-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WSmcQgTxg+42KsLjIVcbqUNdD0JSQq99jfcTPdX1MxOZV56vJ/sgi5Cbhp/PYRMB lpkstbbTswDU8wj2WE4T8w== 0000927016-03-001558.txt : 20030331 0000927016-03-001558.hdr.sgml : 20030331 20030331164741 ACCESSION NUMBER: 0000927016-03-001558 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENOME THERAPEUTICS CORP CENTRAL INDEX KEY: 0000356830 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 042297484 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10824 FILM NUMBER: 03631520 BUSINESS ADDRESS: STREET 1: 1OO BEAVER ST CITY: WALTHAM STATE: MA ZIP: 02453 BUSINESS PHONE: 7813982300 MAIL ADDRESS: STREET 1: 100 BEAVER STREET CITY: WALTHAM STATE: MA ZIP: 02453 FORMER COMPANY: FORMER CONFORMED NAME: COLLABORATIVE RESEARCH INC DATE OF NAME CHANGE: 19920703 10-K 1 d10k.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-10824 ----------------- GENOME THERAPEUTICS CORP. (Exact name of registrant as specified in its charter) ----------------- Massachusetts 04-2297484 (State or other (IRS employer jurisdiction identification number) of incorporation or organization) 100 Beaver Street, 02453 Waltham, Massachusetts (Address of principal (Zip Code) executive offices) Registrant's telephone number: (781) 398-2300 ----------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 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 amendment to this Form 10-K [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [_] No [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 28, 2002, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $53,333,000. The number of shares outstanding of the registrant's common stock as of March 25, 2003 was 23,635,460. Documents Incorporated By Reference. Portions of the registrant's proxy statement for use at its Annual Meeting to be held on May 9, 2003 are incorporated by reference into Part III. ================================================================================ PART I Item 1. Business Overview We are a biopharmaceutical company focused on the discovery, development and commercialization of pharmaceutical and diagnostic products. Our strategic goal is to directly participate in the commercialization of products that are used primarily in hospitals. For diseases treated by larger physician audiences, we seek to discover, develop and commercialize products through alliances with major pharmaceutical companies. We have nine established product development programs. We are managing the development and commercialization of our lead product candidate, Ramoplanin, in the United States and Canada. This product is in a Phase III clinical trial for the prevention of bloodstream infections caused by vancomycin-resistant enterococci (VRE) and a Phase II trial for the treatment of patients with Clostridium difficile-associated diarrhea (CDAD). We have seven product discovery and development alliances with pharmaceutical companies including Amgen, AstraZeneca, bioMerieux, Schering-Plough and Wyeth. In addition, we have a portfolio of internal drug discovery programs. During 2002, we also maintained an active service business, GenomeVision/TM/ Services, providing drug discovery services to pharmaceutical and biotechnology companies and to the National Human Genome Research Institute. As part of our continued evolution into a biopharmaceutical company, this business unit was divested in March 2003. We concentrate our product discovery, development and commercialization efforts in two principal areas: (i) infectious diseases caused by bacterial and fungal pathogens, and (ii) human diseases believed to have a significant genetic component. Infectious diseases remain the world's leading cause of premature death. Each year approximately 2 million patients in the U.S. develop antibiotic resistant infections while being treated in hospitals. Antibiotic resistant organisms, many of which have multiple antibiotic resistances, cause these infections. Industry sources estimate that the pharmaceutical market for antibiotic products worldwide was more than $22 billion in 2002. We seek to supplement our drug discovery efforts with an active in-licensing program. Our in-licensing efforts are focused on products in preclinical and/or clinical development that will complement our internal drug discovery efforts for infectious diseases as well as our strategic focus on the hospital target market. In October 2001, we in-licensed the compound Ramoplanin, a novel glycolipodepsipeptide antibiotic produced by fermentation of the bacteria Actinoplanes, with activity against Gram-positive aerobic and anaerobic microorganisms. We are developing this antibiotic for the prevention of bloodstream infections caused by VRE and the treatment of Clostridium difficile-associated diarrhea (CDAD). We have invested to build an experienced clinical development and regulatory team that is overseeing the clinical development of Ramoplanin. We have also built a commercial team to develop and implement the marketing planning effort for this product. We have long been a leader in the use of genomics to discover new drugs for the treatment of bacterial and fungal infections. We have built integrated discovery platforms to discover genes and characterize their function. We use these platforms to pursue the discovery of new products through strategic alliances with corporate partners and through internal research programs. We have two ongoing anti-infective discovery and development collaborations with Schering-Plough. The first is focused on new treatments for drug-resistant bacterial infections, including those caused by Staphylococcus aureus, and the second is focused on identifying novel antifungals. We have partnered with AstraZeneca to develop treatments for ulcers caused by Helicobacter pylori (H. pylori) and with bioMerieux to develop diagnostics for bacterial infections. 2 In addition to drug discovery for bacterial and fungal infections, we are leaders in the use of population genetics as a tool in discovering new therapies for the treatment of chronic human diseases. We have formed three alliances with pharmaceutical companies: Schering-Plough for the discovery of new treatments for asthma; Wyeth for the prevention or treatment of osteoporosis; and Amgen for the prevention and treatment of bone diseases, including osteoporosis. We also continue to invest in the development of new therapies for the treatment of other chronic human diseases, including central nervous system disorders. Our internal discovery efforts are focused on bacterial and fungal infections. During the last two years, we have built a high-throughput screening capability and a diverse compound library of approximately 130,000 compounds derived from commercial sources. We have invested in our in vivo, pre-clinical capabilities and have commenced in vivo testing on several compounds. We have also formed joint ventures and collaborations with other biotechnology companies to discover and develop new broad-spectrum antibiotics. While we will seek to partner some of these programs with larger companies, we may also develop and commercialize some of these discoveries ourselves for niche opportunities, such as hospital-acquired infections or infections in immunocompromised patients. Biopharmaceutical and Diagnostic Programs We have nine ongoing product development programs. Our lead product candidate, Ramoplanin, is in a Phase III clinical trial for the prevention of bloodstream infections caused by VRE and a Phase II clinical trial for the treatment of Clostridium difficile-associated diarrhea (CDAD). We have seven alliances with pharmaceutical companies including Amgen, AstraZeneca, bioMerieux, Schering-Plough and Wyeth. In addition to these seven alliances, we have a number of collaborators and a portfolio of internal drug discovery programs. Ramoplanin Bacteria are commonly classified into two categories: Gram-positive and Gram-negative. Enterococci are a family of Gram-positive bacteria that are part of the normal flora of the human gastrointestinal (GI) tract. While these organisms do not normally cause infections in healthy people, they become a threat in patients that have a compromised immune system and are frequently found in hospitalized patients. Enterococci are now the second most common cause of bloodstream infections acquired in the Intensive Care Units (ICUs) of hospitals in the United States. Enterococcal bloodstream infections in the ICU have been associated with a crude mortality rate of over 30%. For thirty years, the antibiotic of last resort for enterococcal bloodstream infections was vancomycin. However, the widespread use of vancomycin and other antibiotics, such as third generation cephalosporins, has increased the prevalence of resistant strains of enterococci, known as vancomycin-resistant enterococci (VRE). In 2000, more than 26% of intensive care unit enterococci infections were caused by VRE, a 93% increase from 1994. Given its rapid spread and the