.1.2 ZGEN Core Genes

(a) ZGEN anticipates advancing the ZGEN Core Genes to Medical Hypothesis, at its sole cost and expense. Therefore, except as set forth in Subsection (b), Serono shall not evaluate the therapeutic utility of the proteins expressed by a ZGEN Core Gene during the Evaluation Term. [ * ].

(b) ZGEN may by written notice to Serono remove a Gene’s designation as a ZGEN Core Gene and allow Serono to evaluate the therapeutic utility of the proteins it expresses during the Evaluation Term.

3.1.3 Initial Transfer

Promptly following the Effective Date, the Research Team shall develop a plan whereby the parties shall disclose to each other ZGEN Enabling Technology and Serono Enabling Technology, respectively.

3.2 Selection for Collaborative Research at Medical Hypothesis

3.2.1 Notice of Medical Hypothesis to the Other Party and Novo

(a) Each party’s Research Leader shall provide prompt written notice to the other Research Leader when the party he or she represents has formed a Medical Hypothesis for a Gene. The notice shall summarize in writing the information relating to the Medical Hypothesis set forth in Exhibit B. The Research Leaders shall submit the notice to the Steering Committee for approval within [ * ] of receipt, and the Steering Committee shall consider the Medical Hypothesis within [ * ] thereafter and approve or give reasons for withholding approval of the Medical Hypothesis for the Gene.

[ * ] Confidential Treatment Requested

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(b) If ZGEN considers that a Medical Hypothesis exists for a Gene, ZGEN shall be free to [ * ]. If a Medical Hypothesis is acceptable [ * ] approved by the Steering Committee.

(c) ZGEN shall be responsible for all communications with Novo relating to [ * ]. Simultaneous with its communication to Novo, ZGEN will report to Serono all material information that is communicated by ZGEN to Novo relating to [ * ] disclosed in accordance with the Novo Agreement, as well as each Definitive Response or Extension Response [ * ] and notice of any extension of the option period under Section 4.3.3 of the Novo Agreement.

3.2.2 Collaboration Election; Procedure

(a) By the [ * ] after the later of the day on which:

(i) the Steering Committee approves a Medical Hypothesis for a Gene; and

(ii) ZGEN gives Serono notice of a Definitive Response for such Gene;

Serono shall indicate in writing whether it wishes to perform research relating to the Gene to gather information to support the designation of a related Lead or Target. [ * ] after receipt of a notice from Serono indicating a wish to perform research, ZGEN shall indicate in writing whether it wishes to collaborate in such research.

(b) All research relating to a Gene for which a Collaboration Election is made shall be conducted in accordance with Article Four.

3.2.3 No Collaboration Election Because ZGEN Does Not Wish to Perform Research

(a) If Serono (but not ZGEN) wishes to perform research relating to a Gene for which a Medical Hypothesis is approved to support the designation of a related Lead or Target, it may do so at its sole cost and expense during the Research Term. Serono shall submit to ZGEN a written status report on a semi-annual basis during the Research Term. A status report shall cover the then-current status, the results achieved, the problems encountered and other pertinent material information relating to the designation of a Lead or Target related to the Gene. Serono shall [ * ] to gather information relating to the Gene in order to support the designation of a related Lead or Target, [ * ]. During the Research Term, ZGEN will provide to Serono full and prompt disclosure of any new ZGEN Enabling Technology described in paragraph 76(a)(i) or to be transferred pursuant to paragraph 76(a)(iii) of Exhibit A, including any invention disclosures submitted to its patent department which disclose such new ZGEN Enabling Technology.

(b) If Serono subsequently exercises its Option Rights as to a Lead or Target related to a Gene for which it performed research without ZGEN under Subsection (a), the parties shall

[ * ] Confidential Treatment Requested

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enter into an Exclusive License Agreement with respect to such Lead or Target, i.e., ZGEN shall have no right to enter into a Co-Development/Co-Promotion and License Agreement with respect to such Lead or Target.

(c) Serono may terminate research relating to a Gene for which it performs research without ZGEN under Subsection (a) at any time before a Lead or Target related to the Gene is designated by giving ZGEN written notice, which shall be effective immediately upon receipt by ZGEN. On the effective date of Serono’s termination of research with respect to such Gene, the parties shall have the Wind Down Rights and Obligations with respect to such Gene.

(d) If ZGEN believes that Serono has failed [ * ] with respect to the performance of research relating to a Gene as required by Subsection (a), ZGEN shall deliver a written notice to Serono stating that Serono has failed [ * ] and ZGEN’s reasons for such belief. Unless Serono earlier provides written notice disputing ZGEN’s assertion, effective on the [ * ] following Serono’s receipt of ZGEN’s notice, the parties shall have the Wind Down Rights and Obligations with respect to such Gene. If Serono timely provides notice of a dispute, then notwithstanding Section 15.4, such dispute shall be resolved in accordance with Sections 15.1 through 15.3, and, if such dispute is finally resolved in ZGEN’s favor, the parties shall have the Wind Down Rights and Obligations with respect to such Gene. If such dispute is finally resolved in Serono’s favor, Serono shall retain all its rights and obligations hereunder with respect to such Gene.

3.2.4 No Collaboration Election Because Serono Does Not Wish to Perform Research

If Serono does not wish to perform research relating to a Gene for which a Medical Hypothesis is approved to support the designation of a related Lead or Target, the parties shall have the Wind Down Rights and Obligations with respect to such Gene.

3.3 Expiration of the Evaluation Term

If, on expiration of the Evaluation Term for a Gene, a Medical Hypothesis for the Gene has not been formed, either:

(a) Serono may exercise its Option Rights with respect to any potential Lead or Target related to the Gene (subject to, in the case of ZGEN Core Genes, the Cap) on the financial terms outlined as if such potential Lead or Target (as appropriate) related to the Gene met the stated criteria and had been designated; or

(b) the parties shall have the Wind Down Rights and Obligations with respect to such Gene.

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ARTICLE FOUR

Collaborative Research Following a Collaboration Election

4.1 Guiding Principles

The parties intend to conduct any research relating to a Gene for which a Collaboration Election is made in accordance with the following principles (“Guiding Principles”): joint governance, collaboration, joint decision-making, shared access and responsibility and shared opportunity.

4.2 Efforts; Cooperation

(a) Each party shall [ * ] gather information relating to a Gene for which a Collaboration Election is made in order to support the designation of a Lead or Target based on such Gene, including performing its Research Tasks in accordance with the Research Plan and Budget for the Gene.

(b) Each party shall cooperate with and provide reasonable support to the other party, as requested by the other party, in connection with the performance of its Research Tasks.

(c) Each party shall be responsible for the selection and supervision of its personnel who are assigned any Research Tasks pursuant to this Agreement.

4.3 Exchange of Technology

During the Research Term, Serono and ZGEN will each provide to the other party full and prompt disclosure of any new Serono Enabling Technology, ZGEN Enabling Technology or Project Technology Controlled by such party, including any invention disclosures submitted to its patent department which disclose such new Serono Enabling Technology, ZGEN Enabling Technology or Project Technology.

4.4 Research Plan and Budget

The Research Plan and Budget shall describe the Research Tasks and allocate them between the parties in accordance with the Guiding Principles.

4.5 Shared Research Costs

4.5.1 Cost Sharing Ratio

All Research Costs incurred during the Research Term and pursuant to the Research Plan and Budget shall be funded and borne [ * ] percent ([ * ]%) by Serono and [ * ] percent ([ * ]%) by ZGEN, regardless of which party is allocated, performs or incurs the cost of one or more of the relevant Research Tasks. Notwithstanding the foregoing, in the event [ * ], the amount of the Research Costs to be funded and borne by the parties pursuant to the Research Plan and Budget shall be [ * ] of the Research Costs [ * ].

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4.5.2 Cap on Research Costs

The Research Plan and Budget for a Gene shall specify an annual maximum amount of Research Costs that may be incurred in connection with research on the Gene, subject to appropriate adjustment of such Research Plan and Budget by the Steering Committee from time to time. Neither party shall be obliged to incur or reimburse costs in excess of its cost sharing portion of such maximum amount of Research Costs.

4.5.3 Quarterly Accounting and Reconciliation

(a) Each party shall submit to the Research Leaders at least quarterly (or on such other schedule as may be determined by the Research Team) a written and itemized accounting of the expenditures, costs, and other resources actually devoted by such party to Research Tasks in accordance with the Research Plan and Budget since the last such accounting. The parties’ accountings shall be considered to be Information subject to the confidentiality restrictions of Article Eleven. The parties’ accountings will be reviewed and approved in whole or in part (and/or returned in whole or in part to a party for correction or adjustment prior to resubmission) by action of the Research Leaders within thirty (30) days of receipt. The Research Leaders will notify each party on a quarterly basis of the results of such reviews.

(b) To the extent that both parties’ accountings for prior expenditures, costs and other resources for the Research Plan and Budget are approved by the Research Leaders, the Research Leaders will direct by a quarterly invoice (with copies to both parties) that the party that has borne less than its share of the aggregate Research Costs shall reconcile the disparity by paying to the other party an amount sufficient to bring the respective amounts borne by each party, as of the end of the period covered by the accountings, back to the ratio set forth in Section 4.5.1. Any such invoice shall be payable by Serono or ZGEN, as the case may be, to the other party in accordance with Article Eight and within thirty (30) days after receipt of the invoice.

(c) The Research Costs shall be accounted for by each party in accordance with the cost accounting principles described in Exhibit C.

4.6 Third Party Research Fees

No Third Party Research Fees shall be allowable as part of the Research Costs borne by a party hereto except to the extent that the same are:

(a) payable by Serono under Section 9.4 (whether or not Subsection (b) of this Section 4.6 applies); or

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(b) within the Research Plan and Budget and allowed by the Steering Committee under Section 2.3 or the Research Leaders under Section 2.2.1. All other Third Party Research Fees, if any, shall be borne solely by the party hereto (or its Affiliate) that is party to the applicable Third Party Agreement.

4.7 Serono’s Right to Opt Out of Collaborative Research

Serono may opt out of research relating to a Gene for which a Collaboration Election was made at any time before a Lead or Target related to the Gene is designated by giving ZGEN written notice, which shall be effective [ * ] after receipt by ZGEN. On the effective date of Serono’s opt out with respect to such Gene:

(a) Serono’s obligation to contribute to future Research Costs shall cease. However, Serono shall continue to be responsible for its pro rata share of Research Costs incurred during the [ * ] period prior to the effective date of its opt out in accordance with the Research Plan and Budget in effect on the date the opt out notice was given.

(b) The parties shall have the Wind Down Rights and Obligations.

4.8 ZGEN’s Right to Opt Out of Collaborative Research

ZGEN may opt out of research relating to a Gene for which a Collaboration Election was made at any time before a Lead or Target related to the Gene is designated by giving Serono written notice, which shall be effective [ * ] after receipt by Serono. On the effective date of ZGEN’s opt out with respect to such Gene:

(a) ZGEN’s obligation to contribute to future Research Costs shall cease. However, ZGEN shall continue to be responsible for its pro rata share of Research Costs incurred during the [ * ] period prior to the effective date of its opt out in accordance with the Research Plan and Budget in effect on the date the opt out notice was given.

(b) If Serono subsequently exercises its Option Rights as to the Lead or Target related to such Gene, the parties shall enter into an Exclusive License Agreement with respect to such Lead or Target, i.e., ZGEN shall have no right to enter into a Co-Development/Co-Promotion and License Agreement with respect to such Lead or Target.

4.9 Expiration of the Research Term

If, on expiration of the Research Term for a Gene, a Lead or Target related to the Gene has not been designated, either:

(a) Serono may exercise its Option Rights with respect to any potential Lead or Target related to the Gene (subject to, in the case of ZGEN Core Genes, the Cap) on the financial terms outlined as if such potential Lead or Target (as appropriate) related to the Gene met the stated criteria and had been designated; or

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(b) the parties shall have the Wind Down Rights and Obligations with respect to such Gene.

ARTICLE FIVE

Option Rights

5.1 Option Rights

Subject to:

(a) the terms of this Agreement, including, in the case of ZGEN Core Genes, the Cap; and

(b) the rights of Novo under the Novo Agreement and License Agreements entered into pursuant thereto in accordance with Section 5.4,

Serono shall have exclusive rights (“Option Rights”) to acquire rights and licenses to any Lead or Target that has been designated during the Research Term or any potential Lead or Target described in Sections 3.3 or 4.9. ZGEN will not grant any rights or licenses under the ZGEN IP to any such Lead or Target unless Serono has not exercised its Option Rights with respect to such Lead or Target and such Option Rights have expired. The procedure for the exercise of these Option Rights is set forth in Section 5.2 below.

5.2 Procedure

(a) Once sufficient information with respect to a Gene has been generated to support the designation of a Lead or Target, the Research Team or, if Serono is performing research on the Gene alone under Section 3.2.3, Serono will summarize in writing all available information relating to a putative Lead or Target and submit it to the Steering Committee for approval, and the Steering Committee shall consider the designation of the Lead or Target within [ * ] thereafter and approve or give reasons for withholding the designation. A notice relating to a Lead shall summarize in writing the information set forth in Exhibit H and a notice relating to a Target shall summarize in writing the information set forth in Exhibit I.

(b) To exercise its Option Rights with respect to a Lead and/or Target, Serono must provide written notice to ZGEN by the [ * ] after the later of the day on which:

(i) the Steering Committee designates such Lead or Target; and

(ii) ZGEN gives Serono notice of a Definitive Response relating to the Gene.

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Notwithstanding the foregoing, if [ * ] Definitive Response extends the period [ * ], then (A) ZGEN shall, pursuant to [ * ] at Serono’s request and subject to Serono’s agreement to exercise its Option Rights [ * ] determine whether it wishes to obtain a license for the Gene, and (B) the period for Serono’s exercise of its Option Rights shall be extended until the [ * ] after the day on which ZGEN gives Serono notice of a further Definitive Response with respect to such Gene.

(c) If Novo decides to exercise its right to license a Gene under the Novo Agreement, then Serono may exercise its Option Rights with respect to a Lead or a Target based on such Gene, but the territory for any resulting Co-Development/Co-Promotion and License Agreement or Exclusive License Agreement shall be restricted to the U.S.A. and the EX-U.S.A. If Novo does not exercise its right to license a Gene under the Novo Agreement, then Serono may exercise its Option Rights with respect to a Lead or a Target based on such Gene, but the territory for any resulting Co-Development/Co-Promotion and License Agreement or Exclusive License Agreement shall be worldwide.

(d) Serono may exercise its Option Rights with respect to any Gene by indicating that it wishes to exercise such rights for a Lead based on such Gene or a Target based on such Gene, or both. If Serono exercises such rights for both a Target and a Lead based on the same Gene, then ZGEN and Serono (or its designated Affiliate) will enter into two separate agreements, but the [ * ] under the agreement for the Target shall [ * ] against the [ * ] under the agreement for the Lead. If ZGEN and Serono (or its designated Affiliate) enter into an agreement with respect to a Target and subsequently enter into one or more agreements with respect to a Lead or a Target directed at developing licensed products that bind to or inhibit the activity of the Target that was the subject of the first agreement, then the [ * ] under all such agreements shall be deemed to be satisfied by the [ * ] any one of such agreements.

(e) Subject to Section 3.2.3 and Section 4.8, [ * ] after receipt of Serono’s notice exercising its Option Rights, ZGEN will notify Serono whether ZGEN and Serono (or its designated Affiliate) will enter into a Co-Development/Co-Promotion and License Agreement or an Exclusive License Agreement. Within [ * ] after receipt of Serono’s notice exercising its Option Rights, ZGEN shall provide Serono with a draft Co-Development/Co-Promotion and License Agreement or Exclusive License Agreement in the form set forth in Exhibit J or Exhibit K hereto, as applicable and incorporating the financial terms set forth in Subsection (f) below. ZGEN and Serono (or its designated Affiliate) shall negotiate, to the extent applicable, and execute and deliver such agreement within [ * ] of its receipt by Serono.

(f) Depending on whether the Gene is a Non-Core Gene or a ZGEN Core Gene, the financial terms for the draft Co-Development/Co-Promotion and License Agreement or Exclusive License Agreement described in Subsection (e) shall be the financial terms set forth in Exhibits D, F, E or G as indicated below:

	Co-Development/ Co-Promotion and License Agreement	Exclusive License Agreement
Non-Core Gene	Exhibit D	Exhibit E
ZGEN Core Gene	Exhibit F	Exhibit G

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(g) If Serono does not exercise its Option Rights with respect to a Lead or Target in accordance with the terms and conditions set forth above, the parties shall have the Wind Down Rights and Obligations with respect to the related Gene.

5.3 Licenses to Third Parties

(a) Neither party will, without the prior written consent of the other party, grant to a Third Party a license or other rights with respect to a Gene under the Serono Enabling Technology, ZGEN Enabling Technology or Project Technology, as applicable, during the Evaluation Term or Research Term. Serono hereby consents to the grant by ZGEN of one or more licenses to Novo in accordance with the Novo Agreement and in accordance with Section 5.4.

(b) Except for ZGEN Core Genes [ * ], ZGEN and Serono shall share equally in remuneration for any of the Serono Enabling Technology, the ZGEN Enabling Technology or the Project Technology, respectively, licensed by ZGEN or Serono to a Third Party during the Evaluation Term or Research Term in accordance with Subsection (a). For the avoidance of doubt, [ * ] does not include the [ * ] paid to ZGEN under the [ * ].

5.4 Terms of the Novo Agreement

Serono acknowledges that, in certain circumstances outlined in the Novo Agreement, ZGEN will be obliged to grant licenses to Novo to develop and commercialize therapeutic products related to Genes. The foregoing licenses are to be on the terms outlined in the Novo Agreement and otherwise negotiated by ZGEN and Novo; provided, however, that ZGEN will consult with Serono with respect to any license of the [ * ] to Novo. The terms of any license with Novo related to Genes shall in no way be inconsistent with the terms of this Agreement and shall not in any way be deemed to modify the terms of this Agreement except as explicitly provided herein.

5.5 Designation of U.S.A. Vendor

Pursuant to any Co-Development/Co-Promotion and License Agreement entered into by Serono (or its designated Affiliate) and ZGEN pursuant to this Agreement or the Master

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Agreement, either Serono (or its designated Affiliate) or ZGEN shall be designated the U.S.A. Vendor of a Licensed Product as follows (all capitalized terms used in this Section 5.5 and not defined in this Agreement are defined in the Co-Development/Co-Promotion and License Agreement):

(a) For Licensed Products with respect to which Serono has rights in the ROW, Serono shall be the U.S.A. Vendor of the [ * ] and ZGEN shall be the U.S.A. Vendor of the [ * ], unless the parties agree to depart from such [ * ] appointment, in which case the parties shall also agree on the impact [ * ] of such departure, i.e., whether a party loses the right to be a U.S.A. Vendor or [ * ] is restarted.

(b) For any Licensed Product with respect to which [ * ], Serono shall be the U.S.A. Vendor.

ARTICLE SIX

Right of Negotiation for an [ * ] Agreement

6.1 Negotiation Right

ZGEN shall not, at any time after the Effective Date of the Master Agreement and prior to the [ * ] of the Effective Date, enter into an agreement with a Third Party whereby the Third Party gains any rights to any of the [ * ] Gene, the [ * ] Protein, the [ * ] Gene, the [ * ] Protein, the [ * ] Gene or the [ * ] Protein in North America (but not rights that relate solely to (i) research purposes, (ii) a contract whose only purpose is to retain personnel to be utilized as a sales force (i.e., a contract for a contract sales organization), (iii) a contract with a Distributor or (iv) a manufacturing arrangement), without first providing Serono with a right to negotiate an [ * ] Agreement pursuant to Section 6.2 (the “Negotiation Right”).

6.2 Conduct of Negotiations

ZGEN shall notify Serono in writing of its desire to enter into an [ * ] Agreement with respect to any or all of the [ * ] Gene, the [ * ] Protein, the [ * ] Gene, the [ * ] Protein, the [ * ] Gene or the [ * ] Protein (the “Negotiation Notice”). If Serono exercises the Negotiation Right in writing within [ * ] following receipt of the Negotiation Notice:

(a) ZGEN shall provide to Serono, or otherwise make readily available to Serono, all material data that (i) relates to those of the [ * ] Gene, the [ * ] Protein, the [ * ] Gene, the [ * ] Protein, the [ * ] Gene and the [ * ] Protein that are the subject of the Negotiation Notice and (ii) is reasonably available to ZGEN and its Affiliates and necessary for Serono to evaluate such genes and proteins; and

(b) ZGEN and Serono shall exclusively negotiate in good faith for a period of up to [ * ] commencing on the date of the Negotiation Notice a definitive [ * ] Agreement relating

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to those of the [ * ] Gene, the [ * ] Protein, the [ * ] Gene, the [ * ] Protein, the [ * ] Gene and the [ * ] Protein that are the subject of the Negotiation Notice. If, at the end of the [ * ] period, ZGEN and Serono are unable to agree on terms for a definitive [ * ] Agreement, ZGEN shall be free to initiate discussions and conclude an [ * ] Agreement with one or more Third Parties, with no further obligation to Serono under this Agreement with respect only to such of the [ * ] Gene, the [ * ] Protein, the [ * ] Gene, the [ * ] Protein, the [ * ] Gene or the [ * ] Protein that were the subject of the Negotiation Notice.

ARTICLE SEVEN

Payment

In partial consideration for ZGEN’s entering into this Agreement and granting the rights and licenses hereunder, Serono shall pay to ZGEN a fee of Twenty Million Dollars ($20,000,000) within thirty (30) days after the Effective Date. The foregoing fee shall be noncreditable against any other amounts payable by Serono to ZGEN hereunder.

ARTICLE EIGHT

Records, Reporting, Payment and Audits

8.1 Form of Payment; Currency Conversion

All monies due from one party to the other hereunder shall be paid in United States Dollars by wire transfer or other method designated from time to time by the receiving party. The rate of exchange to be used shall be the average rate of exchange for the thirty (30) days preceding the date of payment for the conversion of local currency to United States Dollars as published by The Wall Street Journal (or if it ceases to be published, a comparable publication to be agreed upon by the parties) or, for those countries for which such average exchange rate is not published by The Wall Street Journal, the exchange rate used by Serono for its own corporate consolidation purposes.