difficulty in treating blood-borne infections, VRE has received significant attention from both the medical and public health communities. Most VRE are not only resistant to vancomycin, but also to other common antibiotics. This resistance provides VRE with a selective advantage over other enterococcal isolates in the gut and enables resistant pathogens to easily colonize the human GI tract. The morbidity and mortality associated with VRE bloodstream infections is substantially higher than for enterococcal bloodstream infections caused by vancomycin-sensitive strains of enterococci. Given the high morbidity, mortality and cost of VRE bloodstream infections and the limited treatment options for active infections, a great deal of focus within the infectious diseases community has been placed on infection control practices within the hospital to prevent VRE infections. Infection control has focused on 3 screening to identify colonized patients and the use of barrier methods to avoid the spread of the bacteria to other patients. Typically, these measures require isolation of the patient in a room with negative air pressure and the "gowning and gloving" of physicians and nursing staff. Such patients are often not allowed to have family visitors. The large quantity of VRE in the gut has motivated investigators to seek to decolonize the gut in an attempt to prevent VRE bloodstream infections. However, attempts to prevent VRE bloodstream infections by decolonization have been unsuccessful. Bacitracin to date has been tried in combination with or without gentamicin or a tetracycline. Novobiocin has also been tried. It is believed that these approaches have not been successful due to lack of potency or the inability of the antibacterials to reach sufficient levels in the gut to suppress VRE effectively. Clostridium difficile-associated diarrhea (CDAD), a serious form of colitis caused by toxins produced by the Gram-positive bacteria Clostridium difficile (C. difficile), is the most common form of antibiotic-associated diarrhea in the hospital. One study has demonstrated that as many as 20% of hospital patients are colonized with C. difficile either prior to or during admission. Because it is a spore-forming bacterium, C. difficile is readily spread from person to person, especially in the hospital and nursing home environment. Under certain conditions, such as extended antibiotic therapy and gastrointestinal surgery, C. difficile can colonize the gut and release toxins, leading to bowel inflammation and severe diarrhea. Serious cases can occur and involve the development of fulminant colitis (severe inflammation of the colon); such occurrences can be life threatening, especially in elderly or immunocompromised populations. Over 400,000 patients are treated in U.S. hospitals each year for CDAD. CDAD is associated with an average increase of length of stay in the hospital of 3.6 days and an average increase in hospital costs of over $3,600 per patient. It is estimated that the annual increase in hospital costs attributable to CDAD exceeds $1 billion. Current therapies for the treatment of CDAD include oral metronidazole and oral vancomycin. Both of these agents are associated with a 15-20% relapse rate. The use of oral vancomycin has been associated with the selection of vancomycin-resistant organisms, including VRE. The use of oral metronidazole has been associated with increased density of VRE in the gastrointestinal tracts of treated patients. Resistance has been reported for both drugs. Finally, both drugs are used extensively for the treatment of systemic infections outside of the gastrointestinal tract. In October 2001, we in-licensed Ramoplanin from Biosearch Italia S.p.A (which merged with Versicor Inc. in March 2003). Subsequently, Versicor changed its name to Vicuron Pharmaceuticals Inc. (Vicuron). Ramoplanin is a novel glycolipodepsipeptide antibiotic produced by fermentation of the bacteria Actinoplanes, with activity against Gram-positive aerobic and anaerobic microorganisms. In preclinical studies, Ramoplanin has been shown to be bactericidal against most Gram-positive species, including methicillin-resistant staphylococci, VRE and C. difficile. Ramoplanin inhibits the bacterial cell wall peptidoglycan biosynthesis with a mechanism different from that of vancomycin, teicoplanin or other cell wall-synthesis inhibitors. No evidence of cross-resistance between Ramoplanin and other glycopeptide antibiotics has been observed. Ramoplanin has a unique profile (see Table: Ramoplanin Profile--below) that may make it a particularly attractive compound for killing bacteria in the GI tract. This may make the product a useful drug in the treatment of certain infections (such as C. difficile) that occur in the GI tract. It may also make the compound effective in the prevention of bloodstream infections by Gram-positive organisms that are concentrated in the GI tract, including VRE. Finally, Ramoplanin may show value in preventing patient-to-patient transmission of Gram-positive pathogens in the hospital setting. 4 Table : Ramoplanin Profile Characteristic Potential Advantage ------------------------- ------------------------- Novel class of antibiotic No observed cross-resistance with other antibiotics No observed resistance Orally administered, but Concentrates and exerts not absorbed into its killing effects in bloodstream the GI tract Bactericidal Rapid killing effect Less likely to develop resistance Potential value to prevent patient-to-patient transmission of pathogens Gram Positive Spectrum Low potency against Gram-negative anaerobes Less likely to result in overgrowth of other opportunistic organisms Potential value vs. C. difficile In a Phase II, multicenter, double-blind, placebo-controlled trial, oral Ramoplanin was well tolerated. In addition, after seven days of treatment, 90% of patients who were colonized with VRE at the beginning of the study had no detectable VRE in their GI tract, while all of the placebo patients had detectable VRE (p=0.01). Ramoplanin has been granted Fast Track status by the FDA and is currently being tested in a Phase III clinical study. The ongoing Phase III study is designed to demonstrate whether oral Ramoplanin reduces the incidence of VRE bloodstream infections in cancer patients carrying VRE bacteria in their intestines. Approximately half of the planned 950 patients have been enrolled in the study at more than 40 clinical trial sites in the U.S. and more than 50% of the projected 65 events (bloodstream infections caused by VRE) required for completion have been recorded. We have stated our goal of filing a New Drug Application in 2004. Enrollment in this study remains challenging due, in part, to many potential patients being excluded from the study because of their participation in other clinical trials to treat their underlying malignancies. We continue discussions with the FDA to introduce modifications to our Phase III trial, aimed at accelerating completion of the trial and increasing the probability of meeting our 2004 filing goal. Shortly after the close of 2002, we began a Phase II trial to assess the safety and efficacy of Ramoplanin to treat CDAD. The protocol calls for an 87-person, open-label, multi-center trial comparing two doses of Ramoplanin (200 mg and 400 mg twice daily) to vancomycin (which requires a dose of 125 mg four times daily for the treatment of CDAD). Both agents will be administered for ten days, during which data on Ramoplanin will be collected to measure safety and efficacy. The results of the Phase II trial will guide the design of a Phase III investigation of Ramoplanin for the treatment of CDAD. Ramoplanin has demonstrated in vitro activity against C. difficile, including strains resistant to metronidazole and vancomycin. The CDAD Phase II trial will use a newly developed capsule formulation of Ramoplanin. At the end of 2002, we announced the completion of a clinical study comparing the microbiological activity and the pharmacokinetic profile of the capsule and sachet (powder for reconstitution) formulations. Analysis of the data confirmed Ramoplanin's ability to suppress enterococci in the GI tract. Further, both formulations were equally active microbiologically and there was no evidence of systemic absorption with either formulation. Developing this capsule formulation is an important step toward readying the product for commercialization, as a capsule is expected to be the formulation preferred by most patients. Our license agreement with Vicuron provides us with exclusive rights to develop and market oral Ramoplanin in the U.S. and Canada. Vicuron will provide the bulk material for the manufacture of the product. Under the terms of the agreement, we paid Vicuron initial consideration of $2 million. We will also make milestone payments of up to an additional $8 million in a combination of cash and notes convertible into our stock if certain development milestones are met. In addition to purchasing bulk material from Vicuron, we will fund the completion of clinical trials and pay a royalty to Vicuron on product sales. The combined total of bulk product purchases and royalties is expected to be 26% of our net product sales. 5 We have established a joint committee with Vicuron to coordinate global efforts for the ongoing clinical development and future commercialization of Ramoplanin. Drug Discovery Alliances We form strategic alliances with major pharmaceutical companies to maximize our success in product discovery and development. The following table summarizes our existing product discovery and development partnerships:
Bacterial and Fungal Infections Alliances Proceeds Received Potential Proceeds, Partner as of December Excluding Alliance Focus ( Date of Agreement) Status of Alliance 31, 2002 Royalties* -------------- -------------------- ------------------------------- ----------------- ------------------- Ulcers AstraZeneca Contract research program (September 1995) completed; Program transferred to AstraZeneca; Currently in lead optimization. $13.7 million $23.3 million Drug-Resistant Schering-Plough Contract research program Bacterial Infections (December 1995) completed; Validated targets and screening assays transferred to Schering-Plough; Currently in high-throughput screening. $21.5 million $45.5 million Fungal Infections Schering-Plough Contract research program (September 1997) completed; Validated targets and screening assays transferred to Schering-Plough; Currently in high-throughput screening. $12.2 million $33.2 million Infectious Disease bioMerieux PathoGenome(TM) Database Diagnostics (September 1999) delivered; Identification of gene markers ongoing. $4.4 million $5.2 million
Human Disease Alliances Proceeds Received as of Partner (Date of December 31, Potential Proceeds, Alliance Focus Agreement) Status of Alliance 2002 Excluding Royalties* - -------------- ---------------- -------------------------------------- ------------ -------------------- Osteoporosis Wyeth Identified specific gene mutation that (December 1999) leads to increased bone mass; Contract research extended through December 2003; Currently in high-throughput $9.2 screening. million $119.0 million Asthma Schering-Plough Two genes discovered; Transferred to (December 1996) Schering-Plough in January 2003; Currently in high-throughput $42.4 screening. million $81.0 million Bone Diseases Amgen** (December 2002) Gene target identification underway. $0 $67.0 million**
- -------- * Assumes receipt or payment of all license fees, funded research and contingent payments for achieving milestones, after extensions and/or reallocations; excludes potential royalties. ** If all milestones are met in our alliance with Amgen, total payments to us will approximate $67.0 million, excluding royalties, if a single product is developed, and a maximum of $104.0 million, excluding royalties, if more than one product is developed under the agreement. 6 Bacterial and Fungal Infection Alliances Ulcers H. pylori infection affects an estimated 30% of the United States population, causing more than 5 million cases of peptic ulcer disease per year. Industry sources estimate that the market for ulcer disease products worldwide was $14.5 billion in 2001. The pathogen, H. pylori, is believed to be responsible for 90% of duodenal ulcers, the most common type of ulcer, and approximately 80% of gastric peptic ulcers. The World Health Organization has estimated that H. pylori is responsible for 550,000 new cases of stomach cancer per year worldwide. Using our sequencing technology, we completed the sequencing and finishing of the genome of H. pylori. We believe that drugs targeted at genes essential to the survival of H. pylori will provide novel treatments for peptic ulcers. In September 1995, we formed an alliance with AstraZeneca to identify genes critical to the survival of H. pylori and proteins on the surface of the bacterium that we believe to be likely targets for drugs. AstraZeneca is a leader in the field of products to treat peptic ulcer disease. Its anti-ulcer franchise, which includes Nexium(R) and Prilosec(R), generated worldwide sales of $6.2 billion in 2001. As of December 31, 2002, we had received payments of $13.7 million under this alliance and have rights to receive, based on attainment of milestones, an additional $9.6 million of payments in addition to potential royalties. In August 1999, we completed our research obligations under this alliance and turned over validated drug targets and assays to AstraZeneca for pre-clinical testing. AstraZeneca announced in 2002 that it had begun a lead optimization program on a lead identified through the high-throughput screening program conducted using one of these targets. As of March 31, 2003, Astra's exclusive access rights to our H. pylori genomic sequence technology will terminate and we will be able to enter into alliances with other partners to develop drugs, vaccines and diagnostic products effective against peptic ulcers or any other disease caused by H. pylori. Drug-Resistant Bacterial Infections The pathogen Staphylococcus aureus is a common cause of skin, wound and blood infections. Staph. aureus infections are typically treated with antibiotics. In recent decades, the incidence of Staph. aureus infections that are resistant to available antibiotic treatments has risen. Using our high-throughput sequencing capabilities, we have sequenced the genome of antibiotic-resistant Staph. aureus. We believe that drugs targeted at genes essential to the survival of Staph. aureus will provide novel treatments for skin, wound and blood infections contracted in hospitals. In December 1995, we formed an alliance with Schering-Plough to identify and validate gene targets for the development of drugs to treat infections caused by Staph. aureus and other pathogens that have become resistant to current antibiotics. Schering-Plough is an established participant in the anti-infective market and a leader in the utilization of genomics to discover novel anti-infective products. As of December 31, 2002, we had received payments of $21.5 million under this alliance and have rights to receive, based on attainment of milestones, an additional $24.0 million of payments as well as potential royalties. As of December 31, 2001, we had completed our research obligations under this alliance and had turned over validated drug targets and assays to Schering-Plough for high-throughput screening. Fungal Infections The past twenty years have seen dramatic changes in the pattern of fungal infections in humans. These pathogens have assumed a much greater importance because of their increasing incidence in immunocompromised patients, such as AIDS patients, transplant recipients, cancer patients and other groups of immunocompromised individuals. Increased international travel and misuse of antimicrobial agents have also contributed to this trend and the emerging resistance to certain treatments. Industry sources estimate that the global market for prescription antifungal drugs was approximately $4.3 billion in 2002, with non-prescription 7 fungal treatments adding significantly to overall market size. Currently, there are a limited number of antifungals available for use against hospital related fungal infections, and many of the products currently on the market have serious side effects. We believe that drugs targeted at genes that are essential to the survival of fungal pathogens will provide novel and effective treatments for fungal infections. In September 1997, we formed an alliance with Schering-Plough to use our high-throughput sequencing capabilities and genomic tools to identify new, validated fungal targets for the development of drugs to treat fungal infections. Schering-Plough is a leader in the field of drugs targeted against fungal infections, with market leading products such as the Lotrimin AF(R) and Tinactin(R) lines of topical antifungals. As of December 31, 2002, we had received payments of $12.2 million under this alliance and have rights to receive, based on attainment of milestones, an additional $21.0 million of payments in addition to potential royalties. In early 2002, we completed our research obligations under this alliance and turned over validated drug targets and assays to Schering-Plough for high-throughput screening. Infectious Disease Diagnostics The World Health Organization estimates that more than 14 million people worldwide die of an infectious disease each year, with many of those infections acquired in hospitals. There has been a global resurgence of infectious diseases, including the identification of new pathogens, the re-emergence of old infectious agents and the rapid spread of resistance to anti-infective agents. Rapidly identifying the specific microorganisms involved in a disease is becoming increasingly important and complex, providing challenges and opportunities for infectious disease testing. Highly sophisticated and versatile