8.2 Late Payment

Without limitation on other available rights or remedies, all amounts payable under this Agreement will bear interest at the rate of one percent (1%) per month or the maximum legal rate, whichever is less, from the date due through the date of payment.

8.3 Records

Both Serono and ZGEN shall keep true and accurate records of revenues, deductions from revenue, expenses and employees’ time devoted to the collaborative effort undertaken pursuant to this Agreement and any Research Plan and Budget for a Gene, such that their Research Costs and Third Party Research Fees will be accurately accounted for and determined hereunder. All such records shall be retained for a period of at least two (2) years following the end of the calendar year to which they relate.

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8.4 Audits

At the other party’s request, Serono and ZGEN shall permit the records kept and maintained pursuant hereto to be inspected at any time during regular business hours, but not more often than once per calendar year, by an independent public accountant appointed by the other party for this purpose and reasonably acceptable to the audited party. The independent public accountant shall report to the auditing party and the party under audit only its conclusions regarding the amount of the allowed costs or deductions and/or the payments due hereunder. The parties shall mutually determine a general strategy for such audit in advance of its conduct. Any such audit shall be at the expense of the party requesting the same, unless the audit concludes that, with respect to the period under audit, the party under audit overstated or understated any amounts to such an extent that a payment made or called for under this Agreement was more than five percent (5%) in error and in the favor of the party under audit, in which event if such conclusion is undisputed, the party under audit shall pay or reimburse the auditing party for the reasonable expenses of such audit. ZGEN and Serono agree that unless covered by one or more exceptions described in Sections 11.2(a) - (e), all information subject to audit under this Section 8.4 is confidential and that each Party shall cause its accounting firm to retain all such information subject to the confidentiality restrictions of Article Eleven.

8.5 Payments Based on Audit Results

If the independent public accountant makes an undisputed determination that any amounts to be paid hereunder have been under-paid or over-paid, the party that benefited therefrom shall promptly make a payment to the other party such that all amounts paid hereunder shall conform to the amounts so determined to be payable.

8.6 Withholding

If any amounts are required to be withheld or any taxes are required to be paid on behalf of or with respect to any party hereto by reason of any payment to such party by the other party, the payor may withhold such amounts and make the tax payments so required. All such tax payments made on behalf of a party shall be considered to be paid to such party for purposes of this Agreement. The party withholding the same shall promptly secure and deliver to the other party appropriate official receipts for the taxes withheld and other documents necessary to enable such other party to claim appropriate foreign tax credits for such taxes paid.

ARTICLE NINE

Licenses

9.1 License to Serono

Subject to Section 9.5 and the terms of this Agreement, ZGEN hereby grants to Serono a nonexclusive license under the ZGEN IP to:

(a) evaluate the therapeutic utility of a protein expressed by a Non-Core Gene during the Evaluation Term; and

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(b) perform Serono’s Research Tasks or perform research pursuant to Section 3.2.3 during the Research Term.

Unless separately licensed, Serono shall not use the ZGEN IP for any other purpose, including [ * ].

9.2 License to ZGEN

Subject to Section 9.5 and the terms of this Agreement, Serono hereby grants to ZGEN a nonexclusive license under the Serono IP to:

(a) evaluate the therapeutic utility of a protein expressed by a Gene during the Evaluation Term; and

(b) perform ZGEN’s Research Tasks during the Research Term.

Unless separately licensed, ZGEN shall not use the Serono IP for any other purpose, including [ * ].

9.3 Grant of Sublicenses and Use of Contractors

ZGEN and Serono shall each have the right to grant sublicenses under the licenses granted in Sections 9.1 and 9.2 respectively or otherwise use Contractors to perform this Agreement; provided that:

(a) any such sublicense or agreement shall be in writing and shall provide that:

(i) all intellectual property resulting from the sublicense or the Contractor’s activities is [ * ] (as the case may be);

(ii) the grant of further sublicenses or subcontracts is prohibited; and

(iii) its scope is limited to the performance of this Agreement; and

(b) the party granting the sublicense or entering the agreement with a Contractor shall not be relieved of its responsibilities and obligations hereunder.

9.4 Licenses from Third Parties

If ZGEN licenses, or has licensed, ZGEN Enabling Technology from a Third Party, ZGEN will notify Serono of any such licenses, and at the request of Serono and where permitted

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by the Third Party Agreement, ZGEN will sublicense such rights to Serono for the sole purpose of evaluating the therapeutic utility of the proteins expressed by the Gene and performing Research Tasks or research pursuant to Section 3.2.3 relating to the Gene; provided that Serono [ * ] in connection with acquiring or exercising the sublicensed rights, which [ * ] if incurred in connection with the performance of Research Tasks. ZGEN shall be deemed not to Control the applicable ZGEN Enabling Technology contemplated by this Section 9.4 until [ * ] under this Section 9.4.

9.5 [ * ]

The license rights granted under Sections 9.1 and 9.2 shall not apply in the [ * ] until, on a Gene by Gene basis, the earlier of:

(a) [ * ] election to waive all [ * ] to license a Gene;

(b) the expiration of the period [ * ] to exercise its rights [ * ] to license a Gene; or

(c) [ * ] election to exercise its rights [ * ] to license a Gene for a field other than [ * ] and the expiration of [ * ] without [ * ] exercising its right [ * ] to take a license [ * ].

9.6 No Other Rights

Except for the rights expressly granted under this Article Nine, Article Five and Article Six, no right, option or license is granted or implied to Serono or ZGEN under any patent or other intellectual property or to any other product, in any field, or in any geographic territory. Neither party makes any grant of rights by implication.

9.7 Use of Names, Trade Names and Trademarks

Except as provided herein, nothing contained in this Agreement shall be construed as conferring any right on either party to use in advertising or other promotional activities any name, trade name, trademark or other designation of the other party hereto, any of its Affiliates or of any of its licensors under any Third Party Agreement, including any contraction, abbreviation or simulation of any of the foregoing, unless the express written permission of such other party has been obtained.

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ARTICLE TEN

Intellectual Property Ownership, Prosecution and Enforcement

10.1 Intellectual Property Ownership

ZGEN shall own any and all intellectual property covering ZGEN IP, Serono shall own any and all intellectual property covering Serono IP, and ZGEN and Serono shall jointly own any and all intellectual property covering Joint Project Technology, in each case subject to the licenses granted hereunder. Regardless of where an invention is discovered, developed or otherwise generated and regardless of the laws of the country in which the patent application is filed, laws of the United States shall apply to determine inventorship hereunder.

10.2 Patent Contacts for Gene

Each party shall designate its initial Patent Contact within thirty (30) days following the Effective Date and shall promptly thereafter notify the other party of such designation. If at any time a vacancy occurs for any reason, the party that appointed the prior incumbent shall as soon as reasonably practicable appoint a successor. Each party shall promptly notify the other party of any substitution of another person as its Patent Contact. The Patent Contacts shall have the responsibilities set forth in Section 10.3.3.

10.3 Prosecution and Maintenance

10.3.1 ZGEN IP

ZGEN shall be solely responsible, as it shall determine in its sole discretion and at its own expense, for the filing and prosecution of any and all patent applications with respect, in whole or in part, to any ZGEN IP (other than ZGEN’s interest in Joint Project Technology, which is addressed in Section 10.3.3), for opposition, appeal, reexamination, reissue, revocation, interference or other administrative proceedings with respect thereto, and for the maintenance of any available patent protection with respect thereto.

10.3.2 Serono IP

Serono shall be solely responsible, as it shall determine in its sole discretion and at its own expense, for the filing and prosecution of any and all patent applications with respect, in whole or in part, to any Serono IP (other than Serono’s interest in Joint Project Technology, which is addressed in Section 10.3.3), for opposition, appeal, reexamination, reissue, revocation, interference or other administrative proceedings with respect thereto, and for the maintenance of any available patent protection with respect thereto.

10.3.3 Joint Project Technology

ZGEN and Serono shall share responsibilities and decision making with regard to patent matters relating to Joint Project Technology and shall share the costs of filing, prosecution, oppositions, appeals, reexaminations, reissues, revocations, interferences, other administrative proceedings and maintenance with respect thereto on a fifty/fifty (50/50) basis. The Patent

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Contacts shall be responsible for assigning specific tasks to each of the parties for the filing and prosecution of any and all patent applications, for opposition, appeal, reexamination, reissue, revocation, interference or other administrative proceedings, and for the maintenance of any available patent protection with respect to any Joint Project Technology.

10.3.4 Patent Prosecution Party’s Efforts

(a) The “Patent Prosecution Party” means:

(i) with respect to patents and patent applications within the ZGEN IP (other than Joint Project Technology), ZGEN;

(ii) with respect to patents and patent applications within the Serono IP (other than Joint Project Technology), Serono; and

(iii) with respect to patents and patent applications within the Joint Project Technology, the party appointed by the Patent Contacts on a patent-by-patent basis.

(b) For each patent application, patent and proceeding described in this Section 10.3, the Patent Prosecution Party shall exert its Reasonable Commercial Efforts, consistent with its customary practices with respect to its own activities. However, with respect to Joint Project Technology, the Patent Prosecution Party shall:

(i) deliver to the other party copies of communications between the Patent Prosecution Party and relevant patent offices, promptly after receipt from, or delivery to, such patent office; and

(ii) take the other party’s comments and suggestions, if any, into consideration when framing responses and submissions to patent offices.

The Patent Prosecution Party shall have no obligation to solicit comments or suggestions from the other party and shall have final authority over patent strategy, including selection of jurisdictions in which to file patent applications and the content of responses and submissions to patent offices.

10.4 Defense and Enforcement Actions

During the Term, each party shall, as soon as reasonably practicable after it becomes aware of the relevant event, notify the other party of:

(a) any attack on the validity or enforceability of the Serono Enabling Technology, ZGEN Enabling Technology or Project Technology;

(b) any infringement or misappropriation of the Serono Enabling Technology, ZGEN Enabling Technology or Project Technology; or

(c) any certification filed under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984 claiming that any patent within the Serono Enabling Technology, ZGEN Enabling Technology or Project Technology, is invalid or that infringement of any such technology will not arise from the manufacture, use or sale of any product by a Third Party.

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The Patent Prosecution Party shall have the sole right to respond to the applicable event listed in Section 10.4. However, the parties may, on the recommendation of the Patent Contacts and with the consent of the Patent Prosecution Party, decide to pursue the Third Party jointly under mutually agreeable conditions but, except where a party has an interest in Joint Project Technology, the other party shall have no right under this Agreement to intervene if the Patent Prosecution Party fails to take action in connection with an event listed in this Section 10.4. In the case where an event listed in this Section 10.4 relates to Joint Project Technology, if the Patent Prosecution Party for the relevant patents fails to take reasonable action within ninety (90) days after receiving notice of the claim (or twenty-one (21) days after the filing date with respect to an event listed in Section 10.4(c)), then the other party shall have the right to take such action, by counsel of its own choice and at its own expense. Each party shall provide reasonable cooperation and assistance as may be reasonably requested by the party taking any action pursuant to this Section 10.4. For the sake of clarity, the other party shall have no right to intervene if the patent owner or Patent Prosecution Party fails to take action in connection with any patent that does not relate to Joint Project Technology.

ARTICLE ELEVEN

Confidentiality; Materials; Publicity

11.1 Confidentiality and Non-Use

During the Term and for a period [ * ] thereafter each party shall maintain the other party’s Information as confidential, using the same degree of care it uses to protect its own confidential information. During the Term and at all times thereafter, neither party shall use the other party’s Information, except for the activities contemplated by this Agreement.

11.2 Exceptions

The obligations of Section 11.1 shall not apply to Information that:

(a) was known by the receiving party or its Affiliates prior to disclosure by the disclosing party, as evidenced by prior written records;

(b) becomes part of the public domain through no fault of the receiving party or its Affiliates;

(c) was obtained, on a non-confidential basis, by the receiving party or its Affiliates from a Third Party having no direct or indirect obligation of confidentiality to the disclosing party or its Affiliates;

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(d) was disclosed by the disclosing party to a Third Party on a non-confidential basis; or

(e) is developed by the receiving party or its Affiliates independently of disclosures made hereunder, as evidenced by written records.

11.3 Permitted Disclosures

Notwithstanding Section 11.1, Serono and ZGEN shall each be permitted to disclose the other party’s Information:

(a) to its Affiliates, Contractors and sublicensees, or prospective Affiliates, Contractors or sublicensees, and its licensors under Third Party Agreements, who are subject to confidentiality requirements at least as stringent as those contained herein;

(b) to its employees, and employees of its Affiliates, Contractors or sublicensees who require the same for the purposes contemplated by this Agreement, and who are subject to confidentiality requirements at least as stringent as those contained herein;

(c) to its patent attorney or agent or any patent authority in any country as shall be reasonably required for filing or prosecuting any patent application with respect to any Patent Rights in accordance with Article Ten;

(d) in support of or in connection with any actions to defend or enforce any Patent Rights in accordance with Article Ten;

(e) if such disclosure is required to meet the requirements of any stock exchange or stock market or securities laws or regulations to which either party may be subject;

(f) if such disclosure is required by any order of a court or other governmental authorities of competent jurisdiction, but only after having provided the other party with written notice within a period sufficiently prior to such disclosure to permit the other party to apply for a protective order or take other appropriate action to restrict such disclosure and, if disclosure is still required, so far as reasonably practicable, having minimized the degree of such disclosure and provided such disclosure is covered by conditions of confidentiality; or

(g) to Novo in accordance with the Novo Agreement provided such disclosure is covered by obligations of confidentiality.

11.4 Materials; Permitted Uses

Any Materials transferred by one party to the other pursuant to this Agreement shall be used by the receiving party and its Affiliates, Contractors and sublicensees solely for the purposes contemplated by and in accordance with this Agreement. Any Affiliate, Contractor or sublicensee shall be bound by terms at least as stringent as the confidentiality and non-use obligations hereunder with respect to such Materials. Any person using Materials on behalf of the receiving party will be advised of, and is subject to, the terms of this Section 11.4.

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11.5 Publications

Each party agrees that the parties’ personnel involved in a Research Project, separately, together or with other authors, shall be permitted to present at symposia and national or regional professional meetings, and to publish in journals, theses, dissertations or otherwise the results of the Research Project. The foregoing permission is subject to each party’s right (via the relevant Research Leader) to receive copies of any proposed publication or presentation in advance of the submission of such proposed publication or presentation to a journal, editor, or other Third Party. The foregoing right shall lapse as to publications relating to a Gene as to which the Wind Down Rights and Obligations apply. Each party shall have [ * ] after receipt of said copies to object to such proposed presentation or proposed publication either:

(a) because there is subject matter that either party desires [ * ] to [ * ] of this Agreement; or

(b) because there is [ * ] which needs [ * ].

If either party makes an objection under Subsection (a) above, such subject matter shall remain subject to Article Eleven and shall not be published or otherwise disclosed without the written consent of both parties. If either party makes an objection under Subsection (b) above, the parties shall negotiate a mutually acceptable version, and both parties and such other authors (if any) shall withhold such subject matter from such publication or presentation until [ * ] or, if earlier, the date [ * ] from the date of receipt of such objection from either party.

11.6 Obligations of Confidentiality to Third Parties

Nothing herein or otherwise shall require any party to disclose information with respect to which such party has an obligation of confidentiality to a Third Party, but each party will exert its Reasonable Commercial Efforts to bring to the attention of the Steering Committee any such Third Party restrictions as may be relevant hereunder.

ARTICLE TWELVE

Representations, Warranties and Covenants

12.1 Representations, Warranties and Covenants of Serono

Serono hereby makes in favor of ZGEN the representations, warranties and covenants set forth below.

12.1.1 Organization and Good Standing

Serono is a corporation duly organized, validly existing and in corporate good standing under the laws of Switzerland and has the corporate and legal right, title, authority and power to enter into and to perform this Agreement.

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12.1.2 Enforceability; Authority and No Current Conflicts

This Agreement is a legal and valid obligation binding upon Serono and enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights generally and by general equitable principles. Serono has taken all necessary action to authorize the execution, delivery and performance of this Agreement. The execution, delivery and performance of Serono’s obligations under this Agreement will not conflict with or result in a breach of or a default under any agreements, contracts, commitments or other arrangements to which Serono is a party or by which it or its properties are bound or violate any order, law or regulation of any court, governmental authority or administrative or other agency having authority over it.

12.1.3 Invention Agreements With Personnel

Serono and its Affiliates have in place with all of their officers and employees who will perform this Agreement written agreements in proper form and substance requiring the assignment to Serono or such Affiliate of all inventions made during the course of their employment by Serono or such Affiliate and requiring such individuals to maintain the confidentiality of Serono’s or such Affiliate’s own information and information that is entrusted to Serono or such Affiliate in confidence by others.

12.1.4 No Future Conflicts

Serono will not during the Term enter into any agreements, contracts, commitments or other arrangements that could prevent Serono from meeting its obligations hereunder.

12.1.5 Compliance With Laws

Serono will comply and will require its Affiliates, Contractors and sublicensees to comply with all applicable laws and regulations in connection with the performance of Serono’s obligations and other activities pursuant to this Agreement; all applicable rules and regulations relating to the use of Materials, including those relating to the use of human and animal subjects or recombinant DNA; and all laws and regulations of Switzerland and any other relevant country concerning any export or other transfer of technology, services or products.

12.1.6 Authority to License

Serono has the right, power and authority to grant the rights and licenses granted by Serono herein.

12.2 Representations, Warranties and Covenants of ZGEN

ZGEN hereby makes in favor of Serono the representations, warranties and covenants set forth below.

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12.2.1 Organization and Good Standing

ZGEN is a corporation duly organized, validly existing and in corporate good standing under the laws of the State of Washington, U.S.A., and has the corporate and legal right, title, authority and power to enter into and to perform this Agreement.

12.2.2 Enforceability; Authority and No Current Conflicts

This Agreement is a legal and valid obligation binding upon ZGEN and enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights generally and by general equitable principles. ZGEN has taken all necessary action to authorize the execution, delivery and performance of this Agreement. The execution, delivery and performance of ZGEN’s obligations under this Agreement will not conflict with or result in a breach of or a default under any agreements, contracts, commitments or other arrangements to which ZGEN is a party or by which it or its properties are bound or violate any order, law or regulation of any court, governmental authority or administrative or other agency having authority over it.

12.2.3 Invention Agreements With Personnel

ZGEN and its Affiliates have in place with all of their officers and employees who will perform this Agreement written agreements in proper form and substance requiring the assignment to ZGEN or such Affiliate of all inventions made during the course of their employment by ZGEN or such Affiliate and requiring such individuals to maintain the confidentiality of ZGEN’s or such Affiliate’s own information and information that is entrusted to ZGEN or such Affiliate in confidence by others.

12.2.4 No Future Conflicts

ZGEN will not during the Term enter into any agreements, contracts, commitments or other arrangements that could conflict with the Option Rights or Negotiation Right or otherwise prevent ZGEN from meeting its obligations hereunder.

12.2.5 Compliance With Laws

ZGEN will comply and will require its Affiliates, Contractors and sublicensees to comply with all applicable laws and regulations in connection with the performance of ZGEN’s obligations and other activities pursuant to this Agreement; all applicable rules and regulations relating to the use of Materials, including those relating to the use of human and animal subjects or recombinant DNA; and all laws and regulations of the U.S.A. and any other relevant country concerning any export or other transfer of technology, services or products.

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12.2.6 Authority to License

ZGEN has the right, power and authority to grant the rights and licenses granted by ZGEN herein. As of the Effective Date, ZGEN has not, [ * ], granted any Third Party a right to commercialize a product based on a Gene or a protein expressed by such Gene covered by Patent Rights claiming such Gene or protein expressed by such Gene, except:

(a) for rights under the Novo Agreement or License Agreements entered into pursuant thereto.

(b) for rights to commercialize that have expired or terminated; or

(c) pursuant to currently effective agreements listed on Exhibit O with respect to the Genes and in the fields described on Exhibit O.

12.3 Materials

ANY MATERIALS PROVIDED OR TO BE PROVIDED HEREUNDER ARE EXPERIMENTAL IN NATURE AND ARE TRANSFERRED BETWEEN THE PARTIES “AS IS” AND WITH ALL FAULTS. NEITHER SERONO NOR ZGEN MAKES ANY WARRANTY OR REPRESENTATION WITH RESPECT TO THE UTILITY, EFFICACY, NONTOXICITY, SAFETY OR APPROPRIATENESS OF USING THE MATERIALS. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY USE OF MATERIALS, OR ANY LOSS THAT MAY ARISE FROM SUCH USE.

12.4 Warranty Disclaimer

EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO THE ZGEN IP, SERONO IP, JOINT PROJECT TECHNOLOGY, GOODS, SERVICES OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, PATENTABILITY OR VALIDITY WITH RESPECT TO ANY AND ALL OF THE FOREGOING.

12.5 No Use in Humans

In no event shall a party perform studies or trials in humans relating to the evaluation of a Gene or a Research Project.

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ARTICLE THIRTEEN

Indemnification; Insurance

13.1 Indemnification

13.1.1 Matters Covered

Each party (the “Indemnifying Party”) shall defend, indemnify and hold harmless the other party and its Affiliates, Contractors and sublicensees and their respective directors, employees and agents (the “Indemnified Parties”) from and against any and all Liabilities to the extent they arise out of:

(a) Third Party claims or actions for personal injury or property damage to the extent such injury or damage is attributable to matters within the scope of the Indemnifying Party’s responsibilities or allocated tasks hereunder;

(b) Third Party claims or actions arising from the conduct of any Research Tasks by or for the Indemnifying Party; or

(c) Third Party claims or actions arising in connection with any breach of this Agreement by the Indemnifying Party, including a breach of any warranties, representations or covenants made by the Indemnifying Party hereunder.

13.1.2 Exclusions

The Indemnifying Party will not be required to defend, indemnify or hold harmless any Indemnified Party from any Liabilities to the extent they result from:

(a) Third Party claims or actions arising from the negligence or willful malfeasance of any Indemnified Party;

(b) Third Party claims or actions arising from any breach of this Agreement, including the representations, warranties and covenants set forth herein, by, if Serono is the Indemnifying Party, ZGEN and, if ZGEN is the Indemnifying Party, Serono; or

(c) any settlement or admission of liability made or purported to be made by any Indemnified Party without the Indemnifying Party’s prior written approval.

13.2 Defense of Claims

13.2.1 Provision of Attorney

The Indemnifying Party agrees, at its own expense, to provide attorneys to defend against any claims or actions brought or filed against the Indemnified Parties with respect to the subject of the indemnity contained in Section 13.1, whether or not such claims or actions are rightfully brought or filed.

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13.2.2 Notice

An Indemnified Party seeking indemnification hereunder shall notify the Indemnifying Party in writing promptly after the assertion of any claim within the scope of the Indemnifying Party’s indemnity obligation hereunder; provided, however, that the failure or delay so to notify the Indemnifying Party shall not relieve it of any obligation hereunder except to the extent that the Indemnifying Party demonstrates that such failure or delay adversely affected its ability to defend or resolve such claim.

13.2.3 Tender of Defense

An Indemnified Party seeking indemnification hereunder shall tender to the Indemnifying Party the right to control the defense of the relevant claim or action, including any decisions regarding the settlement or disposition thereof; provided, however, that

(a) The Indemnifying Party shall not settle any claim or action in a way that prejudices or adversely impacts an Indemnified Party without the prior approval of the Indemnified Party, which approval shall not be unreasonably withheld or delayed;

(b) If the defendants in any claim or action include both the Indemnifying Party and the Indemnified Party, and either of them concludes that there may be legal defenses available to it that are different from, additional to or inconsistent with those available to the other party, the party so concluding shall:

(i) have the right to select separate counsel to participate in the defense of the claim or action on its behalf; and

(ii) bear the cost and expense of such separate defense, unless, and to the extent, the parties otherwise agree or it is determined pursuant to Article Fifteen that such cost and expense are or were required to be indemnified by the Indemnifying Party hereunder and are or were required to be incurred separately due to such different, additional or inconsistent defenses; and

(c) If the Indemnifying Party determines not to defend the claim or action, or otherwise fails to do so diligently, the Indemnified Party shall have the right to maintain the defense of such claim or action and the Indemnifying Party shall provide reasonable assistance to it in the defense of such claim or action and shall bear the reasonable cost and expense of such defense (including reasonable attorneys’ fees, experts’ fees and other costs of defense at any stage of the proceedings).

13.2.4 Assistance

Either Serono or ZGEN, as applicable, shall provide, and shall cause any Indemnified Party to provide, reasonable assistance to the Indemnifying Party in the defense, settlement or other disposition of a claim or action, including by making available all pertinent information and personnel under its control to the Indemnifying Party.

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13.3 Insurance

Each party shall obtain and keep in force, through self insurance or otherwise, in a form reasonably acceptable to the other party hereto, insurance in the amount of [ * ] Dollars ($[ * ]) covering its indemnification obligations. It is understood that such insurance shall not be construed to limit a party’s liability with respect to indemnification obligations under this Article Thirteen. Each party shall, except to the extent self insured, provide to the other party upon request a certificate evidencing the insurance such party is required to obtain and keep in force under this Article Thirteen. Such certificate shall provide that such insurance shall not expire or be cancelled or modified without at least thirty (30) days’ prior notice to the other party.

ARTICLE FOURTEEN

Term and Termination

14.1 Term

This Agreement shall be effective for the period (“Term”) starting on the Effective Date and, unless terminated earlier in accordance with this Agreement, ending on the later of:

(a) the expiration of the last to expire of any Evaluation Term; and

(b) the expiration of the last to expire of any Research Term.

14.2 Termination for Material Breach

Serono and ZGEN shall have the right to terminate this Agreement, including the Option Rights, Negotiation Right and licenses granted herein, in the event that any material term or condition of this Agreement is breached by the other party, and such breach is not remedied within a period of [ * ] after the other party’s receipt of written notice of such breach. If a material breach is corrected within the [ * ] period, this Agreement and the rights granted hereunder shall continue in full force and effect.

14.3 Termination Upon Serono’s Bankruptcy

This Agreement will automatically terminate if Serono becomes insolvent, makes an assignment for the benefit of its creditors, appoints or suffers appointment of a receiver or trustee over its property, files a petition under any bankruptcy or insolvency act or has such a petition filed against it and any such event shall have continued for [ * ] undismissed or undischarged.

14.4 No Termination Upon ZGEN’s Bankruptcy

All rights and licenses granted under or pursuant to this Agreement by ZGEN to Serono are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the United States

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Bankruptcy Code, as amended from time to time (the “Bankruptcy Code”), licenses of rights to “intellectual property” as defined under Section 101(35A) of the Bankruptcy Code. The parties agree that Serono, as a recipient of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. The parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against ZGEN under the Bankruptcy Code that is not dismissed within [ * ] after it is filed, either the expiration of the Evaluation Terms with respect to the ZGEN Core Genes or the exercise by ZGEN of its right to opt out of research for which a Collaboration Election was made shall be deemed to have occurred, as applicable. The parties also further agree that, in the event of the commencement of a bankruptcy proceeding by or against ZGEN under the Bankruptcy Code that is not dismissed within [ * ] after it is filed, Serono shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, and the same, if not already in its possession, shall be promptly delivered to Serono:

(a) upon written request therefor by Serono, unless ZGEN elects to continue to perform all of its obligations under this Agreement; or

(b) if not delivered under Subsection (a) above, upon the rejection of this Agreement by or on behalf of ZGEN and written request therefor by Serono.

Following the commencement of such a bankruptcy proceeding and so long as such proceeding continues, ZGEN will not, without Serono’s prior written consent, sell, transfer, assign or otherwise dispose of, or purport to sell, transfer, assign or otherwise dispose of, any right, title or interest in, to or under the ZGEN IP related to any Gene.

14.5 Termination of License With Respect to Contested Patent Rights

Either ZGEN, as the licensor of ZGEN IP under this Agreement, or Serono, as the licensor of Serono IP under this Agreement, may at its option terminate the Option Rights, Negotiation Right and its licenses to the other party under this Agreement to the extent covering any of the licensor’s Patent Rights as to which the other party hereto commences any action or asserts any formal position in any forum (including a court, a patent office, or an arbitral tribunal, and whether in the form of petitions for declaratory relief, claims, counterclaims, defenses, interferences, petitions for reexamination, oppositions or otherwise) that such Patent Right is invalid or unenforceable.

14.6 Consequences of Expiration and Termination

14.6.1 Accrued Rights

Expiration or termination of this Agreement shall not affect the parties’ rights and obligations that have accrued as of the expiration or termination date, including the parties’ obligations to bear Research Costs incurred prior to the effectiveness of the expiration or termination.

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14.6.2 Surviving Provisions

The parties’ rights and obligations under Sections 4.5 and 5.5 and those provisions of Articles Eight, and Eleven, and Articles Thirteen through Sixteen that by their context are intended to survive termination or expiration, shall so survive.

14.6.3 Cumulative Remedies

Any right to terminate this Agreement shall be in addition to and not in lieu of all other rights or remedies that the party giving notice of termination may have at law, in equity or otherwise, including rights under the Bankruptcy Code.

ARTICLE FIFTEEN

Dispute Resolution

15.1 Cooperative Decision Making

15.1.1 General Rule

Subject to Section 15.4, the parties intend that, to the maximum extent practicable, they shall reach decisions hereunder cooperatively through the deliberations of the Steering Committee. Accordingly any disputes, controversies or claims (each a “Dispute”) arising out of or relating to this Agreement shall be first referred to the Steering Committee by either party at any time after such Dispute has arisen; provided, however, that any Dispute relating to the determination of validity of a party’s Patent Rights or other issues relating solely to a party’s intellectual property may only be determined in accordance with Section 15.4 hereof.

15.1.2 Resolution by Senior Executives

If a decision cannot be made in accordance with Section 15.1.1 by the Steering Committee within [ * ] of being requested by a party to do so or the Steering Committee is unable to resolve a Dispute among its members, any two (2) members of the Steering Committee may institute the procedure described in this Article Fifteen. In such circumstances, a summary of the unresolved Dispute will be provided in writing to the parties’ respective Senior Executives. If either party has not then designated any Senior Executives, such summary shall be provided to such party’s CEO with a request that one or more Senior Executives be appointed. The CEO shall within [ * ] appoint such party’s Senior Executive(s) and forward the summary to them. The parties’ respective Senior Executives shall discuss the unresolved Dispute, and shall meet with respect thereto if one or more of them believes a meeting or meetings to be useful.

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15.1.3 Escalation to CEOs

If the Senior Executives do not resolve the matter within [ * ] following the receipt by them (or by the CEO for either or both of them, as described above) of the summary of the unresolved Dispute (or such lesser or longer period as they may agree is a useful period for their discussions), then any one or more of the Senior Executives may institute a formal review of such matter by the parties’ CEOs pursuant to Section 15.2.

15.2 Review by CEOs

15.2.1 Matters Referred to CEOs

Any Dispute that cannot be resolved pursuant to Section 15.1, shall be referred for review by the parties’ respective CEOs.

15.2.2 Resolution by CEOs

A summary or summaries of the Dispute will be provided in writing by the Senior Executives to the parties’ respective CEOs. The CEOs shall discuss the Dispute, and shall meet with respect thereto if either of them believes a meeting or meetings to be useful.

15.2.3 Escalation to Arbitration

If the CEOs do not resolve the Dispute [ * ] (or such lesser or longer period as they may agree is a useful period for their discussions), then (except as provided in Section 15.4) then either party may submit any Disputes with respect to the interpretation or potential breach, termination or invalidity of this Agreement to federal court pursuant to Section 15.4 and may submit any other Disputes to arbitration pursuant to Section 15.3.

15.3 Arbitration

15.3.1 Matters to be Arbitrated

Subject to Section 15.4, should the parties fail to reach agreement with respect to a Dispute, then the Dispute will be determined by arbitration in accordance with this Section 15.3.

15.3.2 Venue, Rules and Applicable Law

[ * ] shall be the venue for the arbitration, which shall be conducted in accordance with the Non-Administered Arbitration Rules & Commentary (Revised 2000) of the CPR Institute for Dispute Resolution. Any arbitration pursuant to this Section 15.3 will be governed by the substantive laws of [ * ] applicable to contracts made and to be performed in that state, without regard to conflicts of law rules, and by the arbitration law of the Federal Arbitration Act -33- 34 (9 U.S.C. § 1 et seq.). Judgment upon the award rendered by the tribunal may be entered

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by any court having jurisdiction thereof. The statute of limitations of [ * ] applicable to the commencement of a lawsuit will apply to the commencement of an arbitration under this Section 15.3, except that no defenses will be available based upon the passage of time during any negotiation required pursuant to this Article Fifteen.

15.3.3 Composition of Tribunal

The arbitration shall be conducted before a tribunal of three (3) independent and impartial arbitrators, one of which will be appointed by each of ZGEN and Serono, and the third of which shall be appointed by agreement of both parties and shall have had both training and experience as a mediator of pharmaceutical industry licensing and other general commercial matters. If the parties to this Agreement cannot agree on the third arbitrator, then the third arbitrator will be selected by the CPR Institute for Dispute Resolution in accordance with the criteria set forth in the preceding sentence.

15.3.4 Tribunal’s Jurisdiction

The tribunal may decide any issue as to whether, or as to the extent to which, any Dispute is subject to the arbitration and other dispute resolution provisions in this Agreement. The tribunal must render its award in a writing, which writing must include an explanation of the reasons for such award.

15.3.5 Costs

All fees, costs and expenses of the arbitrators, and all other costs and expenses of the arbitration, will be shared equally by the parties to this Agreement unless such parties agree otherwise or unless the tribunal in the award assesses such costs and expenses against one of such parties or allocates such costs and expenses other than equally between such parties.

15.3.6 Continuing Performance

Pending the award of the arbitration tribunal, the parties shall continue to perform their respective obligations under this Agreement.

15.3.7 Equitable Remedies

Notwithstanding the foregoing, either party may, on good cause shown, seek a temporary restraining order and/or a preliminary injunction from a court of competent jurisdiction, to be effective pending the institution of the arbitration process or the deliberation and award of the arbitration tribunal.

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15.4 Matters to Proceed to Court

Notwithstanding the foregoing, any Dispute relating to the determination of validity of a party’s Patent Rights or other issues relating solely to a party’s intellectual property and any Dispute with respect to the interpretation or potential breach, termination or invalidity of this Agreement, including potential breach of the representations, warranties and covenants made hereunder, shall be submitted exclusively to the [ * ] court [ * ], and the parties hereby consent to the jurisdiction and venue of such court.

ARTICLE SIXTEEN

General

16.1 Entire Agreement

Except for the Master Agreement and the agreements referenced therein, this Agreement, together with all of the Exhibits hereto, constitutes the entire agreement between the parties and supersedes all prior and contemporaneous oral and written agreements, term sheets, summaries, understandings or arrangements relating to the subject matter hereof, including the NDA.

16.2 No Drafting Party; Legal Counsel

This Agreement has been submitted to the scrutiny of, and has been negotiated by, both parties and their counsel, and shall be given a fair and reasonable interpretation in accordance with its terms, without consideration or weight being given to any such terms having been drafted by any party or its counsel.

16.3 Controlling Law

This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the doctrine of conflict of laws, except that the issues of patentability, validity, enforceability and scope of any Patent Rights shall be determined according to the patent laws of the country in which the particular Patent Rights are pending or granted.

16.4 Notices

All notices, reports and other communications by ZGEN or Serono to the other under this Agreement shall:

(a) be in writing in the English language;

(b) refer specifically to this Agreement; and

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(c) be sent by electronic or facsimile transmission for which a confirmation of delivery is obtained or by express courier services providing evidence of delivery,

in each case to the respective address specified below (or to such updated address as may be specified in writing to the other party from time to time).

If to Serono:

Serono S.A.

c/o Serono International S.A.

15 bis, Chemin des Mines

Case Postale 54

CH-1211 Geneve 20

Switzerland

Attn: General Counsel

FAX: 41-22-739-3070

If to ZGEN:

ZymoGenetics, Inc.

1201 Eastlake Avenue East

Seattle, WA 98102

U.S.A.

Attn: Senior Vice President,

  Intellectual Property and Legal Affairs

FAX: (206) 442-6678

Such notice, report or other communication will be deemed effective as of the date so delivered either by courier service or by electronic or facsimile transmission.

16.5 Force Majeure

If either party hereto is prevented from carrying out its obligations under this Agreement by events beyond its reasonable control, including acts or omissions of the other party, acts of God or government, fire, acts of terrorism, political strife, labor disputes, failure or delay of transportation, default by suppliers or unavailability of raw materials, then such party’s performance of its obligations hereunder shall be excused during the period of such events and for a reasonable period of recovery thereafter, and the time for performance of such obligations shall be automatically extended for a period of time equal to the duration of such events; provided, however, that the party claiming force majeure shall promptly notify the other party of the existence of such force majeure, shall use Reasonable Commercial Efforts to avoid or remedy such force majeure and shall continue performance hereunder with the utmost dispatch whenever such force majeure is avoided or remedied.

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16.6 Assignability

(a) Except an assignment that:

(i) does not relieve the assigning party of any of its responsibilities or obligations hereunder and in which the assignee agrees to be bound by all obligations of the assigning party under this Agreement; and

(ii) is made in connection with the transfer of all or substantially all of the assets of a party and its Affiliates (i.e., the entire Affiliated group of companies) related to their respective pharmaceutical businesses to a single buyer or pursuant to a merger or other corporate reorganization,

neither this Agreement nor any right herein granted may be assigned by either party to any Affiliate or Third Party, without the prior, express written consent of the other party, which consent shall not be unreasonably withheld. Any purported assignment prohibited hereunder and made without the other party’s consent shall be void and shall constitute a material breach of this Agreement.

(b) Notwithstanding Subsection (a), a party may assign its rights and interests under this Agreement to an entity that is its Affiliate as of the date of such assignment; provided that such assignment does not relieve the assigning party of any of its responsibilities or obligations hereunder and the assignee agrees to be bound by all obligations of the assigning party hereunder, including the obligations set forth in this Section 16.6.

(c) A sale or transfer of the ownership or control of a party or any of its Affiliates to whom it has assigned its rights or interest under this Agreement as provided herein other than in connection with the transfer of all or substantially all of the assets of the party and its Affiliates (i.e., the entire Affiliated group of companies) related to their respective pharmaceutical businesses shall be deemed to be a prohibited assignment under this Section 16.6.

16.7 Amendments and Waivers

No terms or provisions of this Agreement shall be modified by any prior or subsequent statement, conduct or act of either of the parties, whether oral or written, except that the parties may amend this Agreement by written instruments specifically referring to, and executed in the same manner as, this Agreement. No waiver of any right or remedy hereunder shall be effective unless in a writing signed by the party to be bound, nor shall any waiver in one instance constitute a waiver of the same or any other right or remedy in any other instance.

16.8 Severability

If any provision hereof should be held invalid, illegal or unenforceable in any respect in any jurisdiction, then, to the fullest extent permitted by law:

(a) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intentions of the parties hereto as nearly as is possible; and

(b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction.

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To the extent permitted by applicable law, ZGEN and Serono hereby waive their right to enforce any provision of law that would render any provision hereof prohibited or unenforceable in any respect. If the terms and conditions of this Agreement are materially altered as a result of this Section 16.8, the parties shall attempt to renegotiate the terms and conditions of this Agreement, in good faith, to resolve any inequities.

16.9 Counterparts

This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of such counterparts taken together shall constitute one and the same instrument.

16.10 Relationship

This Agreement shall not create any employer-employee relationship between ZGEN and Serono, nor shall it be deemed to establish a joint venture or partnership between ZGEN and Serono. Neither party shall at any time enter into or incur, or hold itself out to Third Parties as having the authority to enter into or incur, on behalf of the other party, any commitment, expense or liability whatsoever.

IN WITNESS WHEREOF, the parties have executed and delivered this Agreement to be effective as of the Effective Date.

SERONO S.A.
By:	/s/ Leon Bushara
	Leon Bushara
Its:	Authorized Representative
ZYMOGENETICS, INC.
By:	/s/ Fredrik Henell
	Fredrik Henell
Its:	Senior Vice President, Business Development

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EX-10.45

Exhibit 10.45

EXHIBIT 10.45

TO

ZymoGenetics’s

Form 10-K

For the Year Ended

December 31, 2004

“[ * ]” = omitted, confidential material, which material has been separately filed with the Securities and Exchange Commission pursuant to a request for confidential treatment.

License Agreement for

Recombinant Factor XIII

This Agreement, effective as of October 4, 2004 (the “Effective Date”), is entered into by and among ZymoGenetics, Inc., a Washington corporation whose address is 1201 Eastlake Ave. East, Seattle, WA 98102 (“ZGEN”), Novo Nordisk A/S, a Danish corporation whose address is Novo Allé, DK-2880, Bagsvaerd, Denmark (“Novo”), and Novo Nordisk Health Care AG, a Swiss corporation and wholly-owned affiliate of Novo whose address is Andreasstrasse 15, 8050 Zürich, Switzerland (“NN”). ZGEN and NN are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

WHEREAS, ZGEN owns and/or controls certain intellectual property rights, regulatory filings, contracts, clinical supplies, biological materials, reagents, assays, protocols, SOPs and know-how with respect to Recombinant Factor XIII and related preclinical and clinical studies;

WHEREAS, NN is a company engaged in the research, development, manufacturing and commercialization of pharmaceutical and biotechnology products;

WHEREAS, NN desires to obtain from ZGEN, and ZGEN desires to grant to NN, rights to such intellectual property, regulatory filings, contracts, clinical supplies, biological materials, reagents, assays, protocols, SOPs and know-how, upon the terms and conditions set forth herein; and

WHEREAS, Novo from time to time carries out certain research and development activities for NN;

NOW, THEREFORE, the Parties and Novo, in consideration of the mutual representations, warranties and covenants contained herein and for other good and valuable consideration, hereby agree as follows:

Article 1

Definitions

Section 1.1. “Affiliate” means, with respect to a Party, any other business entity which directly or indirectly controls, is controlled by or is under common control with the Party. The direct or indirect ownership of at least fifty percent (50%) or, if smaller, the maximum allowed by applicable law, of the voting securities of a business entity or of an interest in the assets, profits or earnings of a business entity shall be deemed to constitute control of the business entity. For the avoidance of doubt, ZGEN and NN are not Affiliates of each other.

Section 1.2. “Agreement” means this License Agreement for Recombinant Factor XIII, as amended in accordance with its terms.

Section 1.3 “Avecia” means Avecia Limited.

Section 1.4 “Avecia Agreement” means the agreement between ZGEN and Avecia for the manufacture of rFXIII dated August 15, 2001, as amended by First, Second, Third, Fourth and Fifth Amendments and Programme Amendment Orders, including PAO 4.2 dated March 2001 relating to [ * ] fermentation with full processing of an approximate [ * ] aliquot.

[ * ] Confidential Treatment Requested

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Section 1.5. “Aventis Agreement” means the Exclusive Patent License Agreement between Aventis Behring GmbH (now known as ZLB Holding GmbH, “Aventis”) and ZGEN dated December 18, 2002, as amended by a First Amendment dated December 8, 2003 and a Second Amendment dated October 1, 2004.

Section 1.6. “Best of its Knowledge” means to the best knowledge of senior management or the legal department of ZGEN or NN, as the case may be.

Section 1.7. “Biologically Active Substance” means a pharmaceutically active substance that has intrinsic biological or cell stimulatory activity, but not including a substance that acts as a stabilizing agent, excipient or adjuvant or whose primary function is to act as a delivery vehicle.

Section 1.8. “Calendar Quarter” means each three (3) month period commencing on January 1, April 1, July 1, or October 1.

Section 1.9. “Calendar Year” means each twelve (12) month period commencing on January 1.

Section 1.10. “[ * ] Indication” means bleeding in a patient with [ * ] that occurs either as a consequence of the [ * ] or the treatment of the [ * ] and requires medical intervention.