methods are needed to identify a larger and more diverse list of pathogens, including variants with drug-resistant characteristics. It is anticipated that nucleic acid tests incorporating such methods will be part of the fastest growing segment of the $20 billion in vitro diagnostic global market. In September 1999, we entered into a strategic alliance with bioMerieux to develop, manufacture and sell in vitro pathogen diagnostics for human clinical and industrial applications. A privately held company based in France, bioMerieux is one of the top 10 diagnostics companies in the world and the leader in the field of microbiology. The total amount of research and development funding provided by bioMerieux approximates $5.2 million for the four-year term of this agreement. As of December 31, 2002, we had received payments of $4.4 million and have rights to receive future milestone payments and royalties based upon successful commercialization of diagnostic products. Chronic Human Disease Alliances Osteoporosis Osteoporosis is a major health problem characterized by low bone mass that affects more than 200 million people worldwide and approximately one-third of post-menopausal women. In the U.S. alone, osteoporosis contributes to more than 1.5 million bone fractures per year. Estimated direct expenditures in the United States for osteoporosis and associated fractures were $17.0 billion in 2001. Twin and family studies suggest a strong genetic component to the disease. Under a collaboration with Creighton University of Omaha, Nebraska, we have gained access to data from related individuals identified by Creighton who exhibit high bone mass. We believe the identification of genes regulating bone density and disease progression will lead to the discovery of novel drugs for treating osteoporosis by increasing bone mass, as well as to the development of diagnostic tests. In December 1999, we formed an alliance with Wyeth to develop drugs to treat osteoporosis based on our genetic research. Wyeth is a leader in the field of women's health with a broad array of products, including Premarin(R), a leading estrogen replacement therapy. As of December 31, 2002, we had received payments of $9.2 million under this alliance and have rights to receive, subject to the achievement of milestones, an additional $109.8 million in milestone payments and research support, as well as royalties on sales of any products developed. Under this alliance, we are carrying out functional studies to confirm the identity of target genes. In 8 the January 2002 issue of the American Journal of Human Genetics, we reported the identification of a specific gene mutation in the LRP5 gene that leads to increased bone mass. Also in 2002, this program entered high-throughput screening for drug candidates. Recently, the sponsored research phase of this alliance was extended through December 31, 2003. Asthma Asthma affects over 155 million people worldwide according to the World Health Organization and the incidence of asthma appears to be rising dramatically. In the United States, the incidence of asthma has doubled over the past two decades and affects approximately 4% to 10% of the United States population. The annual direct and indirect costs associated with treating the disease exceed $15.0 billion. Published research suggests that multiple genetic factors, as well as environmental influences, play a role in the disease. We believe that the asthma genes that we have identified will facilitate the development of superior diagnostics and novel drugs. In December 1996, we formed an alliance with Schering-Plough to use our disease gene identification strategies to identify genes involved in the development of asthma. Schering-Plough is a leader in the field of allergy and respiratory care products, with products such as Afrin(R) nasal spray, a leading product in the branded nasal spray market, and Clarinex(R) and the Claritin(R) line of antihistamines, which generated $2.0 billion in sales in 2002. As of December 31, 2002, we had received payments of $42.4 million under this alliance and have rights to receive, based on attainment of milestones, an additional $38.6 million of payments as well as potential royalties. During the past two years, we used our proprietary genomics tools, bioinformatics and high-throughput sequencing to discover two genes associated with asthma. As of December 31, 2002, we had completed our research obligations under this alliance. The two genes discovered have been transferred to Schering-Plough for further drug discovery efforts. In 2002 this program advanced into high-throughput screening for drug candidates and the first gene discovery was published in the peer-reviewed journal, Nature. Bone Diseases On January 2, 2003, we announced an agreement with Amgen Inc. for the identification and development of novel therapeutic agents for bone diseases, including osteoporosis. Both companies will participate in collaborative research efforts to discover one or more drug candidates suitable for development. The companies may, as part of the research activities, use genetic information, developed by us based on research conducted at the Creighton University Osteoporosis Research Center, which has been exclusively licensed to Amgen. As part of the agreement, we will receive from Amgen an upfront cash payment, sponsored research funding, and potentially additional milestones and other downstream consideration depending on the success of the discovery, development and commercialization activities. Amgen will be responsible for development and commercialization of any products. Contingent upon the success of the discovery, development and commercialization activities, Amgen may also purchase shares of our common stock. Amgen's equity ownership in us will be limited to no more than 4.99% of our outstanding shares. If all milestones are met, total payments to us will approximate $67.0 million, excluding royalties, if a single product is developed, and a maximum of $104.0 million, excluding royalties, if more than one product is developed under the agreement. Of the total potential payments for one product, approximately $59 million represents research payments, milestone payments and a license fee, and $8.0 million represents an equity investment in us by Amgen. We recognized approximately $42,000 in revenue during the year ended December 31, 2002, which consisted of amortization of an up-front license fee. We will receive royalties on product sales ranging from 4%-10% depending on the level of those sales. We may elect to participate in the funding of the clinical development program, in which case we may co-promote in the U.S. and Canada and receive either increased royalties on sales or participate in profits from product sales in the U.S. and Canada. 9 Internal Drug Discovery Bacterial and Fungal Infections Our internal pre-clinical anti-infectives efforts are directed at discovering new antibiotics active against novel antimicrobial targets. We accomplish this through both our internal investment and through joint ventures with other biotechnology companies. We began this effort two years ago focusing on our family of validated microbial targets. Using our proprietary functional genomics technology, our scientists have been able to discover bacterial and fungal genes that are essential for the survival of pathogenic organisms. Our gene discovery approach has generated validated essential microbial targets that possess both selectivity and specificity, which are ideal attributes for drug intervention. These targets serve as the basis for our internal drug discovery efforts. In this regard, we have drawn upon our strengths in microbial genetics to develop both biochemical and cell based assays for these targets for use in our high-throughput screening platform. We have built a compound library of over 130,000 compounds and generated more than 3 million screening data points on a dozen of our genomic targets. From our screening efforts, we have established a growing portfolio of hits and leads. We have formed two joint ventures focused on discovering new broad-spectrum antibacterials: one with ArQule, beginning in 2000; and one with MerLion Pharmaceuticals initiated at the beginning of 2003. In October 2000, we formed a joint venture with ArQule, Inc. The joint venture, which replaced an earlier 1998 collaboration agreement between the companies, included commitment of shared, dedicated scientific and technical resources from both companies and joint ownership rights to all lead compounds and commercial outcomes that result from this effort. The joint venture focused on the discovery and development of novel, small molecule, broad-spectrum antibacterials. In July 2002, the companies announced they had nominated two anti-infective lead compound series for optimization arising out of the collaboration. By screening chemical compounds against validated microbial genomic targets that we identified