Section 1.11. “[ * ] Indication” means bleeding or oozing of blood in a patient undergoing [ * ] or having undergone [ * ] that occurs during or following the [ * ] and requires medical intervention.

Section 1.12. “Clinical Proof of Concept” and “CPOC” mean demonstration in a Phase II Clinical Trial that the safety and efficacy of the product being tested as compared to placebo meet prospectively defined study endpoints.

Section 1.13. “Clinical Proof of Concept Study” and “CPOC Study” mean a Phase II Clinical Trial in which the safety and efficacy of the product being tested are compared to placebo using prospectively defined study endpoints.

Section 1.14. “CMC” means processes and information typically known as “chemistry, manufacturing and controls” information to be provided to Regulatory Agencies.

Section 1.15. “Combination Product” means a Licensed Product that includes one or more Biologically Active Substance(s) other than Recombinant Factor XIII.

Section 1.16. “Combination rFVIIa/rFXIII” means a Combination Product that includes both rFXIII and rFVIIa and no other Biologically Active Substances.

Section 1.17. “Confidential Information” means all proprietary information and materials, patentable or otherwise, of a Party or Novo disclosed by or on behalf of such disclosing Party or Novo to the receiving Party or Novo, such as, but not limited to, DNA sequences, amino acid sequences, vectors, cells, substances, formulations, techniques, methodology, equipment, data, reports, know-how, assay results, preclinical studies and clinical trials and the results thereof, patent positioning and business plans, including any negative developments.

Section 1.18. “Congenital Factor XIII Deficiency” means the lack of adequate factor XIII activity in a patient from birth.

[ * ] Confidential Treatment Requested

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Section 1.19. “Control” means the ability to grant licenses or sublicenses without violating the terms of any agreement or other arrangement with any Third Party.

Section 1.20. “Data Monitoring Committee” means a committee described in an FDA draft guidance document dated November 2001 and entitled “On the Establishment and Operation of Clinical Trial Data Monitoring Committees” that is established for the purpose of reviewing data from a clinical study, including safety data.

Section 1.21. “Decision to Submit Registration File” means notification by NN to ZGEN of the determination by [ * ] that the clinical and safety data for a given indication are sufficient for purposes of submitting a Marketing Application for Marketing Approval. Such notification shall be given by NN to ZGEN no later than, and shall be deemed to have been given on (if such notification has not been given), the [ * ] following such [ * ].

Section 1.22. “Dose Escalation” means sequentially administering increasing doses of an investigational drug or biologic to different cohorts of study subjects until a prespecified event occurs or the maximum desired dose is reached.

Section 1.23. “Effective Date” means the date written in the first paragraph of this Agreement.

Section 1.24. “EMEA” means the European Agency for the Evaluation of Medicinal Products or the European Commission.

Section 1.25. “Event Milestone” has the meaning set forth in Section 4.2.

Section 1.26. “Exhibit” means an exhibit explicitly referenced as such in this Agreement. All such Exhibits are by such references incorporated into this Agreement as if fully set forth herein.

Section 1.27. “Factor XIII Product” means a Licensed Product containing Recombinant Factor XIII as the only Biologically Active Substance.

Section 1.28. “FDA” means the United States Food and Drug Administration or any successor agency vested with administrative and regulatory authority to approve testing and marketing of human pharmaceutical or biological therapeutic or diagnostic products in the United States.

Section 1.29 “FTE” means the full-time equivalent of a person being employed for one year (including applicable vacations and holidays).

Section 1.30. “First Commercial Sale” means, in a country, the first sale by NN or its Affiliate or Sublicensee of the Licensed Product to a Third Party after Marketing Approval to sell the Licensed Product in the country has been granted.

Section 1.31. “First Patient First Visit” and “FPFV” mean the first visit at which data (e.g., medical history) is collected from the first study subject to determine eligibility to participate in a given clinical study.

Section 1.31A. “GMP Manufacturing Run” has the meaning set forth in Section 5.5(d).

[ * ] Confidential Treatment Requested

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Section 1.32. “Know-How Product” means a product that (a) contains Recombinant Factor XIII, (b) was developed through use of any Licensed Know-How or otherwise incorporates or embodies any Licensed Know-How, and (c) is not a Patent Product.

Section 1.33. “Licensed Know-How” means all inventions, discoveries, know-how, methodologies, technology, tangible materials (including nucleic acids, peptides, vectors, proteins, and the like) that (a) pertain to Recombinant Factor XIII, (b) were invented, discovered, developed or otherwise generated by or for ZGEN, and (c) are owned and Controlled by ZGEN as of the Effective Date. For the avoidance of doubt, Licensed Know-How shall not include such items which: (i) at the time of disclosure is in the public domain; (ii) prior to the disclosure from ZGEN to NN, was in NN’s possession; or (iii) are developed independently by NN without any use of any confidential ZGEN know-how or confidential ZGEN patent rights whatsoever. The Technology Transfer Letter lists the information and tangible biological materials, reagents, assays and other items to be transferred to NN pursuant to Article 5 that contain Licensed Know-How.

Section 1.34. “Licensed Patents” means all patents and patent applications, except those identified in a letter to NN from ZGEN dated October 4, 2004 and related divisionals, continuations (in whole or in part), foreign counterparts, reissues, reexaminations, renewals and extensions thereof and patents issuing thereon, claiming the benefit of a priority date on or before the Effective Date and owned by ZGEN at any time during the term of this Agreement that contain one or more claims specifically naming rFXIII and claiming (i) rFXIII as a composition of matter; (ii) a process, formulation and/or mixture comprising rFXIII, (iii) a method of making or manufacturing rFXIII, or (iv) a method of using rFXIII, and including without limitation:

(a) the patents and patent applications identified in Exhibit A and Exhibit B attached to this Agreement;

(b) all divisional or continuation, in whole or in part, applications based on any of the foregoing;

(c) any and all foreign applications corresponding to the patent applications described in paragraphs (a) and (b) above;

(d) any and all issued and unexpired patents resulting from any of the applications described in paragraph (a), (b) or (c) above; and

(e) any and all issued and unexpired reissues, reexaminations, renewals or extensions that may be based on any of the patents described in paragraph (a) or (d) above.

Section 1.35. “Licensed Product” means either a Know-How Product or a Patent Product.

Section 1.36. “Marketing Application” means a Biologics License Application, New Drug Application or an application for any other approval from a Regulatory Agency to market a Licensed Product.

Section 1.37. “Marketing Approval” means receipt of written approval from a Regulatory Agency to market and sell a Licensed Product.

Section 1.38. “Net Sales” means the gross amount invoiced by NN, its Affiliates and Sublicensees from sales or other dispositions of Licensed Products to any Third Party, less the following with respect to the invoiced Licensed Product:

(a) any direct or indirect credits and allowances or adjustments, including, without limitation, credits and allowances on account of retroactive price adjustments or on account of rejection, recall or return of Licensed Products previously invoiced;

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(b) any trade and cash discounts, price reductions or rebates, retroactive or otherwise, imposed by government authorities and fees charged by third party distributors for stocking or maintaining inventories of Licensed Product;

(c) any sales, excise, turnover, value added, or similar taxes and any duties and other governmental charges imposed upon the production, importation, use or sale of Licensed Product(s) and included in the invoiced amount;

(d) applicable transportation, importation, insurance and other handling charges; and

(e) the per unit cost of special delivery devices (including any per unit cost of assembling such special devices) that are included in the invoiced amount and are used for administration of Licensed Product. Such special devices shall not include conventional devices (e.g., tablets, standard syringes, suppositories and/or standard transdermal patches).

No royalty shall be payable on any sale between NN, its Affiliate and/or a Sublicensee unless the purchaser is the end user of the Licensed Product.

Any Licensed Product sold or otherwise disposed of in other than an arm’s-length transaction or for other than property (e.g., barter) shall be deemed invoiced at its fair market value in the country of sale or disposition.

Section 1.39. “Patent Claim” means a claim of any patent or pending patent application (except a patent application that has been pending for more than [ * ] after the initial filing of such patent application in the applicable jurisdiction) within the Licensed Patents or Sublicensed Patents that has not:

(a) lapsed, been disclaimed, withdrawn, canceled, abandoned or admitted to be invalid or unenforceable;

(b) been finally rejected or held invalid by a final decision of a patent-granting or appellate authority from which no appeal has been or can be taken; or

(c) been held invalid or unenforceable in an unappealable decision of a court or competent body having jurisdiction (including a decision which was appealable, but which was not timely appealed).

Section 1.40. “Patent Product” means a product that contains Recombinant Factor XIII, the making, using, importation, exportation, offer for sale or sale of which product would infringe, in the absence of the licenses granted under this Agreement, any unexpired Patent Claim.

Section 1.41. “Phase I Clinical Trials” means human clinical trials intended to obtain initial data regarding the safety of a Licensed Product.

Section 1.42. “Phase II Clinical Trials” means human clinical trials intended to study the safety, dose range and efficacy of a Licensed Product that do not constitute Phase III Clinical Trials of such Licensed Product.

Section 1.43. “Phase III Clinical Trials” means human clinical trials that are intended to demonstrate the statistical efficacy and safety of a Licensed Product and that are intended to be the final stage of clinical testing prior to and in support of the filing of a Marketing Application.

[ * ] Confidential Treatment Requested

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Section 1.44. “Phase III Development Candidate” means the product to be advanced into Phase III Clinical Trials pursuant to Section 3.6.

Section 1.45. “Primary Endpoint” means the variable capable of providing the most clinically relevant and convincing evidence directly related to the primary objective of a clinical trial.

Section 1.46. “Recombinant Factor VIIa” and “rFVIIa” mean a protein that has an amino acid sequence of human factor VIIa or its subunits and that is produced by recombinant DNA techniques (including without limitation, production in prokaryotic and eukaryotic host cells and transgenic animals), including variants, derivatives, modifications, fragments, hybrids, mutants, conjugates, fusion proteins and analogs of such protein. For purposes of Sections 3.3 through 3.6, Recombinant Factor VIIa and rFVIIa shall mean the active Factor VIIa protein in NN’s product known as NovoSeven^®.

Section 1.47. “Recombinant Factor XIII” and “rFXIII” mean a protein that has an amino acid sequence of human factor XIII or its subunits ([A₂], [B], [A₂B₂] or any combination thereof) and that is produced by recombinant DNA techniques (including, without limitation, production in prokaryotic and eukaryotic host cells and transgenic animals), including variants, derivatives, modifications, fragments, hybrids, mutants, conjugates, fusion proteins and analogs of such protein.

Section 1.48. “Regulatory Agency” means:

(a) the FDA;

(b) the EMEA; or

(c) any regulatory body with similar regulatory authority in any other jurisdiction anywhere in the world.

Section 1.49. “Regulatory Event” means an adverse event in the regulatory process with a Regulatory Agency with respect to a Licensed Product or an rFVII product that is unexpected and not customary for products of a similar profile. For the avoidance of doubt, a “clinical hold” imposed on a human clinical trial by a Regulatory Agency is a “Regulatory Event.”

Section 1.50. “rFXIII Supplies” has the meaning set forth in Section 5.4.

Section 1.51. “Signature Fee” has the meaning set forth in Section 4.1.

Section 1.52. “Statistical Analysis” means the analysis of the Clinical Proof of Concept Study results performed in accordance with Section 3.5.

Section 1.53. “Sublicensed Patents” means all patents and patent applications licensed to ZGEN pursuant to the UW Agreement and Aventis Agreement, including without limitation

(a) the patents and patent applications identified in Exhibits C, D and E attached to this Agreement;

(b) to the extent licensed to ZGEN, all divisional or continuation, in whole or in part, applications based on any of the foregoing;

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(c) to the extent licensed to ZGEN, any and all foreign applications corresponding to the patent applications described in (a) and (b) above;

(d) to the extent licensed to ZGEN, any and all issued and unexpired patents resulting from any of the applications described in paragraph (a), (b) or (c) above; and

(e) to the extent licensed to ZGEN, any and all issued and unexpired reissues, reexaminations, renewals or extensions that may be based on any of the patents described in paragraph (a) or (d) above.

Section 1.54. “Sublicensee” means a Third Party to whom NN has granted a license or sublicense under its rights under this Agreement to research, develop, make, have made, use, import, have sold, sell or offer to sell a Licensed Product in one or more countries of the world. For the purpose of any compensation payable to ZGEN hereunder, “Sublicensee” shall include a Third Party to whom NN, its Affiliate or another Sublicensee (a) shall have sold or transferred a Licensed Product in bulk (e.g., as bulk rFXIII) or other form and the Licensed Product is changed into another form or composition (e.g., formulation, dose form, etc.) for sale for therapeutic, prophylactic or diagnostic purposes, provided, that in the case of a diagnostic Licensed Product, rFXIII acts therein as an active ingredient (through binding or otherwise), or (b) shall have granted the right to distribute one or more Licensed Product(s), wherein such a distributor pays to NN, its Affiliate or such other Sublicensee a royalty based on the revenues received or profits earned by the distributor for the sale of such Licensed Product(s), but shall not include any Third Party where NN, its Affiliate or another Sublicensee merely sells such Licensed Product at a fixed transfer price to such distributor for resale by such distributor and the party is not compensated based on the resale price or profit of such Licensed Product by such distributor.

Section 1.55. “Technology Transfer Date” means, with respect to the transfer pursuant to Section 5.1 of each item of information or physical material described in the Technology Transfer Letter, the date that is a certain number of days after the “Target Date” for such item set forth in Technology Transfer Letter, which “Target Date” is specified as a number of days after execution of this Agreement by the Parties. With respect to those items in the Technology Transfer Letter that have a “Target Date” designated as “closing,” the Technology Transfer Date shall be ten (10) days after the execution of this Agreement by the Parties. With respect to those items in the Technology Transfer Letter that have a “Target Date” specified as a number of days, the Technology Transfer Date shall be such number of days plus fifteen (15) days after the execution of this Agreement by the Parties.

Section 1.56. “Technology Transfer Letter” means the letter dated October 4, 2004 from ZGEN to NN (with attachments) which lists the information and tangible biological materials, reagents, assays and other items to be transferred to NN by ZGEN.

Section 1.57. “Third Party” means any person or entity other than ZGEN, NN, Novo or their respective Affiliates.

Section 1.58. “Time Milestone” has the meaning set forth in Section 4.2.

Section 1.59. “UW” means the University of Washington.

Section 1.60. “UW Agreement” means the License Agreement between UW and ZGEN dated February 23, 1989.

Section 1.61. “WRF” means Washington Research Foundation.

Section 1.62. “WRF Agreement” means the Field-Of-Use Non-Exclusive License Agreement between WRF and ZGEN for Factor XIII effective as of January 7, 2002.

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Section 1.63. “WRF Option” means the transferable option to obtain a [ * ] from WRF described in Section 3.4 of the WRF Agreement.

Section 1.64. “ZGEN CD Protocol” means the ZGEN design of the protocol as summarized in ZGEN’s protocol synopses [ * ] and [ * ] that were submitted to the FDA on [ * ] as part of the [ * ] briefing packet and discussed in a teleconference between ZGEN and the FDA held on [ * ] (the substance of which is summarized in a ZGEN memo dated [ * ]).

Section 1.65. “ZGEN IP” means the Licensed Patents and Licensed Know-How.

Article 2

License and Rights

Section 2.1. Grant of License. Subject to the terms and conditions of this Agreement, ZGEN hereby grants to NN a worldwide, exclusive (even as to ZGEN) license under the ZGEN IP to research, develop, make, have made, use, import, have sold, sell and offer to sell Licensed Products.

Section 2.2. Grant of Sublicense. Subject to the terms and conditions of this Agreement, the UW Agreement and the Aventis Agreement, ZGEN hereby grants to NN a worldwide, exclusive (even as to ZGEN) sublicense of its license rights under the UW Agreement and Aventis Agreement to the Sublicensed Patents to research, develop, make, have made, use, import, have sold, sell and offer to sell Licensed Products. Except for the payments to UW by ZGEN pursuant to Section 4.4, NN shall comply with and perform in accordance with the terms of the UW Agreement and Aventis Agreement.

Section 2.3. Sublicenses. NN may sublicense its rights granted to it pursuant to Sections 2.1 and 2.2 to one or more Sublicensees. Each sublicense shall be terminable at ZGEN’s option upon termination of this Agreement. Each sublicense shall be in writing, shall be subject to and consistent with the terms of this Agreement, and shall contain provisions substantially identical to Sections 3.1, 4.11, 7.3, 8.7, 9.5, 9.6, 9.8, 9.9, 13.7, 13.8, 13.11, 13.12, 13.15 and 13.17 and Articles 10 and 12. NN shall within ten (10) days inform ZGEN of the execution, scope, territory, amendment of scope/territory and termination of each sublicense and the name and address of each Sublicensee. For the avoidance of doubt and notwithstanding the sublicensing of its rights and obligations hereunder, NN shall remain responsible for the full and complete performance of all of NN’s obligations and duties under this Agreement, including the making of the payments due under Article 4.

Section 2.4. WRF Agreement. Subject to the terms and conditions of this Agreement and the WRF Agreement, ZGEN hereby transfers the WRF Option to NN. Within ten (10) days of the execution of this Agreement, ZGEN shall notify WRF of its selection of NN as the transferee of the WRF Option. NN shall be responsible for exercising the WRF Option and for complying with the terms of any license agreement between NN and WRF resulting from the exercise of such option, including the payment of any amounts due to WRF under any such license agreement.

Section 2.5. Service Contracts. ZGEN shall cooperate with NN in NN’s efforts to establish service contracts, including consulting arrangements, with the parties with whom ZGEN has active, ongoing contracts for providing services to ZGEN in connection with its rFXIII program and shall continue its service contracts identified in Exhibit F attached to this Agreement for the benefit of NN for at least three (3) months (or such shorter time as requested by NN and permitted by such agreements), for which it shall receive full reimbursement for its costs thereunder that are incurred after the Effective Date (including any prepaid costs for services during such period).

[ * ] Confidential Treatment Requested

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Section 2.6. Transfer of Regulatory Filings. Within ten (10) business days of the execution of this Agreement by the Parties, ZGEN shall file documents with the applicable Regulatory Agencies for the purpose of transferring to NN the regulatory filings, approvals and orphan drug designations listed in Exhibit G attached to this Agreement.

Section 2.7. Avecia Supply Agreement. Promptly following execution of this Agreement by the Parties, ZGEN shall request that Avecia enter into an agreement with NN on terms and conditions no less favorable than the Avecia Agreement; provided, however, that NN shall have the sole responsibility for negotiating the terms and conditions of such agreement directly with Avecia.

Section 2.8. Government Rights. NN acknowledges that the Sublicensed Patents identified in Exhibit C may be subject to the rights, obligations and limitations of 35 U.S.C. § 200 et seq., and applicable implementing regulations.

Section 2.9. No Further Rights. Except as explicitly provided in this Article 2 and this Agreement, no further or different license or right, express or implied, is granted by ZGEN. NN shall not use, and shall not allow its Affiliates and Sublicensees to use, the ZGEN IP or the Sublicensed Patents for any purpose other than as expressly licensed in this Article 2 and this Agreement.

Section 2.10. UW/Aventis Agreements. ZGEN shall perform its obligations under the UW Agreement and Aventis Agreement, subject to performance by NN of its obligations related thereto (including payment of royalties and milestones under the Aventis Agreement) and hereunder. ZGEN shall provide prompt notice to NN of (a) any notice it receives of alleged breaches of either agreement or (b) to the Best of its Knowledge, any event that constitutes a material breach of either agreement. NN shall provide prompt notice to ZGEN of (a) any notice it receives from Aventis regarding alleged breaches of the Aventis Agreement or (b) to the Best of its Knowledge, any event that constitutes a material breach of the Aventis Agreement. ZGEN shall not amend, modify or terminate the UW Agreement or the Aventis Agreement without the prior written consent of NN, which consent shall not be unreasonably withheld or delayed.

Article 3

NN’s Diligence and Development

Section 3.1. General Responsibilities of NN. NN shall, at its sole expense, be solely responsible for the development and commercialization of Licensed Products. NN shall use commercially reasonable efforts that are consistent with its activities (and the activities of its Affiliates, including Novo) with respect to products of similar profit potential and product profile to develop and commercialize Licensed Products under this Agreement. NN, at its sole discretion, may decide on a development plan for any Licensed Product, so long as such development plan complies with the terms and conditions of this Article 3, as may be revised by NN to reflect any advice or guidance received from a Regulatory Agency as documented in meeting minutes or correspondence with the Regulatory Agency. All costs related to the development of Licensed Products incurred by NN or ZGEN following execution of this Agreement by the Parties shall be borne by NN, provided that any services provided by ZGEN and the costs associated therewith shall have been approved in writing by NN in advance or the reimbursement or payment of ZGEN’s costs by NN have been specified in this Agreement (e.g., Section 2.5 and Article 5).

Section 3.2. Product Development and Commercialization Requirements.

(a) Subject to Sections 3.2(b) and 3.2(e), NN shall develop and seek Marketing Approval in the European Union from the EMEA and in the United States from the FDA for a Factor XIII Product for the treatment of Congenital Factor XIII Deficiency. Despite such development and Marketing Approval, NN shall not be required to market a Factor XIII Product for the treatment of Congenital Factor XIII Deficiency.

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(b) Notwithstanding Section 3.2(a), NN shall only be required to develop and seek Marketing Approval for a Factor XIII Product for the treatment of Congenital Factor XIII Deficiency (i) in the European Union if both the FDA and EMEA accept the ZGEN CD Protocol (or a protocol of similar magnitude and feasibility which allows the start of a Phase III Clinical Trial directly after a Phase I Clinical Trial) and (ii) in the United States if the FDA accepts the ZGEN CD Protocol (or a protocol of similar magnitude and feasibility which allows the start of a Phase III trial directly after a Phase I Clinical Trial).

(c) Subject to Section 3.2(e) and Section 3.6(c) or (d), NN shall develop, seek Marketing Approval for and commercialize one or more Licensed Products (or a rFVIIa product in the case of Section 3.6(e)) for the treatment of the [ * ] Indication and the [ * ] Indication in the European Union and United States.

(d) NN, at its sole discretion, may develop, seek Marketing Approval and commercialize Licensed Products for any additional therapeutic indications.

(e) NN shall have the right to terminate the development of a Licensed Product, or the development of an rFVIIa product pursuant to Section 3.6(e), for the treatment of Congenital Factor XIII Deficiency, the [ * ] Indication or the [ * ] Indication under this Section 3.2 at any stage of development in the event of an adverse occurrence or condition with respect to CMC, efficacy, safety and/or toxicology related to the Licensed Product or the rFVIIa product, as the case may be, which materially affects NN’s ability to progress the therapeutic indication and which cannot be overcome by commercially reasonable efforts. As soon as reasonably practicable after any such occurrence or condition that could reasonably be expected to be grounds for termination under this Section 3.2(e), NN shall notify ZGEN of such occurrence or condition and shall provide ZGEN with information (to the extent available at the time) regarding the situation, including NN’s preliminary assessment and NN’s estimated time to complete a full assessment. After further investigation and evaluation, and prior to exercising its right to terminate under this Section 3.2(e), NN shall provide and discuss with ZGEN all relevant information and NN’s evaluation regarding (i) the impact of such occurrence or condition on NN’s ability to progress the therapeutic indication and (ii) NN’s efforts to overcome such occurrence or condition.

Section 3.3. Dose Escalation Study Requirement. Subject to Section 3.2(e), NN shall conduct Dose Escalation studies in Phase II Clinical Trials for both the [ * ] Indication and the [ * ] Indication. Each of the Dose Escalation studies for the two indications shall be conducted in accordance with the following parameters:

(a) Each shall be a four (4) arm study with up to [ * ] study subjects in each arm;

(b) The four (4) arms of each study shall be (i) Dose Escalation of rFXIII alone, (ii) Dose Escalation of rFVIIa alone, (iii) Dose Escalation of Combination rFVIIa/rFXIII, and (iv) placebo; provided, however, that if requested by the applicable Regulatory Agency or otherwise made necessary by clinical feasibility, Dose Escalation of Combination rFVIIa/rFXIII may be performed after Dose Escalation of rFXIII alone and Dose Escalation of rFVIIa alone, provided further that an arm for the Dose Escalation study for rFVIIa in the [ * ] Indication need not be performed because of the prior studies conducted by NN, the results of which have been disclosed to ZGEN and provided further, that the Parties acknowledge that an arm for the Dose Escalation study for rFVIIa in the [ * ] Indication has been commenced by NN; and

(c) The Primary Endpoint for each study shall be [ * ].

If the Dose Escalation study of Combination rFVIIa/rFXIII is delayed, NN may consider and decide whether to proceed with a three (3) arm CPOC Study (i.e., without the Combination rFVIIa/rFXIII arm). If NN decides to proceed with a three (3) arm CPOC Study, the Parties will, in good faith, discuss and make appropriate adjustments under this Article 3.

[ * ] Confidential Treatment Requested

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Upon conclusion of the Dose Escalation study and in accordance with Sections 6.2 and 6.3, NN shall provide and discuss with ZGEN information related to the Dose Escalation study.

Section 3.4. Clinical Proof of Concept Study Requirement. Subject to Section 3.2(e), NN shall conduct a CPOC Study for each of the [ * ] Indication and the [ * ] Indication. Each of the CPOC Studies shall be conducted in accordance with the following parameters:

(a) Each shall be a parallel, four (4) arm study utilizing an optimal dose for each arm and shall be adequately powered versus placebo to at least [ * ] but in any event not to exceed [ * ] study subjects in each arm unless NN, in its sole discretion, decides otherwise;

(b) The four (4) arms of each CPOC Study shall be (i) rFXIII alone, (ii) rFVIIa alone, (iii) Combination rFVIIa/rFXIII, and (iv) placebo;

(c) The Primary Endpoint for each CPOC Study shall be [ * ];

(d) For the [ * ] Indication CPOC Study, [ * ] shall be determined, at NN’s decision, as (i) the [ * ] by the study subject, such as by [ * ], (ii) [ * ] required by the study subject, or (iii) some reasonable combination of Section 3.4(d)(i) and 3.4(d)(ii);

(e) For the [ * ] Indication CPOC Study, [ * ] shall be determined, at NN’s decision, as (i) a qualitative clinical [ * ] for each study subject, (ii) the [ * ] of [ * ] required by the study subject, or (iii) some reasonable combination of Section 3.4(e)(i) and 3.4(e)(ii);

(f) For each of the CPOC Studies, state-of-the-art techniques and technology shall be used in [ * ] and determining or evaluating whether [ * ]; and

(g) At the conclusion of each CPOC Study, the data from the study shall be analyzed to determine if CPOC has been achieved for each active arm of the study and NN shall inform ZGEN of the results pursuant to Sections 6.2 and 6.3. CPOC shall be deemed to have been achieved if (i) the results from the active arm compared to the placebo arm, based on the Primary Endpoint for the study, show a statistical significance of [ * ] and (ii) no significant safety concerns have been identified by the Data Monitoring Committee for the active arm.

Section 3.5. Superiority Assessment; Statistical Analysis of CPOC Study Results. If [ * ] or more arms achieved CPOC in a CPOC Study described in Section 3.4, NN shall conduct a statistical analysis of the results of the CPOC Study with respect to such products in accordance with the following parameters:

(a) If CPOC was achieved for each of rFXIII and rFVIIa, a superiority assessment of rFXIII compared to rFVIIa shall be performed comparing the efficacy results from the rFXIII arm with the rFVIIa arm. If the results of the CPOC Study based on the Primary Endpoint show that the rFXIII arm is superior to the rFVIIa arm with [ * ], then rFXIII shall be deemed to be superior to rFVIIa;

(b) If CPOC was achieved for each of rFXIII and rFVIIa, a superiority assessment of rFVIIa compared to rFXIII shall be performed comparing the efficacy results from the rFVIIa arm with the rFXIII arm. If the results of the CPOC Study based on the Primary Endpoint show that the rFVIIa arm is superior to the rFXIII arm with [ * ], then rFVIIa shall be deemed to be superior to rFXIII;

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(c) If CPOC was achieved for each of rFVIIa and Combination rFVIIa/rFXIII, a superiority assessment of Combination rFVIIa/rFXIII compared to rFVIIa shall be performed comparing the efficacy results from the Combination rFVIIa/rFXIII arm with the rFVIIa arm. If the results of the CPOC Study based on the Primary Endpoint show that the Combination rFVIIa/rFXIII arm is superior to the rFVIIa arm with [ * ], then Combination rFVIIa/rFXIII shall be deemed to be superior to rFVIIa; and

(d) If CPOC was achieved for each of rFXIII and Combination rFVIIa/rFXIII, a superiority assessment of Combination rFVIIa/rFXIII compared to rFXIII shall be performed comparing the efficacy results from the Combination rFVIIa/rFXIII arm with the rFXIII arm. If the results of the CPOC Study based on the Primary Endpoint show that the Combination rFVIIa/rFXIII arm is superior to the rFXIII arm with [ * ], then Combination rFVIIa/rFXIII shall be deemed to be superior to rFXIII.

Upon conclusion of the Statistical Analysis and in accordance with Sections 6.2 and 6.3, NN shall provide and reasonably discuss with ZGEN the results of the Statistical Analysis.

Section 3.6. Phase III Development Candidate. If only one of rFXIII or Combination rFVIIa/rFXIII achieved CPOC in the CPOC Study described in Section 3.4 for an indication, it shall be the Phase III Development Candidate for the indication (i.e., [ * ] Indication or [ * ] Indication). If more than one product achieved CPOC in a CPOC Study described in Section 3.4 for an indication, the product that shall be the Phase III Development Candidate for the indication shall be established according to the following criteria based on the Statistical Analysis performed in Section 3.5 for establishing a “superior” product and applying the rule that a product that has achieved CPOC shall automatically be deemed to be “superior” to a product that has not achieved CPOC:

(a) If (i) rFXIII is superior to rFVIIa and (ii) Combination rFVIIa/rFXIII is not superior to rFXIII, then rFXIII shall be the Phase III Development Candidate;

(b) If (i) Combination rFVIIa/rFXIII is superior to rFVIIa and (ii) Combination rFVIIa/rFXIII is superior to rFXIII, then Combination rFVIIa/rFXIII shall be the Phase III Development Candidate;

(c) If (i) rFXIII achieves CPOC, (ii) rFVIIa is superior to rFXIII, and (iii) Combination rFVIIa/rFXIII is not superior to rFVIIa, then no Phase III Development Candidate needs to be established for the applicable indication and NN shall have no further development obligations with respect to Licensed Products for such indication, provided, however, that in such case, NN may, in its sole discretion, select rFVIIa as the Phase III Development Candidate;

(d) If (i) rFXIII did not achieve CPOC and either (ii) Combination rFVIIa/rFXIII does not achieve CPOC or (iii) Combination rFVIIa/rFXIII is not superior to rFVIIa, then no Phase III Development Candidate needs to be established for the applicable indication and NN shall have no further development obligations with respect to Licensed Products for such indication, provided, however, that in such case, NN may, in its sole discretion, select rFVIIa as the Phase III Development Candidate; and

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(e) In all other cases in which no product is superior, NN shall select, within a reasonable time after completion of the Statistical Analysis in Section 3.5, either rFXIII or rFVIIa as the Phase III Development Candidate based on NN’s commercial considerations.

It is recognized that it is possible that different products may be established as the Phase III Development Candidate for each of the two indications. NN shall promptly inform ZGEN of the Phase III Development Candidate for each indication.

The method for establishing the Phase III Development Candidate described in this Section 3.6 is designed to capture, refine, clarify and supplement the outline set forth in Exhibit H attached to this Agreement that the Parties had used to negotiate this Agreement. In the event of any conflict or inconsistency between Exhibit H and the provisions of this Section 3.6, this Section 3.6 shall prevail.

Section 3.7. Conduct of Phase III Clinical Trials. NN shall conduct Phase III Clinical Trials for the [ * ] Indication and [ * ] Indication using the Phase III Development Candidates established pursuant to Section 3.6. Each Phase III Clinical Trial shall be conducted using a two (2) arm parallel design and shall include an adequate number of study subjects based on the Primary Endpoint. Subject to consultation with the applicable Regulatory Agency, the Primary Endpoints for the Phase III Clinical Trials for the [ * ] Indication and the [ * ] Indication shall be similar to the Primary Endpoints used in the CPOC Studies pursuant to Section 3.4 for the [ * ] Indication and the [ * ] Indication, respectively. It is recognized that, in the event that the applicable Regulatory Agency requires a Primary Endpoint for either Phase III Clinical Trial that is not similar to the Primary Endpoint used for the corresponding CPOC Study and such requirement delays the start of the Phase III Clinical Trial, then the Time Milestones (as defined in Section 4.2) shall be delayed pursuant to Section 4.2(e)(iv).

Section 3.8. Regulatory Filings. NN shall be solely responsible for the filing of and shall be the sole owner of all clinical trial applications and Marketing Applications for Licensed Products filed with any Regulatory Agency in any jurisdiction after the Effective Date.

Section 3.9. Manufacturing and Clinical Supplies. Subject to the provisions of Section 5.5 with respect to Licensed Products to be supplied by ZGEN to NN, NN shall be solely responsible for the manufacture of Licensed Products as needed to meet its development and commercialization obligations under this Agreement. NN, at its sole discretion, may manufacture Licensed Products itself or utilize one or more contract manufacturing organizations for such manufacture.

Section 3.10. Commercialization. NN shall be solely responsible, at its sole discretion and cost, for all sales and marketing activities for Licensed Products. NN shall employ resources and efforts in promoting, marketing and selling Licensed Products that are consistent with its activities (and the activities of its Affiliates, including Novo) with respect to its other products of similar profit potential and product profile. NN, at its sole discretion and cost, shall develop trademarks and trade dress for Licensed Products and shall be the owner of all such trademarks and trade dress.

Section 3.11. Improvements. Nothing in this Agreement shall prevent or prohibit NN from discovering or conceiving of, or filing patent applications with respect to, any improvements made by NN related to rFXIII, including new methods of use, formulations, combinations or other inventions.

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Article 4

Fees and Royalties

Section 4.1. Signature Fee. NN shall pay to ZGEN a signature fee of [ * ] (the “Signature Fee”) within [ * ] of the execution of this Agreement by the Parties and Novo. No part of the Signature Fee shall be refundable, nor may any part be credited against any other amounts payable under this Agreement or otherwise.

Section 4.2. Milestone Fees. NN shall pay to ZGEN the milestone fees set forth in Sections 4.2(a) through 4.2(d), subject to utilization of any credits provided in Sections 4.5(b) and 5.5. Each milestone fee shall be paid within thirty (30) days after the indicated milestone event has been achieved by NN or its Affiliate or Sublicensee (“Event Milestone”) or on or before the milestone date (if a milestone date is shown) (“Time Milestone”), whichever occurs first; provided, however, that a Time Milestone associated with an Event Milestone and milestone fee may be delayed or terminated pursuant to Section 4.2(e). Each milestone fee shall be payable only once; no additional milestone fee for a given indication shall be payable for repeated achievement of the Event Milestone or subsequent achievement of the Time Milestone associated with the Event Milestone and milestone fee. No part of the milestone fee shall be refundable. Except as set forth in Sections 4.2(b)(*), 4.2(c)(*), 4.5(b), 5.5(c) and 5.5(d), no part of the milestone fee shall be credited against any other amount payable under this Agreement or otherwise.

(a) The milestone fees for the Congenital Factor XIII Deficiency shall be as follows:

	Earlier of:
Milestone Fee	Event Milestone	Time Milestone (Subject to Section 4.2(e))
U.S. [ * ]	FPFV in first Phase III Clinical Trial of a Licensed Product	[ * ]
U.S. [ * ]	First filing for Marketing Approval in the United States or European Union for a Licensed Product	[ * ]
U.S. [ * ]	First Marketing Approval in the United States or European Union for a Licensed Product	[ * ]

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(b) The milestone fees for the [ * ] Indication shall be as follows:

		Earlier of:
Milestone Fee	Milestone Fee if Licensed Product for Congenital Factor XIII Deficiency Not Developed Due to Section 3.2(b)(*)	Event Milestone	Time Milestone (subject to Section 4.2(e))
U.S. [ * ]	U.S. [ * ]	FPFV in first Dose Escalation study for a Factor XIII Product or Combination Product	[ * ]
U.S. [ * ]	U.S. [ * ]	FPFV in CPOC Study	[ * ]
U.S. [ * ]	U.S. [ * ]	Achievement of CPOC by a Factor XIII Product or Combination Product (**)	[ * ]
U.S. [ * ]	U.S. [ * ]	Decision to Submit Registration File for a Factor XIII Product or Combination Product	[ * ]
U.S. [ * ]	U.S. [ * ]	First Marketing Approval for a Factor XIII Product or Combination Product	[ * ]

(*) If the lower milestone fee has been paid as a result of an Event Milestone or Time Milestone occurring prior to termination of the development of a Licensed Product for Congenital Factor XIII Deficiency pursuant to Section 3.2(b) (e.g., FPFV in the Dose Escalation study or the related Time Milestone has occurred prior to such termination), then NN shall promptly pay ZGEN an amount, which when added to the earlier milestone fee, would equal the higher milestone fee due as a result of such termination under Section 3.2(b); provided, however, that any such amount shall be reduced by the amount previously paid to ZGEN by NN for any Event Milestone or Time Milestone for the Congenital Factor XIII Deficiency pursuant to Section 4.2(a).

(**) Upon achievement of this Event Milestone in a CPOC Study pursuant to Section 3.4 prior to the associated Time Milestone the associated milestone fee to be paid for such Event Milestone shall be adjusted in two special situations to be: (i) [ * ] of the associated milestone fee in the table if Section 3.6(c) applies to the indication and (ii) [ * ] if Section 3.6(d) applies to the indication, to the extent such special determinations under Sections 3.6(c) and 3.6(d) can be made prior to the Time Milestone. Notwithstanding the first paragraph of this Section 4.2, such milestone fee shall not be payable by NN until the earlier of: (A) the Time Milestone (payment of unadjusted milestone fee) or (B) the later of (I) thirty (30) days from the achievement of such Event Milestone or (II) ten (10) days following the completion of the superiority assessments under Section 3.5 that are necessary to determine whether Section 3.6(c) or 3.6(d) apply to the indication (payment of adjusted or unadjusted milestone fee). However, if NN thereafter initiates a Phase III Clinical Trial or achieves CPOC in another CPOC Study for a Factor XIII Product or Combination Product for such indication, the balance of the full milestone fee set forth in the table for such Event Milestone that has not been paid shall become payable.

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(c) The milestone fees for the [ * ] Indication shall be as follows:

		Earlier of:
Milestone Fee	Milestone Fee if Licensed Product for Congenital Factor XIII Deficiency Not Developed Due to Section 3.2(b)(*)	Event Milestone	Time Milestone (subject to Section 4.2(e))
U.S. [ * ]	U.S. [ * ]	FPFV in first Dose Escalation study for a Factor XIII Product or Combination Product	[ * ]
U.S. [ * ]	U.S. [ * ]	FPFV in CPOC Study	[ * ]
U.S. [ * ]	U.S. [ * ]	Achievement of CPOC by a Factor XIII Product or Combination Product (**)	[ * ]
U.S. [ * ]	U.S. [ * ]	Decision to Submit Registration File for a Factor XIII Product or Combination Product	[ * ]
U.S. [ * ]	U.S. [ * ]	First Marketing Approval for a Factor XIII Product or Combination Product	[ * ]

(*) If the lower milestone fee has been paid as a result of an Event Milestone or Time Milestone occurring prior to termination of the development of a Licensed Product for Congenital Factor XIII Deficiency pursuant to Section 3.2(b) (e.g., FPFV in the Dose Escalation study or the related Time Milestone has occurred prior to such termination), then NN shall promptly pay ZGEN an amount, which when added to the earlier milestone fee, would equal the higher milestone fee due as a result of such termination under Section 3.2(b); provided, however, that any such amount shall be reduced by the amount previously paid to ZGEN by NN for any Event Milestone or Time Milestone for the Congenital Factor XIII Deficiency pursuant to Section 4.2(a).

(**) Upon achievement of this Event Milestone in a CPOC Study pursuant to Section 3.4 prior to the associated Time Milestone the associated milestone fee to be paid for such Event Milestone shall be adjusted in two special situations to be: (i) [ * ] of the associated milestone fee in the table if Section 3.6(c) applies to the indication and (ii) [ * ] if Section 3.6(d) applies to the indication, to the extent such special determinations under Sections 3.6(c) and 3.6(d) can be made prior to the Time Milestone. Notwithstanding the first paragraph of this Section 4.2, such milestone fee shall not be payable by NN until the earlier of: (A) the Time Milestone (payment of unadjusted milestone fee) or (B) the later of (I) thirty (30) days from the achievement of such Event Milestone or (II) ten (10) days following the completion of the superiority assessments under Section 3.5 that are necessary to determine whether Section 3.6(c) or 3.6(d) apply to the indication (payment of adjusted or unadjusted milestone fee). However, if NN thereafter initiates a Phase III Clinical Trial or achieves CPOC in another CPOC Study for a Factor XIII Product or Combination Product for such indication, the balance of the full milestone fee set forth in the table for such Event Milestone that has not been paid shall become payable.

(d) In the event that NN selects rFVIIa as the Phase III Development Candidate for the [ * ] Indication or [ * ] Indication pursuant to Section 3.6(e), then NN shall pay milestone fees with respect

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to an rFVIIa product based on Event Milestones and Time Milestones for the indication that are the same as the Event Milestones and Time Milestones in the applicable table in Section 4.2(b) or 4.2(c) as if the rFVIIa product were a Factor XIII Product; however, the related milestone fees shall be: (i) for the achievement of Decision to Submit Registration File for an rFVIIa product-[ * ] the corresponding amount in the table; and (ii) for receipt of first Marketing Approval for an rFVIIa product-[ * ] the corresponding amount in the table.

(e) With respect to the Time Milestones associated with the Event Milestones and milestone fees in the tables in Sections 4.2(a), 4.2(b), 4.2(c) and 4.2(d):

(i) The Time Milestones in the applicable table in Section 4.2(a), 4.2(b) or 4.2(c) for an indication shall terminate if the Licensed Product or rFVIIa product in the case of Section 4.2(d) for the indication is terminated pursuant to Section 3.2(e), and the Time Milestones in the table in Section 4.2(a) shall terminate if a Factor XIII Product for Congenital Factor XIII Deficiency is terminated pursuant to Section 3.2(b);

(ii) The Time Milestone associated with the Decision to Submit Registration File shall not apply if no Phase III Development Candidate needs to be established with respect to the indication pursuant to Section 3.6(c) or Section 3.6(d);

(iii) In the event ZGEN does not transfer the information and materials pursuant to Section 5.1 by the Technology Transfer Dates, the Time Milestones in the tables in Sections 4.2(a), 4.2(b) and 4.2(c) shall be delayed by the actual amount of time lost in development of the Licensed Product or rFVIIa product in the case of Section 4.2(d) for the particular indication as a result of the transfer occurring after the Technology Transfer Dates despite NN’s exercise of commercially reasonable efforts. NN shall notify ZGEN as soon as it appears that there could be a delay in development as a result of a delay in such transfer and shall provide and discuss with ZGEN information regarding the situation and NN’s efforts to overcome or reduce any delay. In the event of a dispute between the Parties regarding the actual amount of delay to be added to the Time Milestones, either Party may request that the matter be referred to the Chief Executive Officers of ZGEN and NN to be resolved, if at all, in the next forty-five (45) days and NN shall promptly provide each of the Chief Executive Officers with information regarding the situation, its estimate of the actual amount of time lost in development and NN’s efforts to overcome or reduce any delay; and

(iv) In the event that development of a Licensed Product, or the development of an rFVIIa product pursuant to Section 3.6(e), for the Congenital Factor XIII Deficiency, [ * ] Indication or [ * ] Indication is delayed due to a Regulatory Event or a technical issue, including [ * ], which delay cannot be overcome or reduced by NN’s commercially reasonable efforts, then the date for the Time Milestone associated with the affected Event Milestone shall be postponed for the period of time of the delay. NN shall notify ZGEN as soon as is reasonably practicable following the occurrence of the Regulatory Event or technical issue that could reasonably be expected to cause such a delay and shall provide ZGEN with information (to the extent available at the time) regarding the situation, including NN’s preliminary assessment, efforts and estimated time to complete a full assessment. Thereafter, NN shall provide ZGEN, from time to time, with any further information regarding the situation and NN’s on-going assessment and efforts. For the avoidance of doubt, this clause (iv) can be applied to (but is not limited to) the Time Milestone associated with the Decision to Submit Registration File in the event there is a delay in the start of a Phase III Clinical Trial that is caused by the FDA or EMEA requiring a Primary Endpoint for a Phase III Clinical Trial that is not similar to the Primary Endpoint used for the corresponding CPOC Study.