and by performing microbiological, biochemical and hit-to-lead chemical analyses, the companies were able to identify these novel small molecule compound series. At that time, the companies also announced an agreement to restructure their joint venture arrangement. Under the restructuring, Genome Therapeutics will take full operational and financial responsibility for advancing these leads through optimization and clinical development, thus ending ArQule's involvement in this joint venture. We recently initiated a second drug discovery joint venture, this one with MerLion Pharmaceuticals, aimed at identifying natural products with potential utility as anti-infective drugs. This effort will focus on leveraging our validated antibacterial drug targets against MerLion's extensive natural product libraries to select compounds for future clinical development, including those appropriate for Investigational New Drug (IND) status. We will share all costs and expenses of the early-stage drug discovery research with MerLion. We will provide MerLion with screening assays on target proteins essential for the survival of many common pathogens. MerLion will screen the targets against its vast natural product libraries to isolate and identify novel chemical entities with an inhibitory effect on the target proteins. We will profile active compounds for their in vitro and in vivo antibacterial properties to identify novel antibacterial lead series. A joint research committee, comprised of members from both companies, will monitor and direct the course of the research. Both companies retain rights for lead optimization, clinical development and commercialization of lead candidates identified during the collaboration. We initiated a collaboration with InterLink Biotechnologies for accessing their libraries of natural products for cell-based screening. Having access to InterLink's and MerLion's natural product libraries is critical for expanding our broad-spectrum anti-infective drug development program, as we seek to increase the number of clinical candidates in our pipeline. In June, we commenced a new collaboration with F2G Limited to discover novel antifungal drugs. In this effort, F2G is using our in-house compound library and F2G's antifungal whole-cell assay screening capabilities 10 to identify specific compounds with potent activity against medically important fungal pathogens. The combination of our in-house compound library with F2G's high-throughout whole-cell assay screening expertise supports our efforts to advance the next generation of novel antifungals, either through internal efforts or with a development partner. Shortly after the close of 2002, we entered into an agreement with PanTherix to support our lead optimization activities. PanTherix will apply its protein structure determination expertise to provide structural information on our drug targets and leads, providing important information on drug-protein interactions and accelerating the development of antibacterial drug candidates. By using PanTherix's x-ray technology, we are gaining information that we expect will support the progress of our lead optimization projects. As a result of our internal drug discovery efforts, we have identified two novel lead chemical series, GTC-162 and GTC-637 analogs, and are entering the lead optimization phase. These two lead series are aimed at novel, broad-spectrum targets and have the potential to be new classes of antibacterials. Behind these lead compounds, we have identified hit series on six additional antimicrobial screens. As these compound series progress, we may enter into alliances with other companies to engage in their development, commercialization and marketing. Chronic Human Diseases We have developed an integrated suite of technologies, tools and data management and analysis capabilities to discover genes associated with human disease. We have developed sophisticated techniques for evaluating families whose members suffer from diseases with a significant inherited component. Our scientists carefully characterize human phenotypes and develop linkage maps to discover genes associated with human disease. Our human disease drug discovery platform uses a well-developed yeast-2 hybrid capability, bioinformatics and microarrays to elucidate the protein pathways of the genes we discover. This approach enables us to find multiple targets for screening. Our asthma alliance and our osteoporosis alliance have advanced into high throughput screening for drug candidates. We plan to continue to invest in our human gene discovery program. We are evaluating a number of families who are affected by chronic diseases with a strong inherited component. By gaining access to these families and analyzing their history and their genetics, we are able to discover disease-associated genes. Additionally, we continue to invest in functional genomics technologies to help determine gene function. We plan to continue to partner all of our programs in human diseases with major pharmaceutical companies. These companies have the biological and disease expertise, the clinical development capabilities and the sales and marketing infrastructure required to discover and develop new drugs in these areas. GenomeVision(TM) Services As part of our continued evolution into a focused biopharmaceutical company, in March 2003, we sold our GenomeVision(TM) Services business to privately held Agencourt Bioscience Corporation. As part of the agreement, we transferred our sequencing operations, including certain equipment and personnel to Agencourt. We will receive a percentage of revenues from commercial and government customers, transferred to Agencourt, for a period of two years, as well as shares of Agencourt common stock. We retain rights to our PathoGenome(TM) Database product, including all associated intellectual property, subscriptions and royalty rights on products developed by subscribers. Furthermore, we retain the capabilities necessary to satisfy the research needs of our existing product-focused alliances, as well as potential new alliances. Through this divestiture, we eliminated approximately 60 full-time positions. In July 1999, the U.S. government named us one of five NIH funded DNA sequencing centers in the U.S. for the international Human Genome Project. We have been scheduled to receive funding from the NHGRI of up 11 to $17.4 million through February 2003, of which all funds have been appropriated. This grant is intended to be transferred to Agencourt and subject to the terms of the divestiture agreement. In October 1999, the U.S. Government named us as one of ten initial centers in the Mouse Genome Sequencing Network. The NHGRI agreed to provide us with funding of up to $13.4 million through February 2003, of which all funds have been appropriated. In August 2000, we were named as one of two primary centers for the Rat Genome Sequencing Program and agreed to switch our research focus from the Mouse Program to the Rat Program. Remaining funds from the Mouse Program, as well as a portion of the remaining funds from the Human Genome Project, are being redirected to the Rat Genome Sequencing Program. This grant is intended to be transferred to Agencourt and subject to the terms of the divestiture agreement. PathoGenome/TM/ Database In 1997, we introduced to the market the PathoGenome(TM) Database, a database consisting of proprietary and publicly available genetic information from over thirty microbial organisms, including organisms responsible for the most prevalent bacterial infections. The PathoGenome(TM) Database provides subscribers with non-exclusive access to a large volume of highly organized and functionally annotated sequence information related to some of the most medically important microbial organisms and fungi. We designed the PathoGenome(TM) Database to be accessed at the client site using our proprietary bioinformatics software. The PathoGenome(TM) Database enables researchers to search for new genes among multiple pathogens and cross-reference genomic information for the development of new anti-infective products. In 2001, we entered into an agreement with EraGen Biosciences, under which they are responsible for the marketing, distribution and maintenance of this product, while we retain our rights to use it and receive a percentage of subscription fees and royalties from subscriber discoveries. Our Technology We have created an integrated platform of drug discovery technologies that include target identification and validation, single nucleotide polymorphism (SNP) discovery and typing, bioinformatics, assay development, high-throughput screening and compound profiling capabilities. Internal Drug Discovery Technologies We have internal capabilities to identify and screen compounds against validated drug targets. Our screening technologies allow for the high-throughput use of biochemical and cell-based screening assays. From these screens, we have used our bioinformatics expertise to build a diverse compound library of over 130,000 compounds from which we can produce profiles based on the compound's "drug-like" properties. Since 2001, we have screened our libraries against multiple targets generating over 3 million data points and advanced two internally-derived compounds series into lead optimization. Gene Target Identification Technologies We possess the capabilities to perform genetic sequencing, with a focus on gene mutation and SNP identification. Using our advanced genotyping techniques for sequencing and finishing, we identify specific gene mutations and SNPs with relevance to chronic human diseases. Through this process, robust raw data is produced and subsequently organized, managed, and analyzed by the bioinformatics team using computers, software, and databases. With this approach, we have identified three gene mutations; one linked to high bone mass, and two linked to asthma susceptibility. 12 Patents and Proprietary Technology Our ultimate commercial success depends in part on our ability to obtain intellectual property protection on our methods, technologies and discoveries, including genes, proteins encoded by genes, patentable human single nucleotide polymorphisms (SNPs), haplotypes or products based on genes or our proprietary gene technology. To that end, our policy is to protect our proprietary technology primarily through patents, in spite of the fact that the current criteria for obtaining patent protection for partially sequenced genes and for genes are unclear. Our current strategy is to apply for patent protection upon the identification of a novel gene or novel gene fragment and pursue claims to these gene sequences as well as equivalent sequences, such as substantially homologous or orthologous sequences. If we have not characterized the biological function of a gene or gene fragment at the time of filing a patent application, we supplement our patent filing as soon as additional biological function information about such gene or gene fragment becomes available. We have filed patent applications and will continue to do so with respect to a number of full-length genes and corresponding proteins and partial genes resulting from our pathogens program. Along with our collaborators, we file foreign counterparts of these U.S. applications within the appropriate time frames. Our patent applications seek to protect these full length and partial gene sequences and corresponding proteins, as well as equivalent sequences, and products derived from and uses of these sequences. We have over 15 pending U.S. patent applications and one issued patent on genes and protein sequences of pathogenic organisms. Three of the pending patent applications are allowed by the U.S. PTO and are expected to issue in the near future. There have been, and continue to be, intensive discussions on the scope of patent protection for gene fragments, single nucleotide polymorphisms, and full-length genes. In 1996, the U.S. PTO issued guidelines limiting the number of nucleic acid sequences that can be covered in a single patent application. In addition, the U.S. courts continue to redefine and narrow the enforceable scope of claims to genes, gene fragments, SNPs, and proteins. In 2000, the U.S. PTO also issued new Utility Guidelines that address the requirements for demonstrating utility, particularly in inventions relating to human therapeutics, and Written Description guidelines that address the amount of disclosure required to support claims to nucleotide sequences. Consequently, we continually must assess our patent applications to determine those that we can support for prosecution. While the U.S. PTO guidelines do not require clinical efficacy data for issuance of patents for human therapeutics, the guidelines have been in effect for only a short period of time and it is possible that the U.S. PTO may interpret them in a way that could delay or adversely affect our ability or the ability of our collaborators to obtain patent protection. The biotechnology patent situation outside the United States is even more uncertain and is currently undergoing review and revision in many countries. We have also filed patent applications on pharmaceutical compositions and corresponding medical uses of these compositions resulting from our clinical trials, and new chemical entities resulting from our internal research programs. We file foreign counterparts to these U.S. applications within the appropriate timeframes. These patent applications seek to protect our pharmaceutical compositions and other products as well as the uses and processes related to these pharmaceutical compositions and products. We are free to apply for patents on the results of our research conducted with government funds. Under the government grants, subject to the limitations described below, we have exclusive ownership rights to any commercial applications of inventions that we first reduce to practice under the grants, including all gene discoveries and technology improvements created or discovered. We are under an obligation under some of the government grants to submit sequencing data resulting from the research to public databases within 24 hours of the date on which we generate such data and materials. The government grants also restrict us from applying for blanket patents on large numbers of human or mouse genes. In addition, the government has a statutory right to practice or permit others to practice inventions that we first reduce to practice under a government grant or contract. In addition, under our government research contracts, the government has ownership rights in the data, clones, genes and other material derived from the material the government furnished to us. 13 The patent positions of biotechnology and pharmaceutical companies are generally uncertain and involve complex legal and factual issues. No assurance can be given that any patent issued to or licensed by us or our collaborators will provide protection that has commercial significance. We cannot assure that: . our patents will afford protection against competitors with similar compounds or technologies, . our patent applications will issue, . others will not obtain patents having claims similar to the claims in our patents or applications, . the patents of others will not have an adverse effect on our ability to do business, or . the patents issued to or licensed by us will not be infringed, challenged, opposed, narrowed, invalidated or circumvented. Moreover, we believe that obtaining foreign patents may, in some cases, be more difficult than obtaining domestic patents because of differences in patent laws. We therefore recognize that our patent position may generally be stronger in the U.S. than abroad. In particular, we are aware that companies have published patent applications relating to nucleic acids encoding several H. pylori proteins and, in other disease programs, relating to genes for which we have found mutations of interest. If these companies are issued patents, their patents may limit our ability and the ability of our collaborators to practice under any patents that may be issued to us. Because of this, our collaborators or we may not be able to obtain a patent with respect to the genes of H. pylori. Further, the value of certain other patents issued to us or our collaborators that are the subject of other collaborations may be limited. Also, even if a patent were issued to our collaborators or us, the scope of coverage or protection afforded to such patent may be limited. We also rely upon trademarks, unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We generally protect this information with confidentiality agreements that provide that all confidential information developed or made known to others during the course of the employment, consulting or business relationship shall be kept confidential except in specified circumstances. Agreements with employees provide that all inventions conceived by the individual while employed by us are our exclusive property. We cannot guarantee, however, that these agreements will be honored, that we will have adequate remedies for breach if they are not honored or that our trade secrets will not otherwise become known or be independently discovered by competitors. Competition The biopharmaceutical industry generally, and our drug discovery and development programs specifically, are characterized by rapidly evolving technology and intense competition. Our competitors include pharmaceutical and biotechnology companies both in the United States and abroad. Many of our competitors have greater research and product development capabilities and financial, scientific, marketing and human resources than we do, and some competitors' drug discovery and clinical development programs are more advanced than our programs. Therefore, our competitors may succeed in discovering or developing products earlier, in obtaining authorization from the FDA for products more rapidly and in developing products that are more effective than those proposed by our collaborators or us. Potential products based on genes that we have identified or may identify in our discovery efforts may face competition both from companies developing gene-based products and from companies developing antibiotics and other forms of diagnosis or treatment for the particular diseases. 