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(f) For the avoidance of doubt, it is acknowledged by the Parties with respect to rFVIIa that (i)no milestone fee shall be payable to ZGEN with respect to the development of rFVIIa for Congenital Factor XIII Deficiency or any other indication, except as provided in Section 4.2(d) with respect to the [ * ] Indication or [ * ] Indication, and (ii) any Time Milestones related to the development of rFVIIa for the [ * ] Indication or [ * ] Indication pursuant to Section 4.2(d) may be terminated or adjusted as provided in Section 4.2(e).

(g) For the avoidance of doubt, it is acknowledged by the Parties that, in the event NN has no further development obligations with respect to an indication pursuant to Section 3.6(c) or Section 3.6(d), NN shall not be obligated to select a Phase III Development Candidate and, as provided in Section 4.2(e)(ii), the Time Milestones related to that indication shall terminate.

(h) The basis for paying milestone fees described in this Section 4.2 is designed to capture, refine, clarify and supplement the outline set forth in Exhibit H attached to this Agreement that the Parties had used to negotiate this Agreement. In the event of any conflict or inconsistency between Exhibit H and the provisions of this Section 4.2, this Section 4.2 shall prevail.

It is recognized and agreed that despite the termination of a development obligation for an indication pursuant to Sections 3.2(b), 3.2(e), 3.6(c) or 3.6(d), a milestone fee will be payable if a Licensed Product eventually achieves an Event Milestone for the indication. For the avoidance of doubt, only the Congenital Factor XIII Deficiency indication, [ * ] Indication and [ * ] Indication can cause milestone fees to become payable.

Section 4.3. Royalties. NN shall pay to ZGEN a royalty on Net Sales of each Licensed Product, as follows:

(a) For each Factor XIII Product that is a Patent Product, NN shall pay ZGEN royalties equal to [ * ] of Net Sales of such Factor XIII Product. The royalties shall be increased to [ * ] of Net Sales of all such Factor XIII Products in the event that:

(i) a Factor XIII Product gains Marketing Approval in the United States or European Union for the treatment of Congenital Factor XIII Deficiency or a Licensed Product gains Marketing Approval for an additional indication other than for the treatment of Congenital Factor XIII Deficiency, the [ * ] Indication or the [ * ] Indication;

(ii) a Licensed Product gains Marketing Approval for treatment of the [ * ] Indication or NN selects rFVIIa as the Phase III Development Candidate for such indication pursuant to Section 3.6(e);

(iii) a Licensed Product gains Marketing Approval for treatment of the [ * ] Indication or NN selects rFVIIa as the Phase III Development Candidate for such indication pursuant to Section 3.6(e); and

(iv) a Licensed Product gains Marketing Approval for an indication other than for the treatment of Congenital Factor XIII Deficiency, the [ * ] Indication, the [ * ] Indication or the additional indication, if applicable, set forth in clause (i) of this Section 4.3(a).

(b) For each Combination Product that is a Patent Product, NN shall pay ZGEN royalties equal to [ * ] of Net Sales of such Combination Product. The royalties shall be increased to [ * ] of Net Sales of all such Combination Products in the event that:

(i) a Factor XIII Product gains Marketing Approval in the United States or European Union for the treatment of Congenital Factor XIII Deficiency or a Licensed Product gains Marketing Approval for an additional indication other than for the treatment of Congenital Factor XIII Deficiency, the [ * ] Indication or the [ * ] Indication;

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(ii) a Licensed Product gains Marketing Approval for treatment of the [ * ] Indication or NN selects rFVIIa as the Phase III Development Candidate for such indication pursuant to Section 3.6(e);

(iii) a Licensed Product gains Marketing Approval for treatment of the [ * ] Indication or NN selects rFVIIa as the Phase III Development Candidate for such indication pursuant to Section 3.6(e); and

(iv) a Licensed Product gains Marketing Approval for an indication other than for the treatment of Congenital Factor XIII Deficiency, the [ * ] Indication, the [ * ] Indication or the additional indication, if applicable, set forth in clause (i) of this Section 4.3(b).

(c) NN’s obligation to pay royalties for a Patent Product shall cease on a country-by-country basis on the expiration date of the last-to-expire of any patent included in the Licensed Patents or Sublicensed Patents (or in the case of only a patent application included therein, [ * ] after the initial filing of such application) with a Patent Claim which would be infringed, in the absence of the licenses granted under this Agreement, by the making, using, importation, offer for sale or sale of the Patent Product (i.e., when the Patent Product ceases being a “Patent Product” as defined in Section 1.40 and thereafter may become a “Know-How Product”).

(d) For each Factor XIII Product or Combination Product that is a Know-How Product, NN shall pay ZGEN royalties equal to [ * ] of Net Sales of such Factor XIII Product and [ * ] of Net Sales of such Combination Product. NN’s obligation to pay royalties for each Know-How Product shall expire with respect to Net Sales in each country occurring after the earlier of: (i) [ * ] after the First Commercial Sale of the Licensed Product in such country or (ii) [ * ].

(e) For the avoidance of doubt, no royalties shall be paid with respect to the sales of rFVIIa.

Section 4.4. Payments Under UW Agreement/Aventis Agreement. ZGEN shall pay to UW, when due, all amounts due under the UW Agreement. NN shall pay to Aventis, when due, all royalties due under the Aventis Agreement and the milestone fee due pursuant to Section 4.3 of the Aventis Agreement.

Section 4.5. Other Licenses and Royalty Offset.

(a) NN shall be solely responsible for determining whether or not additional licenses must be taken in order to commercialize Licensed Products in accordance with this Agreement and for the payment of any royalties and other fees required by such licenses. Except as set forth in Section 4.5(b), NN shall pay to ZGEN the royalties set forth in Section 4.3 regardless of whether a license to any other patents or other rights is required to commercialize a Licensed Product or whether royalties or other fees must be paid to other parties. For the avoidance of doubt and except as set forth in Section 4.5(b), NN shall not be entitled to offset the royalties or fees paid by it to other parties, whether in connection with licenses or otherwise, against the royalties, milestones or other payments due and owing to ZGEN under this Agreement.

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(b) NN may offset any royalties paid to Aventis under the Aventis Agreement against royalties payable to ZGEN hereunder. NN may offset the milestone paid to Aventis pursuant to Section 4.3 of the Aventis Agreement against any milestone fee coming due ZGEN following such payment to Aventis.

Section 4.6. Taxation of Payments. ZGEN shall be responsible for and shall bear any taxes levied upon payments received by ZGEN, and ZGEN hereby authorizes NN to withhold such taxes from the payments which are payable to ZGEN in accordance with this Agreement if NN is either required to do so under the applicable tax laws or directed to do so by an agency of the relevant government. Upon ZGEN’s written request, NN shall, with respect to the laws of Denmark/Switzerland, reasonably support ZGEN in its legal efforts to minimize any such withholding taxes, and provide ZGEN with information about and necessary for any documentation needed to reduce withholding to a legal minimum.

Section 4.7. Currency Blockage. If the laws or regulations of another country prevent the conversion of its currency into United States dollars for the payment of royalties, NN will either (a) pay such royalties by depositing the currency of the other country into a bank account designated by ZGEN in that country or (b) if permitted by law, pay such royalties in the currency of the country in question to ZGEN’s designee in that country.

Section 4.8. Wire Transfer. All payments to be made by NN to ZGEN under this Agreement shall be made by wire transfer from NN to the following account of ZGEN:

Bank of America

Commercial Banking Account

Seattle, WA 98104

ABA routing number: [ * ]

Account number: [ * ]

Section 4.9. Acknowledgment. NN acknowledges that the Licensed Know-How, regulatory filings, supply contracts, clinical supplies, biological materials, reagents, assays, protocols, SOPs and information/documents to be provided under this Agreement constitute valuable intellectual property, trade secrets, know-how, filings, rights, information/documents and materials of ZGEN. The Parties acknowledge and agree that, for their mutual convenience and after considering other alternatives, the payments to ZGEN set forth in this Agreement, including this Article 4, and the timing of and basis for the payments (including the milestone fees and the period during which royalties are due) are an appropriate and mutually convenient way of compensating ZGEN.

Section 4.10. Annual License Fee. In the event that during any [ * ] period:

(a) ZGEN is not entitled to receive any milestone fees under Section 4.2 because, during such [ * ] period, an Event Milestone was not achieved and a Time Milestone did not occur;

(b) ZGEN is not receiving royalty payments under Article 4 related to a Licensed Product for the treatment of any indication;

(c) NN is not conducting a development program pursuant to Article 3 for a Licensed Product for the treatment of Congenital Factor XIII Deficiency, the [ * ] Indication or the [ * ] Indication for which a milestone fee could become payable because all such programs have been completed, terminated pursuant to Sections 3.2(b), 3.2(e), 3.6(c) or 3.6(d); for the avoidance of doubt, if such a program is delayed pursuant to Section 4.2(e)(iii) or (iv), so long as NN is using commercially reasonable efforts to overcome or reduce the delay, the Parties acknowledge that NN is conducting such program and this Section 4.10(c) is not satisfied; and

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(d) NN is not conducting an active and vigorous drug research and development program, including meeting and fulfilling milestones and goals in accordance with NN’s internal guidelines for research and development programs, for a Licensed Product for the treatment of an indication other than Congenital Factor XIII Deficiency, the [ * ] Indication or the [ * ] Indication;

then NN, at its option, shall irrevocably elect no later than thirty (30) days after the expiration of the [ * ] period to either (i) pay ZGEN an annual license fee of [ * ] immediately upon expiration of the [ * ] period and on each annual anniversary thereof until the expiration date of the last-to-expire patent within the Licensed Patents and Sublicensed Patents or (ii) terminate this Agreement by giving ZGEN [ * ] prior written notice of termination. In the event NN does not make a timely election, it shall be deemed to have elected to pay the annual license fee pursuant to clause (i) of the preceding sentence. For the avoidance of doubt, if NN begins paying the milestone payments or royalty payments set forth in paragraphs (a) or (b) above or establishes a development program as set forth in paragraphs (c) or (d) above as reasonably demonstrated to ZGEN, for at least [ * ] prior to the next due date of the next annual license fee, then the next annual license fee shall not be payable to ZGEN and subsequent annual license fees shall not be payable if, during the [ * ] prior to the due date of an annual license fee, such milestones and royalties are being paid or such development programs are being conducted.

Section 4.11. Payments and Reports. Royalties payable pursuant to this Agreement shall be due quarterly within [ * ] following the end of each Calendar Quarter for Net Sales in such Calendar Quarter. All sales in non-United States currencies shall be converted into United States dollars using the rate of exchange quoted by Bank of America and its successor(s) on the last business day of the Calendar Quarter in which the sales were made. Each such payment shall be accompanied by a statement of Net Sales for the quarter (including number of units), applicable exchange rates and the calculation of royalties payable hereunder by Licensed Product and country. Such statement shall also include the royalties and milestone paid or payable to Aventis under the Aventis Agreement, the information to be provided Aventis in connection with such payment and the method for applying the offset pursuant to Section 4.5(b) to amounts otherwise due ZGEN hereunder. All milestone fees, royalties and all other amounts which are overdue under this Agreement will bear interest at the rate of [ * ] percent ([ * ]%) per month from the date due through the date of payment. NN shall keep, and shall cause its Affiliates and Sublicensees to keep, complete, true and accurate records for at least five (5) years for the purpose of showing the derivation of all milestone fees and royalties payable under this Agreement. Independent accountants engaged on behalf of ZGEN, who are reasonably acceptable to NN, shall have the right to inspect and audit such records at any time during reasonable business hours upon reasonable prior notice to NN or any of its Affiliates or Sublicensees, but such right will not be exercised more often than annually (it being understood that a single exercise of such right may include a series of related or continuing inspections and audits). The cost of such inspection and audit shall be borne by ZGEN unless there is a discrepancy of greater than, or equal to, [ * ] in NN’s favor in which case NN shall bear the entire cost of the inspection and audit.

Article 5

Technology Transfer, ZGEN Services and rFXIII Supply

Section 5.1. Transfer. The Technology Transfer Letter sets forth the documents, files and materials that constitute Licensed Know-How that ZGEN expects to transfer to NN, which transfer shall be completed by the Technology Transfer Date for each item; provided, however, that ZGEN shall not be responsible for delays in transfer that are out of its control. It is recognized and agreed that (i) most documents and files to be transferred hereunder will be transferred via electronic media, (ii) those materials in the possession or control of ZGEN at the

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Effective Date will be delivered to NN at their current locations, (iii) if, following the execution of this Agreement, NN indicates a preference for certain of those materials not in ZGEN’s possession at the Effective Date to remain at any outside contractor, ZGEN’s obligation to transfer those certain materials to NN shall be deemed fulfilled upon notification of the contractor (with copies to NN) that responsibility for such materials has been transferred to NN.

Section 5.2. Validation of Assays. ZGEN has established assays for testing and release of rFXIII bulk drug substance and for testing and release of rFXIII drug product. ZGEN shall validate the assays for manufacturing release of rFXIII bulk drug substance and rFXIII drug product for Phase III Clinical Trials and commercial sales according to protocols (including acceptance criteria) that have been forwarded to NN by ZGEN, subject to such modifications as were agreed upon and confirmed in writing by the Parties on or immediately prior to the Effective Date, and using non-GMP material. For such work (including testing of GMP manufacturing runs and preparation of certificates of analysis) by ZGEN after the Effective Date, NN shall pay ZGEN, on a quarterly basis, at the rate of [ * ] per FTE for ZGEN’s personnel who are involved with the project and reimburse ZGEN, on a monthly basis, for any subcontractors’ costs and reasonable travel costs.

Section 5.3 Stability Testing Program. ZGEN and its subcontractors shall continue already-initiated stability testing programs until the date designated by NN to ZGEN as being the date upon which NN wishes to take over such programs. For such work, NN shall pay ZGEN, on a quarterly basis, at the rate of [ * ] per FTE for ZGEN’s personnel who are involved with the project and reimburse ZGEN, on a monthly basis, for any subcontractors’ costs and reasonable travel costs.

Section 5.4 ZGEN Services. ZGEN shall undertake the following services for NN:

(a) At NN’s cost, provide up to two (2) representatives acceptable to NN to participate with NN in the first investigator’s meeting with respect to the [ * ] Indication following the Effective Date and to provide reasonable assistance to NN in preparation work conducted by NN for such meeting.

(b) At NN’s cost, provide up to (2) two representatives from each of preclinical and clinical development to consult and provide advice to NN regarding NN’s preparation for any meeting with a Regulatory Agency regarding Congenital Factor XIII Deficiency during 2004 and 2005 (including, at NN’s request, to attend such meeting); provided, however, that ZGEN’s personnel shall not be obliged to spend more than sixty (60) hours in the aggregate during 2005 in the provision of such support.

(c) At ZGEN’s cost, update the rFXIII Investigational Brochure within five (5) days after the Effective Date in ZGEN’s format with information reasonably sufficient to fulfill the requirements of ICH E6 “Guideline for Good Clinical Practice”, Section 7.0, Investigators’ Brochure, Step 4, June 1996. NN shall then submit an updated version in NN’s preferred format to the FDA within the time period required by applicable regulations.

(d) At ZGEN’s cost, finalize the Congenital Factor XIII Deficiency annual report to the FDA by October 17, 2004 in ZGEN’s format with information reasonably sufficient to fulfill the requirements of 21CFR Part 312.33. NN shall then submit the updated report in NN’s preferred format to the FDA within the time period required by applicable regulations.

(e) At ZGEN’s cost, finalize and submit for publication by December 31, 2004 certain manuscripts as specified in the Manuscripts Letter.

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For purposes of Section 5.4(a) and Section 5.4(b) only, in 2004, NN’s costs shall mean reimbursement of ZGEN, on a monthly basis, for any reasonable out-of-pocket expenses incurred by ZGEN in 2004, including any travel expenses, and in 2005, NN’s costs shall mean reimbursement of ZGEN, on a monthly basis, for any reasonable travel expenses, and payment to ZGEN, on a quarterly basis, for any activities performed by ZGEN personnel in 2005 at the rate of [ * ] per FTE.

Section 5.5. Supply of rFXIII

(a) NN hereby purchases from ZGEN, and ZGEN hereby sells to NN, the amount and form of Recombinant Factor XIII produced by Avecia that is described in Exhibit I (“rFXIII Supplies”). Title to the rFXIII Supplies shall transfer to NN upon the Effective Date, and NN shall be responsible for any storage costs incurred after the Effective Date. Release of the rFXIII Supplies shall be the responsibility of, and under the control of, NN. The rFXIII Supplies are delivered to NN at their current locations.

(b) Within [ * ] of the Effective Date, NN shall pay to ZGEN [ * ] for the rFXIII Supplies.

(c) If either of the two lots of vialed Recombinant Factor XIII described in item 1(a) of Exhibit I fail stability specifications when tested by ZGEN or its subcontractors during routine stability testing in October or November 2004, NN shall be entitled to a credit for each lot that failed in the amount of [ * ] against the first future milestone fee payable to ZGEN following such testing. If it is determined that any materials described in items 1(b) and (c) of Exhibit I did not meet the release specifications as filed with the FDA or as set forth in the Avecia Agreement, as applicable, in effect at the time of release or were not stored properly prior to the Effective Date such that they cannot be used for their expected purposes in research and development, NN shall be entitled to a credit against the first future milestone fee payable to ZGEN following such determination equal in amount to (i) the weight of such materials divided by the aggregate weight of all materials in items 1(b) and (c) of Exhibit I (ii) multiplied by [ * ]. For the avoidance of doubt, the aggregate of all amounts that may be creditable pursuant to this Section 5.5(c) against future milestone fees due pursuant to Section 4.2 shall not exceed [ * ].

(d) For each GMP manufacturing run by Avecia described in items 2 and 3 of Exhibit I (a “GMP Manufacturing Run”), ZGEN and NN will, within sixty (60) days after notification from Avecia that its batch records are ready for review, perform a joint quality audit of such batch records to determine whether the GMP Manufacturing Run meets the release specifications set forth in the Avecia Agreement (according to assays performed by ZGEN or Avecia as relied upon by ZGEN). During such sixty (60) day period, ZGEN and NN will perform joint audits of Avecia’s manufacturing facility and quality system in regard to manufacturing and release testing and the facility and quality systems of any ZGEN subcontractors (to the extent permitted by ZGEN’s contracts) in regard to release testing of any drug substance. During such sixty (60) day period, NN will also audit ZGEN’s facility and quality systems in regards to release testing of any drug substance. Within sixty (60) days after completion of such audits, NN will determine and inform ZGEN whether the GMP Manufacturing Run was prepared in accordance with NN’s standards for cGMP, provided that any major nonconformances have been resolved to NN’s satisfaction. Following the completion by ZGEN or its subcontractors of the validation of assays for release of Factor XIII drug substance pursuant to Section 5.3, ZGEN or its subcontractors will test each GMP Manufacturing Run using these validated assays and will provide a certificate of analysis to NN for each GMP Manufacturing Run based upon these validated assays. For each GMP Manufacturing Run that NN has determined was not prepared in accordance with cGMP (i.e., determined within sixty (60) days after completion of the audits and within thirty (30) days after receiving the certificate of analysis from ZGEN), NN shall be

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entitled to a credit of [ * ] against the first future milestone fee payable to ZGEN following NN’s determination. For the avoidance of doubt, the aggregate of all amounts that may be creditable pursuant to this Section 5.5(d) against future milestone fees due pursuant to Section 4.2 shall not exceed [ * ]; provided, however, that in the event NN uses any GMP Manufacturing Run material, NN shall not be entitled to a credit pursuant to this Section 5.5(d) and if NN has taken a credit for such material, NN shall pay to ZGEN the amount of such credit.

(e) Except as provided in Section 5.2, each Party shall be responsible for its own costs of performing any testing and quality audit on any GMP Manufacturing Run material, including facility audits.

(f) It is acknowledged by the Parties that any failure of GMP Manufacturing Run material to meet cGMP as determined by NN pursuant to Section 5.5(d), shall constitute a CMC issue for the purposes of Section 4.2(e)(iv).

(g) AT THE EFFECTIVE DATE, THE rFXIII SUPPLIES ARE BEING SOLD “AS IS” AND WITHOUT ANY REPRESENTATIONS OR WARRANTIES BY ZGEN, EXCEPT FOR A PASS-THROUGH OF THE WARRANTIES, AND RESPECTIVE LIMITATIONS, PROVIDED BY AVECIA. ZGEN MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OF ANY TYPE WHATSOEVER, REGARDING THE rFXIII SUPPLIES, AND EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, SAMPLES PREVIOUSLY PROVIDED OR NONINFRINGEMENT.

Article 6

Development Reports and Records

Section 6.1. Development Reports. NN shall provide ZGEN written semiannual reports within [ * ] after Novo’s semiannual project review, on research and development progress and management approved plans for research and development for all Licensed Products by NN and each of its Affiliates and Sublicensees, including a description of and progress on significant preclinical, clinical and regulatory plans, projected time lines and actual events related to this Agreement, such as initiation and results of clinical trials and filing of significant regulatory documents. These reports shall [ * ]. NN and each of its Affiliates and Sublicensees operating hereunder shall keep true, complete and accurate records for the purposes of showing their research, development and commercialization progress. ZGEN shall have the right to reasonably review and discuss with the project leader at Novo and any Sublicensees (other than Affiliates of NN) their respective research, development and commercialization plans, progress, results and efforts under this Agreement, provided that ZGEN has given reasonable advance notice to NN with respect to Novo and such Sublicensees and has not sought to contact them directly initially. NN shall cooperate with ZGEN’s reasonable requests for information regarding such research, development and commercialization. The first such report shall be due no later than [ * ] after the Effective Date; subsequent reports shall be due every six (6) months thereafter until the First Commercial Sale of each Licensed Product for a particular indication under this Agreement in both the United States and European Union.