14 Accordingly, competition with respect to our technologies and product candidates is and will be based on, among other things: . our ability to create and maintain advanced technology, . our ability to obtain regulatory approvals for our product candidates in a cost efficient and timely manner, . the speed with which we can identify and characterize the genes involved in human diseases, . our ability to rapidly sequence the genomes of selected pathogens, . our ability and our partners' ability to develop and commercialize therapeutic, vaccine and diagnostic products based upon our gene discoveries, . our ability to attract and retain qualified personnel, . our ability to obtain patent protection, . our ability to develop internally or in-license product candidates for clinical development, and . our ability to secure sufficient capital resources to fund our research and clinical development operations. We also face increasing competition for strategic alliances with leading pharmaceutical and biotechnology companies. We cannot be certain that we will be able to obtain such strategic alliances in the future or that we will be able to obtain them on terms comparable with existing alliances. Competition among companies seeking to discover human disease genes is also increasing for access to unique data from related individuals that are employed to identify those genes. We also face increasing competition for in-licensing opportunities with leading pharmaceutical and biotechnology companies. We cannot be certain that we will be able to in-license product opportunities in the future. Competitive disadvantages in any of these areas could materially harm our business and financial condition. Government Regulation Regulation by governmental entities in the United States and other countries will be a significant factor in the development, manufacturing and marketing of any products that our collaborators or we develop. The extent to which such regulation may apply to our collaborators or us will vary depending on the nature of the product. Virtually all of our or our collaborators' pharmaceutical products will require regulatory approval by governmental agencies prior to commercialization. In particular, the Food and Drug Administration (FDA) in the United States and similar health authorities in foreign countries subject human therapeutic and vaccine products to rigorous preclinical and clinical testing and other approval procedures. Various U.S. federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of human therapeutic and vaccine products. Obtaining these approvals and complying with appropriate federal and foreign statutes and regulations requires a substantial amount of time and financial resources. The FDA regulates human therapeutic products in one of three broad categories: drugs, biologics, or medical devices. Our most advanced product, Ramoplanin, will be regulated by the Center for Drug Evaluation and Research (CDER). Products discovered based on our technologies could potentially fall into all three categories. The FDA generally requires the following steps for pre-market approval of a new drug or biological product: . preclinical laboratory and animal tests, . submission to the FDA of an investigational new drug application, or IND, which must become effective before clinical trials may begin, 15 . adequate and well-controlled human clinical trials to establish the safety and efficacy of the product for its intended indication, . submission to the FDA of a marketing application; a new drug application, or NDA, if the FDA classifies the product as a new drug; or a biologics license application, or BLA, if the FDA classifies the product as biologic, and . FDA review of the marketing application and NDA or BLA in order to determine, among other things, whether the product is safe and effective for its intended uses. Our collaborators or we also may develop diagnostic products based upon the human or pathogen genes that we identify. We believe that the FDA is likely to regulate these diagnostic products as devices rather than drugs or biologics. The nature of the FDA requirements applicable to diagnostic devices depends on how the FDA classifies the diagnostic devices. The FDA most likely will classify a diagnostic device that our collaborators or we develop as a Class III device, requiring pre-market approval. Obtaining premarket approval involves the following process, which may be costly and time-consuming: . conducting pre-clinical studies, . obtaining an investigational device exemption to conduct clinical tests, . conducting clinical trials, . filing a pre-market approval application, and . attaining FDA approval. Products on the market are subject to continual review by the FDA. Therefore, subsequent discovery of previously unknown problems, or failure to comply with the applicable regulatory requirements may result in restricted marketing or withdrawal of the product from the market and possible civil or criminal sanctions. The FDA also may subject biologic products to batch certification and lot release requirements. To the extent that any of our products involve recombinant DNA technology, additional layers of government regulation and review are possible. Similarly, there are additional regulatory requirements for products marketed outside the United States governing the conduct of clinical trials, product licensing, pricing and reimbursement. Manufacturing and Marketing We do not expect to manufacture pharmaceutical products in the near term. The terms of our agreement for Ramoplanin obligate the licensor, Vicuron (which was formed through the merger of Biosearch Italia SpA. and Versicor Inc. in March 2003) to manufacture the bulk drug. We are responsible for the manufacture of the finished dosage form for the United States and Canada. We currently use a contract manufacturer to produce Ramoplanin for our clinical trial program. We also plan to use a contract manufacturer to produce the final dosage to support product sales. In the event we decide to establish a manufacturing facility of our own, we will require substantial additional funds and will need to hire and train significant additional personnel and will need to comply with the FDA's extensive "good manufacturing practice" regulations applicable to such a facility. In addition, if the FDA regulated any products produced at our facility as biologics, we would need to file and obtain approval of an Establishment License Application for our facility. Our current plan is to market and sell Ramoplanin through our own sales and marketing organization. We may, at a later date, determine that the commercial success of Ramoplanin will benefit from the additional resources that a pharmaceutical marketing partner would provide. We currently do not have the resources to market Ramoplanin by ourselves, but fully expect to assemble a sales and marketing organization at the appropriate time. 16 Human Resources As of December 31, 2002, we had 152 full-time equivalent employees, with 122 of these employees engaged in research and development activities and 30 of them conducted general and administrative functions. Twenty-seven of our employees held Ph.D. degrees and 34 more held other advanced degrees. Following the divestiture of our GenomeVision(TM) Services business unit in February 2003, we had 95 employees, of which 68 of these employees engaged in research and development activities and 27 of them conducted general and administrative functions. Currently, 20 of our employees hold Ph.D. degrees and 20 more hold other advanced degrees. None of our employees is covered by a collective bargaining agreement, and we consider our relations with our employees to be good. Item 2. Properties Facilities Our executive offices and laboratories are located at 100 Beaver Street, Waltham, Massachusetts. We lease approximately 80,000 square feet of space and our lease expires on November 15, 2006 with options to extend for two consecutive five-year periods. During 2002, we incurred aggregate rental costs, excluding maintenance and utilities, for our facility of approximately $1,020,000. Item 3. Legal Proceedings None. Item 4. Submission Of Matters to a Vote of Security Holders None. 17 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters Our common stock is traded on the Nasdaq National Market System (ticker symbol "GENE"). The table below sets forth the range of high and low quotations for each fiscal quarter during 2002 and 2001 as furnished by the National Association of Securities Dealers Quotation System.