Section 6.2. Dose Escalation Studies and CPOC Studies. With respect to the Dose Escalation studies pursuant to Section 3.3 and the CPOC Studies pursuant to Section 3.4, NN shall provide ZGEN with the final protocols for such studies (i.e., when forwarded to potential clinical trial sites) and reasonably discuss with ZGEN the final study reports (known as “Integrated Clinical Trial Reports”) generated in accordance with Novo’s internal guidelines for such studies. In addition, NN shall provide and reasonably discuss with ZGEN the reports generated in accordance with Novo’s internal guidelines with respect to the Statistical Analysis and selection of the Phase III Development Candidate pursuant to Sections 3.5 and 3.6.

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Section 6.3. Preliminary Assessment. As soon as NN has unblinded any of the Dose Escalation studies or CPOC Studies and performed a preliminary assessment of such studies or the Statistical Analysis, a representative of NN who is knowledgeable about the preliminary assessment shall call the senior clinical officer at ZGEN to discuss such preliminary assessment; provided, however, in the event NN will be making a public announcement of the preliminary assessment within a short time, ZGEN need not be advised of such preliminary assessment.

Section 6.4 Confidentiality. Any information provided to ZGEN under this Article 6 shall be subject to the confidentiality provisions of Article 10 and used by ZGEN solely for purposes of monitoring NN’s progress and decisions regarding the research, development and commercialization of Licensed Products, unless the information must be provided to the licensor under the UW Agreement or Aventis Agreement (subject to the confidentiality provisions thereof), the information is no longer confidential pursuant to Section 10.2 or otherwise specifically agreed in writing by the Parties.

Article 7

Patent Prosecution

Section 7.1. Prosecution. At its sole cost and expense, NN shall be solely responsible for the prosecution and maintenance, including prosecuting interferences and oppositions, of the Licensed Patents set forth in Exhibit A and the Sublicensed Patents set forth in Exhibits C and D. Upon NN’s reasonable request and at no out-of-pocket expense to ZGEN, ZGEN shall render such reasonable assistance, execute any documents and do such other acts as may be reasonably necessary in connection with the prosecution or maintenance of any such Licensed Patents and Sublicensed Patents by NN. To keep ZGEN apprised of its efforts, NN shall provide ZGEN promptly upon receipt with copies of all office actions and significant communications and correspondence from U.S. and foreign patent offices and foreign associates, and copies of NN’s significant responses and amendments for all patent applications included in such Licensed Patents and Sublicensed Patents, including copies of newly filed related patent applications. ZGEN shall have the right to comment on and to discuss prosecution and maintenance activities with NN, and NN shall consider the same in good faith. The Parties will cooperate to ensure transfer of such prosecution and maintenance efforts to NN promptly following the Effective Date. In prosecuting and maintaining the Licensed Patents set forth in Exhibit A and the Sublicensed Patents set forth in Exhibits C and D under this Section 7.1, NN shall employ efforts that are no less than it uses for the prosecution and maintenance of its own patents and patent applications. At its sole cost, expense and discretion, ZGEN shall be solely responsible for the prosecution and maintenance, including prosecuting interferences and oppositions, of the Licensed Patents set forth in Exhibit B. ZGEN shall provide NN promptly upon receipt with copies of all office actions and significant communications and correspondence from U.S. and foreign patent offices and foreign associates, and copies of ZGEN’s significant responses and amendments for all patent applications included in the Licensed Patents set forth in Exhibit B. NN shall have the right to comment on and to discuss prosecution and maintenance activities with ZGEN, and ZGEN shall consider the same in good faith. The prosecution and maintenance of the Sublicensed Patents set forth in Exhibit E shall be subject to the terms of the Aventis Agreement.

Section 7.2. Abandonment. NN, in its sole discretion, may elect to discontinue the prosecution and/or maintenance of any Licensed Patent set forth in Exhibit A or any Sublicensed Patent set forth in Exhibits C and D. Upon such election, NN shall so advise ZGEN in writing at least sixty (60) days in advance, and ZGEN shall have the right to continue such prosecution or maintenance at ZGEN’s expense, in which event such patent or patent applications (and patents issuing thereon) shall be removed from the definition of Licensed Patent or Sublicensed Patent, as the case may be, and from the licenses or sublicenses granted hereunder. ZGEN, in its sole discretion, may elect to discontinue the prosecution and/or maintenance of any Licensed Patent set forth in Exhibit B. Upon such election by ZGEN, ZGEN shall so advise NN in writing at least sixty (60) days in

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advance and NN shall have the right, at its expense, to file an application to prosecute such Licensed Patent only as to claims specifically naming rFXIII and continue the prosecution thereof so long as such action does not jeopardize or adversely affect the rights of ZGEN’s other licensees. With respect to maintaining any issued patents included in any Licensed Patent set forth in Exhibit B, NN shall have the right, together with ZGEN’s other licensees of such patent, to maintain such patents at the expense of NN and the other licensees and with such other terms and arrangements as they may agree.

Section 7.3. Patent Term Extension. NN shall advise ZGEN of Marketing Approval by any Regulatory Agency to market any Licensed Product and of any other governmental approval obtained by or on behalf of NN, any Affiliate or Sublicensee that is pertinent to any patent term extension (including supplementary protection certificates) for any Licensed Patent or the Sublicensed Patent within ten (10) days after receiving such approval. NN, at its sole discretion and after notice to ZGEN, may seek a patent term extension for any Licensed Patent set forth in Exhibit A or Sublicensed Patent as set forth in Exhibits C and D after considering in good faith any input from ZGEN. Any patent term extension of a Licensed Patent set forth in Exhibit B shall only be made by ZGEN, in its sole discretion, after considering any input from NN and any other licensees. Any request for patent term extension of a Sublicensed Patent set forth in Exhibit E shall be subject to the terms of the Aventis Agreement. Unless the Parties agree otherwise, and except for the Sublicensed Patents set forth in Exhibit E and the Licensed Patents set forth in Exhibit B, all filings for such extension shall be made by NN at its sole cost and expense, and NN shall promptly reimburse ZGEN for its out-of-pocket costs related thereto. The Parties shall cooperate with any efforts to seek patent term extension, including diligently supplying all pertinent information pertaining to such patent term extension, and with all information and supporting documents required to comply with all laws pertaining to the extension of such patent term. With respect to the Sublicensed Patents set forth in [ * ], ZGEN will, [ * ], cooperate with NN in seeking the consent of [ * ] to reasonably requested amendments to the [ * ].

Section 7.4. Sublicensed Patents. It is recognized that this Article 7 is subject to the rights and obligations under, and compliance with the terms of, the UW Agreement and the Aventis Agreement.

Article 8

Patent Infringement

Section 8.1. Notice of Infringement and Conference. Each Party shall promptly inform the other Party in writing if it becomes aware of any alleged or threatened infringement of any Licensed Patents or Sublicensed Patents by a Third Party with respect to a Licensed Product. Upon receipt of such written notice, the Parties shall confer regarding all available evidence of infringement or attack, and the manner of addressing such infringement or attack. The Parties may agree to pursue the matter jointly.

Section 8.2. NN Has First Right. Unless the Parties agree otherwise, NN shall have the first right, but not the obligation, to initiate and control any infringement action, including cease and desist letters and lawsuits, at its expense, to enforce the Licensed Patents set forth in Exhibits A and B or the Sublicensed Patents set forth in Exhibits C and D against any infringer or alleged infringer of the such Licensed Patents or Sublicensed Patents to the extent exclusively licensed hereunder to NN. NN shall notify ZGEN of its decision whether to initiate such an infringement action, but in no event later than sixty (60) days after the conference described in Section 8.1, and before initiating such infringement action, NN shall consider in good faith the views of ZGEN presented in a timely manner following notification of NN’s decision. NN shall keep ZGEN reasonably apprised of the progress of the matter. If ZGEN has agreed to join the action at the request of NN or has been made an involuntary plaintiff (or defendant) in the action and NN’s legal counsel is unable to represent ZGEN because of a bona fide conflict of interest, ZGEN may engage other competent legal counsel (but only one firm)

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to represent ZGEN in any such suit or legal proceeding and NN shall reimburse ZGEN for the reasonable fees and expenses of such counsel. If ZGEN does not wish to be represented by NN’s legal counsel for reasons other than a bona fide conflict of interest, then ZGEN may engage competent legal counsel of its own choosing to represent it at its own expense. NN shall indemnify, defend and hold harmless the Indemnitees (as defined in Section 12.1) from any and all claims, counterclaims, damages, judgments, costs, expenses (including attorneys’ fees), liability and obligations directly associated with any claim or legal proceedings instituted by NN under this Section 8.2. Any infringement action with respect to the Sublicensed Patents set forth in Exhibit E shall be subject to the terms of the Aventis Agreement.

Section 8.3. Awards. Any recovery by NN in proceedings instituted by NN pursuant to Section 8.2 shall first be used to reimburse NN for its reasonable out-of-pocket costs and legal fees incurred to conduct such proceedings, including its reimbursement, if any, of ZGEN’s costs and legal fees pursuant to this Article 8. Any remaining amount shall be divided as follows: NN—[ * ]%; ZGEN—[ * ]%.

Section 8.4. Settlement. NN may enter into any settlement, consent judgment or other voluntary final disposition of any proceeding under Section 8.2 without ZGEN’s prior written consent so long as the Licensed Patents and Sublicensed Patents would not be adversely affected, such settlement is not otherwise inconsistent with the terms of this Agreement and ZGEN receives a general release of any claims against it in such proceeding and ZGEN is promptly provided thereafter a copy of such settlement, consent judgment or other voluntary disposition. Any other settlement, consent judgment or voluntary final disposition of any proceeding under Section 8.2 by NN shall require the prior written consent of ZGEN, which consent shall not be unreasonably withheld or delayed. Any recovery by NN in connection with such settlement, consent judgment or other voluntary final disposition shall be applied first to reimburse NN for its reasonable out-of pocket costs and legal fees incurred and any remaining amount shall be divided as follows: NN—[ * ]%; ZGEN—[ * ]%; provided, however, that noncash consideration or compensation received or to be received by NN shall be valued at a fair market value and ZGEN’s share (as provided herein) paid to ZGEN in cash by NN and, provided further that any dispute between the Parties regarding such fair market value shall be established by binding arbitration in New York, New York and conducted in accordance with the Non-Administered Arbitration Rules & Commentary (Rev. 2000) of the CPR Institute for Dispute Resolution before one independent and impartial arbitrator who has training and experience as a mediator of pharmaceutical industrial licensing and other general commercial matters.

Section 8.5. ZGEN Has Secondary Right. If NN has not taken any action pursuant to Section 8.2 to stop such infringement within sixty (60) days after the conference described in Section 8.1 or desires to cease to continue any such action to stop such infringement (as to which NN shall provide a reasonable notice to ZGEN prior to discontinuing an infringement proceeding) and such infringement (and continued infringement) would be materially detrimental to the development/commercialization of any Licensed Product hereunder, or has resulted in sales of excess of [ * ] in the aggregate, ZGEN shall, at its sole discretion, have the right, but not the obligation, to take legal action regarding such infringement (including continuing NN’s infringement proceeding in the name of ZGEN), as ZGEN deems necessary and desirable at its expense. In the event of any continuance by ZGEN of an NN infringement action, NN shall reasonably cooperate, at no out-of-pocket expense to NN, in all actions reasonably necessary to transfer control of the proceedings from NN to ZGEN. If NN is made an involuntary plaintiff (or defendant) in the action and ZGEN’s legal counsel is unable to represent NN because of a bona fide conflict of interest, NN may engage other competent counsel (but only one firm) to represent NN in such action and ZGEN shall reimburse NN for the reasonable fees and expenses of such counsel. ZGEN may enter into any settlement, consent judgment or other voluntary final disposition of any proceeding under this Section 8.5 without NN’s prior written consent so long as the Licensed Patents and Sublicensed Patents would not be adversely affected, such settlement is not otherwise inconsistent with the terms of this Agreement and NN

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receives a general release of any claims against it in such proceeding, and NN is promptly provided thereafter a copy of such settlement, consent judgment or other voluntary disposition. Any other settlement, consent judgment or voluntary final disposition of any proceeding under this Section 8.5 by ZGEN shall require the prior written consent of NN, which consent shall not be unreasonably withheld or delayed. Any recovery by ZGEN in proceedings instituted by ZGEN pursuant to this Section 8.5 and any recovery pursuant to any settlement, consent judgment or other voluntary disposition thereof shall first be used to reimburse ZGEN for its reasonable out-of-pocket costs and legal fees incurred and any remaining amount shall be divided as follows: ZGEN—[ * ]%; .NN—[ * ]%; provided, however, that noncash consideration or compensation received or to be received by ZGEN shall be valued at a fair market value and NN’s share (as provided herein) paid to NN in cash by ZGEN and, provided further that any dispute between the Parties regarding such fair market value shall be established by binding arbitration in accordance with the procedure set forth in the last proviso of Section 8.4.

Section 8.6. Cooperation. In any legal proceeding conducted under this Article 8, each Party shall, without charge (except for the reimbursement of its out-of-pocket costs), render such reasonable assistance, execute any documents and do such other as may be reasonably necessary in such legal action as the other Party may reasonably request. Each Party shall keep the other Party reasonably informed as to the progress of any proceedings hereunder.

Section 8.7 Affiliates and Sublicensees. NN shall require its Affiliates and Sublicensees to comply with this Article 8.

Section 8.8. Sublicensed Patents. It is recognized that this Article 8 is subject to the rights and obligations under, and compliance with the terms of, the UW Agreement and the Aventis Agreement.

Article 9

Term and Termination

Section 9.1. Term and Expiration. This Agreement and the licenses contained herein shall come into force on the Effective Date. Unless terminated earlier, the licenses provided hereunder for any Licensed Products shall expire on the date on which ZGEN is no longer entitled to receive a royalty with respect thereto, and this Agreement shall expire on the date on which ZGEN is no longer entitled to receive a royalty from NN on any Licensed Product under this Agreement. After expiration (but not termination), NN shall have a fully paid-up (except for payments to third parties), irrevocable, nonexclusive license under the Licensed Know-How to make, have made, use, sell and have sold Know-How Products.

Section 9.2. Termination by NN for Avoidance of Annual Fee. NN may terminate this Agreement in accordance with the provisions of Section 4.10.

Section 9.3. Insolvency. Either Party shall have the right to terminate this Agreement by written notice to the other Party (a) if the other Party is declared insolvent or bankrupt by a court of competent jurisdiction, (b) if a voluntary or involuntary petition in bankruptcy is filed in any court of competent jurisdiction against the other Party and such petition remains undismissed, undischarged or unbonded for a period of ninety (90) days after the filing thereof, or (c) if the other Party shall make or execute an assignment for the benefit of creditors generally, have a receiver, administrator or an equivalent official appointed with respect to its properties or undertakings, enter into any liquidation or become insolvent. In the event of ZGEN’s bankruptcy (particularly where associated with ZGEN’s breach of its obligations under this Agreement) and NN’s failure to elect termination under this Section 9.3, all rights and licenses granted under this Agreement by ZGEN to NN, to the maximum extent permitted by law, shall be deemed to be, for purposes of Section 365(n) of the United States

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Bankruptcy Code, 11 U.S.C. § 101, et seq., licenses of rights to “intellectual property” as defined under Section 101 (35A) of the United States Bankruptcy Code. The Parties agree that NN shall retain and may fully exercise all of its rights and elections under the United States Bankruptcy Code in the event of a bankruptcy by ZGEN. The Parties further agree that in the event of the commencement of a bankruptcy proceeding by or against ZGEN under the United States Bankruptcy Code, NN may seek access to any such intellectual property pertaining to the rights granted by ZGEN in the licenses hereunder.

Section 9.4. Breach. Each Party shall have the right to terminate this Agreement after written notice to the other Party in the event the other Party is in material breach of this Agreement, unless the other Party cures such breach within [ * ] (or in the event such breach is a failure to pay, [ * ]) after the date of notice; provided, however, that any termination shall not release either Party from any obligations accrued prior thereto.

Section 9.5. Termination of License With Respect to Contested Patent Rights. To the extent NN or its Affiliate or Sublicensee, or any entity acting in concert with or on behalf of any of them, commences any action or asserts any formal position in any forum (including a court, patent office or an arbitral tribunal, and whether in the form of petitions for declaratory relief, claims, counterclaims, defenses, interferences, petitions for re-examination, oppositions or otherwise) that any Licensed Patent or Sublicensed Patent is invalid or unenforceable, ZGEN may, at its option, remove such Licensed Patent or Sublicensed Patent, including any divisional, continuation (in whole or in part), foreign counterpart, reissue, reexamination, renewal or extension thereof and any patents issuing thereon, from the definition of Licensed Patents or Sublicensed Patents hereunder.

Section 9.6. Effect of Expiration or Termination. Expiration or termination of this Agreement shall not relieve the Parties of any obligations accruing prior to such expiration or termination. In addition to any provision of this Agreement that expressly provides for its survival, any accrued obligation and the provisions of Article 1, Section 2.3 (second sentence), Section 4.11, Article 6, Section 8.2 (next to last sentence addressing indemnification), Section 8.3, Section 8.4, Section 8.6, Section 9.1 (last sentence in the event of expiration), Section 9.6, Section 9.8, Section 9.9, Article 10, Section 11.5, Article 12 and Article 13 shall survive the expiration or termination of this Agreement. Expiration or termination of this Agreement shall not affect a Party’s ability to seek any other remedies available at law.

Section 9.7. Termination of Licenses. Upon termination of this Agreement, all licenses granted hereunder shall terminate.

Section 9.8. Return of Patent Prosecution. Upon termination of this Agreement, NN shall take all necessary steps to transfer to ZGEN all documents reasonably necessary for ZGEN to maintain and prosecute the Licensed Patents set forth in Exhibit A and Sublicensed Patents set forth in Exhibits C and D, including prosecuting interferences and oppositions. The Parties will cooperate to ensure transfer of such prosecution and maintenance efforts to ZGEN promptly following the termination date. Any subsequent office actions, communications, correspondence or other information received by NN related to the Licensed Patents or such Sublicensed Patents shall be promptly forwarded to ZGEN when received.

Section 9.9. Return of Information and Assignments. Upon termination (but not expiration) of this Agreement, NN shall (a) cause all materials containing any Licensed Know-How (including the information, documents, files and materials transferred pursuant to Article 5) to be delivered to ZGEN within [ * ], (b) at ZGEN’s election, terminate (or assign to ZGEN, to the extent assignable) to the extent related to rFXIII, the nonexclusive license received by NN under the WRF Agreement pursuant to Section 2.4 and (c) at ZGEN’s election, assign and transfer to ZGEN all rights in any regulatory filings transferred to NN pursuant to Section 2.6 and requested by ZGEN, and cause each of its Affiliates and Sublicensees to take such actions. In addition, if

[ * ] Confidential Treatment Requested

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termination is due to a material breach of this Agreement by NN under Section 9.4 or the insolvency of NN under Section 9.3, NN shall (i) at ZGEN’s election, assign to ZGEN all rights in any preclinical and/or clinical data, clinical trial protocols, regulatory applications or approvals (e.g., INDs) (to the extent assignable) requested by ZGEN, and cause each of its Affiliates and Sublicensees to take such actions, and thereafter ZGEN shall be responsible for all future costs and charges related thereto that thereafter accrue and (ii) during the [ * ] following termination, discuss with ZGEN information and data that exists with respect to rFXIII and Licensed Products and provide to ZGEN such relevant information and data requested by ZGEN, which it may thereafter use, either alone or with others. For the avoidance of doubt, in no event shall ZGEN receive any rights or materials under this Section 9.9 with respect to rFVIIa or Combination rFVIIa/rFXIII.

Article 10

Confidentiality

Section 10.1. Confidentiality Obligation. Except as otherwise authorized under this Agreement, during the term of this Agreement and for a period of [ * ] thereafter or [ * ] after the Effective Date, whichever is longer, each Party and Novo shall maintain as secret and confidential all Confidential Information obtained from the other Party or Novo pursuant to this Agreement or prior to and in contemplation of this Agreement, and all other Confidential Information that it may acquire from the other Party or Novo in the course of this Agreement. Each Party and Novo shall respect the proprietary rights of the other Party or Novo in such Confidential Information, use the same exclusively for the purposes of this Agreement, and disclose the same only to those of its representatives to whom and to the extent that such disclosure is reasonably necessary for the purposes of this Agreement. The obligations under this Section 10.1 shall survive the termination of this Agreement.

Section 10.2. Release from Confidentiality Obligation. Notwithstanding the provisions of Section 10.1, a Party shall be permitted to disclose any Confidential Information of the other Party to its patent practitioners or any patent office in any country, as is reasonably required for filing or prosecuting any patent application permitted to be filed by it hereunder. Furthermore, the obligations of Section 10.1 shall not apply to Confidential Information that:

(a) was properly in the possession of the receiving Party or Novo, without any restriction on use or disclosure, prior to receipt from the disclosing Party or Novo, and such possession can be demonstrated by competent evidence of the receiving Party or Novo;

(b) is in the public domain by public use, publication, general knowledge or the like, or after disclosure hereunder becomes general or public knowledge through no fault of the receiving Party or Novo;

(c) is properly obtained by the receiving Party or Novo from a Third Party not under a confidentiality obligation;

(d) is independently developed by or on behalf of the receiving Party or Novo without the assistance of the Confidential Information of the disclosing Party or Novo; or

(e) is required to be disclosed by order of any court or governmental or regulatory authority after notification to the disclosing Party or Novo of the necessity to allow the disclosing Party or Novo to seek protection for the Confidential Information of the disclosing Party or Novo from such court or governmental or regulatory authority.

[ * ] Confidential Treatment Requested

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Section 10.3. Disclosure of Agreement. The Parties acknowledge that ZGEN may be obligated to file a copy of this Agreement with the U.S. Securities and Exchange Commission; provided however, that ZGEN shall request confidential treatment of any trade secrets or commercially sensitive items hereof to the extent such confidential treatment is reasonably available to it under the circumstances then prevailing. In the event of such filing, ZGEN shall provide NN, at least [ * ] in advance of filing with the U.S. Securities and Exchange Commission, with an advance copy of this Agreement marked to show provisions for which ZGEN intends to seek confidential treatment and ZGEN shall reasonably consider NN’s timely comments thereon.

Article 11

Representations, Warranties and Disclaimers

Section 11.1. Representations and Warranties. Each Party and Novo hereby represents and warrants to the other Party and Novo, as of the Effective Date, as follows:

(a) It is a corporation duly organized, and validly existing (and, in the case of ZGEN only, in corporate good standing) under the laws of the jurisdiction in which it is incorporated;

(b) It has the corporate and legal right, title, authority and power to enter into this Agreement;

(c) It has taken all necessary action to authorize the execution, delivery and performance of this Agreement;

(d) Upon the execution and delivery of this Agreement, this Agreement shall constitute a valid and binding obligation of it, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ and contracting parties’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law);

(e) The performance of its obligations under this Agreement will not conflict with or result in the breach of any agreements, contracts or other arrangements to which it is a party; and

(f) It will not during the term of this Agreement enter into any agreements, contracts or other arrangements that would prevent it from meeting its obligations or adversely impact the other Party’s rights under this Agreement.

Section 11.2. Further Representations and Warranties of ZGEN. ZGEN hereby represents and warrants to NN as follows:

(a) ZGEN will comply with all applicable laws, regulations and guidelines in connection with the performance of ZGEN’s obligations under this Agreement;

(b) As of the Effective Date and except as described in the letter to NN from ZGEN dated October 4, 2004, ZGEN is the joint or exclusive owner of the Licensed Patents and, to the Best of its Knowledge, the exclusive licensee of the Sublicensed Patents for purposes of Recombinant Factor XIII, it has the full right and power to grant the licenses and sublicenses set forth herein and there are no outstanding agreements, assignments or encumbrances with respect to the Licensed Patents or, to the Best of its Knowledge, Sublicensed Patents inconsistent with the provisions of this Agreement;

[ * ] Confidential Treatment Requested

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(c) As of the Effective Date, each of the patents set forth in Exhibits A, B and C, and to the Best of its Knowledge, Exhibits D and E, has been duly maintained;

(d) As of the Effective Date, none of the patents or patent applications set forth in Exhibits A, B, C, D and E (i) is subject to a pending interference action, opposition action, reexamination proceeding, litigation or other similar action by a Third Party challenging such patents or patent applications, other than actions by patent offices in connection with the prosecution of patent applications or as otherwise described in the letter to NN from ZGEN dated October 4, 2004, (ii) has been abandoned, (iii) has been asserted to be invalid or unenforceable in a written communication to ZGEN or (iv) is the subject of an on-going infringement by others with respect to Recombinant Factor XIII; provided, however, that the representations and warranties made by ZGEN in the foregoing clauses (i) and (ii) with respect to Exhibits C, D and E, and in the foregoing clause (iv) with respect to Exhibits A, B, C, D and E, are made to the Best of its Knowledge;

(e) As of the Effective Date, each of the Aventis Agreement, UW Agreement and WRF Agreement is in full force and effect, true and complete copies thereof have been provided to NN and no event has occurred which (by the giving of notice or the passing of time or both) would (i) constitute a material breach or default by ZGEN or, to the Best of its Knowledge, another party, (ii) permit termination by ZGEN or, to the Best of its Knowledge, another party or (iii) result in ZGEN’s loss of exclusivity under any such agreement;

(f) As of the Effective Date, ZGEN has paid the yearly amounts due under the WRF Agreement to maintain the WRF Option, which has not been exercised or terminated;

(g) As of the Effective Date and except for the patents and patent applications identified in a letter to NN from ZGEN dated October 4, 2004, Exhibits A, B, C, D and E identify all of the pending patent applications and unexpired patents that are owned or Controlled by ZGEN that contain one or more claims specifically naming rFXIII and claiming (i) rFXIII as a composition of matter, (ii) a process, formulation and/or mixture comprising rFXIII, (iii) a method of making or manufacturing rFXIII, or (iv) a method of using rFXIII; and

(h) As of the Effective Date, copies of all regulatory filings, approvals and orphan drug designation listed in Exhibit G (but not including material incorporated by reference that predates [ * ]) and, to the Best of its Knowledge, copies of all written communications (or minutes, where available, of oral communications) with Regulatory Agencies after [ * ] regarding such filings, approvals and designation have been supplied or made available to NN.

Section 11.3. Further Representations and Warranties of NN. NN hereby represents and warrants to ZGEN that NN will comply with all applicable laws, regulations and guidelines in connection with the exercise of NN’s license rights under this Agreement.

Section 11.4. Warranty Disclaimer. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY NOR NOVO MAKES ANY WARRANTY WITH RESPECT TO rFXIII, LICENSED PRODUCTS, LICENSED PATENTS, SUBLICENSED PATENTS, LICENSED KNOW-HOW (INCLUDING THE INFORMATION, DOCUMENTS, FILES AND MATERIALS TRANSFERRED PURSUANT TO ARTICLE 5) OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND EACH PARTY AND NOVO HEREBY DISCLAIMS WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, SAMPLES PREVIOUSLY PROVIDED, NONINFRINGEMENT AND PATENTABILITY WITH RESPECT TO ANY AND ALL OF THE FOREGOING.

[ * ] Confidential Treatment Requested

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Section 11.5. Limited Liability. EXCEPT IN THE CASE OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, NONE OF NOVO, NN OR ZGEN WILL BE LIABLE WITH RESPECT TO ANY MATTER ARISING UNDER THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY PUNITIVE OR EXEMPLARY DAMAGES.

Article 12

Indemnification

Section 12.1. Personal Injury or Property Damage. NN shall indemnify, defend and hold harmless ZGEN and its directors, officers, employees and agents (collectively, the “Indemnitees”) from and against any and all claims, judgments, costs, awards, expenses (including, but not limited to, any attorneys’ fees) or liability of any kind arising out of personal injury or property damage caused or alleged to be caused by any Licensed Product developed, manufactured, used or sold by NN or any of its Affiliates or Sublicensees or the use of any ZGEN IP or Sublicensed Patents by NN or any of its Affiliates or Sublicensees. In addition, NN shall assume all obligations for warranties and product liability claims that accompany or result from the sale or use of any Licensed Product developed, manufactured or sold by NN or any of its Affiliates or Sublicensees and shall indemnify, defend and hold harmless the Indemnitees from and against any and all claims, judgments, costs, awards, expenses (including, but not limited to, any attorneys’ fees) or liability of any kind arising from a customer’s or user’s use of any Licensed Product developed, manufactured or sold by NN or any of its Affiliates or Sublicensees and relating to such warranty obligations or product liability claims. NN’s obligations under this Section 12.1 shall not apply to any Indemnitee to the extent that such Indemnitee is grossly negligent or engaged in willful misconduct. ZGEN shall (a) promptly notify NN of any claim, judgment, cost, award or expense covered by this Section 12.1, (b) reasonably cooperate with NN in the defense of such claim, judgment, cost, award or expense, at NN’s cost and expense in connection therewith, (c) allow NN to control the defense of the claim, judgment, cost, award or expense, including the taking of any action necessary to permit NN to control such defense, and, (d) not compromise or settle the claim, judgment, cost, award or expense without NN’s prior written consent, which consent shall not be unreasonably withheld.

Section 12.2. Patent Infringement. NN shall indemnify, defend and hold harmless the Indemnitees from and against any and all claims, judgments, costs, awards, expenses (including, but not limited to, any attorneys’ fees) or liability of any kind arising out of or connected with the actual or alleged infringement or misappropriation of any patent or other proprietary right of any Third Party by reason of NN or its Affiliates or Sublicensees having made, imported, used, sold or offered for sale any Licensed Product; provided, however, that in the event a suit, claim or action is brought against NN by a Third Party, ZGEN shall render reasonable assistance to NN upon request of NN, at NN’s cost and expense in connection therewith. NN’s obligations under this Section 12.2 shall not apply to any Indemnitee to the extent that such Indemnitee is grossly negligent or engaged in willful misconduct.

Section 12.3. Insurance. NN shall maintain and cause its Affiliates and Sublicensees to maintain appropriate product liability insurance with respect to the development, manufacture and sale of Licensed Products in such amount as NN customarily maintains with respect to sales of its other products. NN shall maintain and cause its Affiliates and Sublicensees to maintain such insurance for so long as it continues to manufacture or sell Licensed Products, and thereafter for so long as NN customarily maintains insurance with respect to sales of its other products.

Article 13

Miscellaneous

Section 13.1. Assignment. This Agreement may not be assigned by either Party without the prior written consent of the other Party except to an Affiliate of a Party or to a successor or a purchaser of all or substantially all of the assets of a Party and its Affiliates related to the hemostasis field; provided, however, that in the event of an assignment by NN to an Affiliate, the Affiliate’s rights under this Agreement shall terminate once

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it ceases being an “Affiliate” of Novo (however, its rights may be reassigned back to Novo at the time it ceases being an “Affiliate” of Novo), and provided further, that any transfer of NN or substantially all of its assets to other than a successor or a purchaser of all or substantially all of Novo’s assets and business, without the prior written consent of ZGEN, shall be deemed to be a prohibited assignment of this Agreement and material breach of this Agreement, and provided further, any transfer, direct or indirect, of control of NN such that it is no longer an Affiliate of Novo, shall be deemed to be a prohibited assignment hereunder and a material breach of this Agreement. If, as a result of any assignment of any rights or interest in this Agreement by NN, any payment by or on behalf of NN to ZGEN is subject to an increased level of tax withholding than would have been the case under this Agreement with payments by NN from Denmark/Switzerland, and ZGEN cannot use any related tax credit as an offset against its obligation to pay United States federal income tax in the Calendar Year in which the withholding is effected, then NN shall pay ZGEN an amount such that, after deduction of any amount required to be withheld, ZGEN receives the same amount that it would have received but for the assignment. In the event of any permissible assignment under this Agreement, the assignor and assignee shall be jointly and severally liable for assignor’s obligations hereunder. The assigning Party shall give the other Party prompt written notice of such assignment and obtain the agreement of the assignee to abide by the terms of this Agreement and to assume all of the assignor’s obligations under this Agreement. ZGEN shall have the right to assign its right to receive any payments under this Agreement without NN’s consent; provided however, that the assignee of such payments shall not have a right to any development information related to Licensed Products (other than the achievement of Event Milestones) and shall have no rights to Net Sales reports or access to information resulting from inspection/audit of records pertaining to Net Sales under Section 4.11 if such assignee of the payments is a pharmaceutical or biotechnology company and, provided further, such assignee shall be subject to the confidentiality obligations of Article 10. Novo may not transfer or assign its obligations under Section 13.20(b).

Section 13.2. Relationship between the Parties. Nothing in this Agreement is intended to create or shall be deemed to constitute a partnership, agency or joint venture relationship between the Parties or Novo or their Sublicensees, contractors or licensees. Neither Party shall be responsible for the acts or omissions of the other Party, and neither ZGEN nor Novo shall be responsible for the acts or omissions of the other. Neither Party nor Novo shall have the authority to speak for, represent or obligate the other Party or Novo in any way without the prior written authority of the other Party or Novo, as the case may be.

Section 13.3. Public Announcements. Except as otherwise may be required by law or regulation, neither Party nor Novo shall make any public announcement, written or oral, concerning this Agreement or the subject matter hereof, without the prior written approval of the other Party or Novo, as the case may be, such approval not to be unreasonably withheld or delayed. However, ZGEN shall have the right to disclose or announce information concerning the existence and general nature of this Agreement, provided that disclosure of any Confidential Information shall only be made under an obligation or expectation of confidentiality.

Section 13.4. Use of Names, Trade Names and Trademarks. Except as provided herein, nothing contained in this Agreement shall be construed as conferring any right on either Party or Novo to use in advertising, publicity or other promotional activities any name, trade name, trademark or other designation of the other Party or Novo, including any contraction, abbreviation or simulation of any of the foregoing, unless the express written permission of such other Party or Novo has been obtained.

Section 13.5. Force Majeure. If either Party or Novo is prevented or delayed in the performance of any of its obligations under this Agreement by force majeure, and if such Party or Novo gives written notice thereof to the other Party (or Parties in the case of Novo) specifying the matters constituting force majeure, together with such evidence as it can reasonably give and specifying the period for which it is estimated that such prevention or delay will continue, then the Party in question or Novo, as the case may be, shall be excused from the performance of its obligations or the punctual performance thereof as the case may be as from the date of such notice for so long as such cause of prevention or delay shall continue. For the purpose of this Agreement, “force majeure” shall be deemed to be any cause affecting the performance of this Agreement arising from or attributable to acts, events, omissions or accidents beyond the reasonable control of the Party or Novo, as the case may be.

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Section 13.6. Governing Law. This Agreement shall be governed in all respects by the laws of the State of New York (without regard to its choice of law provisions). The UN Convention on Contracts for the International Sale of Goods shall not apply to this Agreement.

Section 13.7 Submission to Jurisdiction. Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought in the United States District Court for the Southern District of New York or any New York state court sitting in the County of New York, and each of the Parties and Novo hereby irrevocably consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any Party or Novo anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each Party and Novo agrees that service of process on such Party or Novo as provided in this Section 13.7 shall be deemed effective service of process on such Party or Novo.

Section 13.8 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO AND NOVO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 13.9. Waiver of Remedies. No forbearance, delay or indulgence by either Party in enforcing the provisions of this Agreement shall prejudice or restrict the rights of that Party, nor shall any waiver of its rights operate as a waiver of any subsequent breach, and no right, power or remedy herein conferred upon or reserved for either Party is exclusive of any other rights, power or remedy available to that Party.

Section 13.10. Entire Agreement. This Agreement and the Exhibits hereto constitute the entire agreement among the Parties and Novo and supersede all prior oral and written agreements, understandings or arrangements relating to the subject matter hereof, including all term sheets and the Mutual Confidential Disclosure Agreements between ZGEN and Novo dated September 26, 2002 and May 21, 2003, as amended. All information disclosed under such Mutual Confidential Disclosure Agreements that is Confidential Information shall be kept confidential in accordance with the terms of Article 10 hereof. No addition to or modification of any provision of this Agreement shall be binding upon the Parties, unless made in writing and signed by a duly authorized representative of each of the Parties.

Section 13.11. Notices. All notices or other communication hereunder shall be in writing and in the English language and shall be deemed to have been duly given if delivered personally, faxed with receipt acknowledged (and with a confirmation copy also sent by registered mail, return receipt requested) or delivered by a recognized commercial courier service with receipt acknowledged, postage prepaid, as follows:

If to NN or Novo:	Novo Nordisk Health Care AG
	Andreasstrasse 15
	8050 Zürich
	Switzerland
	Fax: +41 43 222 4404
	Attention: General Manager

- 35 -

	Novo Nordisk A/S
	Novo Allé
	DK-2880
	Bagsvaerd
	Denmark
	Fax: +45 44 42 72 80
	Attention: Chief Scientific Officer & Executive Vice President, Research & Development
	Novo Nordisk Legal Department
	Novo Allé
	DK-2880 Bagsvaerd
	Denmark
	Fax: +45 4498 0670
If to ZGEN:	Development Reports Under Section 6.1
	ZymoGenetics, Inc.
	1201 Eastlake Avenue East
	Seattle, WA 98102
	Fax: (206) 442- 6793
	Attention: Senior Vice President & Chief Medical Officer
	Royalty Reports under Section 4.11
	ZymoGenetics, Inc.
	1201 Eastlake Avenue East
	Seattle, WA 98102
	Fax: (206) 442-6628
	Attention: Controller
	All other notices
	ZymoGenetics, Inc.
	1201 Eastlake Avenue East
	Seattle, WA 98102
	Fax: 206-442-6678
	Attention: Senior Vice President, Intellectual Property and Legal Affairs

or to such other addresses as the addressee may have specified in a notice duly given to the sender as provided herein. Such notices or other communication will be deemed effective as of the date so delivered (either personally or by courier service) or faxed.

Section 13.12. Severability. If any provision of this Agreement shall for any reason be held to be invalid or unenforceable, such provision shall be enforced to the maximum extent permitted by law and the fundamental intentions of the Parties and Novo hereunder, and the remaining provisions hereof shall not be affected, impaired or invalidated and shall continue in full force and effect.

Section 13.13. Headings. The headings contained herein are for reference only and shall not be considered a part of this Agreement, nor shall they in any way affect the interpretation hereof.

Section 13.14. Review of Agreement. This Agreement has been submitted to the scrutiny of both Parties, Novo and their counsel and shall be given a fair and reasonable interpretation in accordance with the words hereof, without consideration or weight being given to its being drafted by or for one of the Parties or Novo.

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Section 13.15. Compliance with Laws; Export Regulations. In the performance of this Agreement, each Party and Novo shall comply with all laws, regulations, rules, orders and other requirements, now or hereafter in effect, of any governmental authorities having jurisdiction. This Agreement and any information related to Licensed Know-How provided hereunder are subject to restrictions concerning the export of information and materials that may be imposed by a government. Accordingly, NN and Novo agree that it will not export, directly or indirectly, any information or materials acquired under this Agreement or any products utilizing such information or materials to any country for which a government or any agency thereof at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the appropriate agency of the government when required by an applicable statute or regulation.

Section 13.16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Section 13.17. Patent Marking. NN shall mark all Licensed Products with a legible notice indicating that the Licensed Products are covered by claims in a pending patent application or an issued patent included in the Licensed Patents or Sublicensed Patents.

Section 13.18. Data Retention/Documentation. Each Party and Novo, at its own costs, shall be responsible for archiving all relevant and required original documentation and raw data in relation to the research, development, manufacturing and control of the drug substance and drug product, including, with respect to NN, all documentation and data which has been provided to NN by ZGEN in original form and ZGEN shall not be required to maintain any copies thereof. All original notebooks shall be kept indefinitely by the Parties and Novo and development documentation shall be archived by the Parties and Novo in accordance with their documentation control policies, which shall comply with applicable law. All original documentation related to manufacturing shall be kept for the shelf life of the drug substance and drug products plus one year. It is acknowledged that it is ZGEN’s intent to provide NN all original documentation that it has with respect to research, development, manufacture and control of drug substance and drug product, except original lab notebooks, copies of which will be provided to NN; provided, however, that any original documentation relating to manufacture and control of drug substance and drug product that ZGEN does not provide to NN shall be archived indefinitely. In case ZGEN desires to discard the data and documentation relating to manufacture and control of drug substance or drug product or the original notebooks ZGEN shall notify NN of such decision and NN may take over the responsibility for the archiving thereof at NN’s cost.

Section 13.19. Pre-Approval Inspections. Upon reasonable advanced notice and during normal business hours, ZGEN shall allow any applicable health authority or Regulatory Agency to inspect ZGEN and to conduct reviews of any original documents or reports or any facilities that are deemed by the authority or Regulatory Agency to be related to the approval of a Factor XIII Product or a Combination Product. In the event that such health authority or Regulatory Agency contacts ZGEN with respect to such matters, ZGEN shall promptly inform NN. ZGEN shall in all cases provide copies to NN of all correspondence with such health authority or Regulatory Agency.

Section 13.20. Obligations of Novo.

(a) NN hereby appoints Novo to perform NN’s research and development obligations under this Agreement, and Novo hereby accepts such appointment. Accordingly, NN and Novo shall be jointly and severally liable to ZGEN in the event of a failure of performance of NN’s research and development obligations under this Agreement.

(b) Novo absolutely, irrevocably and unconditionally guarantees all payments that NN is required to make to ZGEN under this Agreement and guarantees the payment to ZGEN of any and all

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damages, claims and losses incurred by ZGEN, as determined by a court from which no appeal has been or can be taken in an action against NN or Novo, arising out or related to the failure of NN to perform any of its obligations. The obligations of Novo under this Section 13.20(b) shall not be released, discharged or otherwise affected by (i) any assignment of or sublicense under this Agreement or any rights, interests, benefits or obligations thereunder by NN, whether by operation of law or otherwise and whether or not consented to by Novo or ZGEN or (ii) the amendment, modification or waiver of any of the terms or conditions of this Agreement. Novo expressly waives any and all rights, benefits or defenses under (A) any defense other than payment and satisfaction in full of all of the obligations of NN and (B) any claim or circumstance that constitutes a legal or equitable discharge of a guarantor or surety.

THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK

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IN WITNESS WHEREOF, the Parties hereto and Novo have each caused a duly authorized officer to sign this Agreement as of the Effective Date.

Novo Nordisk Health Care AG		ZymoGenetics, Inc.
By:	/s/ Kåre Schultz	By:	/s/ Bruce L. A. Carter
Title:	Chairman of the Board of Directors		President and CEO
By:	/s/ Morten Vaupel
Title:	Vice President
Novo Nordisk A/S
By:	/s/ Kåre Schultz
Title:	Executive Vice President
By:	/s/ Mads Krogsgaard Thomsen
Title:	Executive Vice President

- 39 -

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No 333-107355) and Form S-8 (No. 333-82012) of ZymoGenetics, Inc. of our report dated March 11, 2005, relating to the financial statements, management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting, which appear in this Form 10-K.

PRICEWATERHOUSECOOPERS LLP

/s/ PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

March 11, 2005

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Bruce L.A. Carter, certify that:

1. I have reviewed this report on Form 10-K of ZymoGenetics, Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: March 11, 2005

/s/ BRUCE L.A. CARTER

President and CEO

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, James A. Johnson, certify that:

1. I have reviewed this report on Form 10-K of ZymoGenetics, Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: March 11, 2005

/s/ JAMES A. JOHNSON

Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Report of ZymoGenetics, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Bruce L.A. Carter, Chief Executive Officer and James A. Johnson, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or 78o(d)); and

(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 11, 2005

/s/ BRUCE L.A. CARTER

Bruce L.A. Carter

Chief Executive Officer

/s/ JAMES A. JOHNSON

James A. Johnson

Chief Financial Officer