2002 2001 ------------- -------------- High Low High Low ------ ------ ------- ------ First Quarter. $7.200 $4.930 $11.690 $4.750 Second Quarter 5.810 2.000 16.900 4.781 Third Quarter. 2.390 1.250 15.450 4.010 Fourth Quarter 2.480 1.000 8.390 5.450
As of March 26, 2003, there were approximately 1,036 shareholders of record of our common stock. We have not paid any dividends since our inception and presently anticipate that all earnings, if any, will be retained for development of our business and that no dividends on our common stock will be declared in the foreseeable future. Any future dividends will be subject to the discretion of our Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, our capital requirements and general business conditions. Item 6. Selected Consolidated Financial Data
For the Year Ended December 31, -------------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------ ------------ ------------ ------------ ------------ Revenues: Biopharmaceutical........... $ 18,135,038 $ 18,162,056 $ 11,851,091 $ 18,438,286 $ 7,715,992 GenomeVision(TM) Services... 3,913,376 6,665,529 13,594,143 17,302,239 15,270,863 ------------ ------------ ------------ ------------ ------------ Total revenues............. 22,048,414 24,827,585 25,445,234 35,740,525 22,986,855 Net loss........................ (12,967,676) (3,940,075) (5,846,839) (10,090,302) (34,017,025) Net loss per common share....... (0.71) (0.21) (0.27) (0.45) (1.48) Weighted average common shares outstanding.................... 18,289,644 18,627,045 21,376,685 22,572,427 22,920,875
As of December 31, ----------------------------------------------------------- 1998 1999 2000 2001 2002 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents, restricted cash, warrant and long and short-term marketable securities................................ $30,816,859 $26,778,026 $73,009,887 $67,341,249 $50,866,198 Working capital............................ 19,749,608 19,447,189 51,601,069 44,156,478 36,511,427 Total assets............................... 48,920,973 45,443,236 90,251,004 82,739,598 65,845,134 Shareholders' equity....................... 27,557,237 28,846,957 72,687,452 66,731,938 35,416,724
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Certain information contained in this report should be considered "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. These statements represent, among other things, the expectations, beliefs, plans and objectives of management and/or assumptions underlying or judgments concerning and future financial performance and other matters discussed in this document. The words "may," 18 "will," "should," "plan," "believe," "estimate," "intend," "anticipate," "project," and "expect" and similar expressions are intended to identify forward-looking statements. All forward-looking statements involve certain risks, estimates, assumptions, and uncertainties with respect to future revenues, cash flows, expenses and the cost of capital, among other things. Some of the important risk factors that could cause our actual results to differ materially from those expressed in our forward-looking statements include, but are not limited to: . risks related to our lead product candidate, Ramoplanin, such as (i) our inability to obtain regulatory approval to commercialize Ramoplanin due to negative, inconclusive or insufficient clinical data and (ii) delays in the progress of our clinical trials for Ramoplanin, and increased cost, due to the pace of enrollment of patients in the trials or fluctuations in the infection rate of enrolled patients; . our inability or the inability of our alliance partners to successfully develop and obtain regulatory approval for products based on our genomics information; . our history of operating losses and our need to raise future capital to support our product development and research initiatives; . intensified competition from pharmaceutical or biotechnology companies that may have greater resources and more experience than us; . our inability to obtain or enforce our intellectual property rights; and . our dependence on key personnel. In addition to the risk factors set forth above, you should consider the risks set forth in Exhibit 99.1 to this Annual Report, the "Business" section of this Annual Report and elsewhere in our filings with the Securities and Exchange Commission. We undertake no obligation to revise the forward-looking statements included in this Annual Report to reflect any future events or circumstances. Overview We are a biopharmaceutical company focused on the discovery, development and commercialization of pharmaceutical and diagnostic products. Our strategic goal is to directly participate in the commercialization of products that are used primarily in hospitals. For diseases treated by larger physician audiences, we seek to discover, develop and commercialize products through alliances with major pharmaceutical companies. We have nine established product development programs. We are managing the development and commercialization of our lead product candidate, Ramoplanin, in the United States and Canada. This product is in a Phase III clinical trial for the prevention of bloodstream infections caused by vancomycin-resistant enterococci (VRE) and a Phase II trial for the treatment of patients with Clostridium difficile-associated diarrhea (CDAD). We have seven product discovery and development alliances with pharmaceutical companies including Amgen, AstraZeneca, bioMerieux, Schering-Plough and Wyeth. In addition, we have a portfolio of internal drug discovery programs. During 2002, we also maintained an active service business, GenomeVision/TM/ Services, providing drug discovery services to pharmaceutical and biotechnology companies and to the National Human Genome Research Institute. As part of the our continued evolution into a biopharmaceutical company, this business unit was divested in March 2003. We concentrate our product discovery, development and commercialization efforts in two principal areas: (i) infectious diseases caused by bacterial and fungal pathogens, and (ii) human diseases believed to have a significant genetic component. 19 In October 2001, we acquired an exclusive license in the United States and Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia S.p.A, which merged with Versicor Inc. (Versicor) in March 2003. Subsequently, Versicor changed its name to Vicuron Pharmaceuticals Inc. (Vicuron). We have assumed responsibility for the product development in the United States of Ramoplanin, currently in a Phase III clinical trial for the prevention of bloodstream infections caused by vancomycin-resistant enterococci (VRE), as well as a Phase II clinical trial to assess the safety and efficacy of Ramoplanin to treat Clostridium difficile-associated diarrhea (CDAD). Our license agreement with Vicuron provides us with exclusive rights to develop and market oral Ramoplanin in the United States and Canada. Vicuron will retain all other rights to market and sell Ramoplanin. In addition, we are obligated to purchase bulk material from Vicuron, fund the completion of clinical trials and pay a royalty on product sales. Upon commercialization the combined total of bulk product purchases and royalties is expected to be approximately 26% of our net product sales. Our primary sources of revenue are from alliance agreements with pharmaceutical company partners. Currently, we have seven major product discovery alliances, and we currently receive contract research funding from three of these alliances. In August 1995, we entered into an alliance with AstraZeneca to develop pharmaceutical, vaccine and diagnostic products effective against gastrointestinal infections or any other disease caused by Helicobacter pylori (H. pylori). In August 1999, the contract research under the alliance concluded and the program transitioned into AstraZeneca's pipeline. We are entitled to receive additional milestone payments and royalties based upon the development by AstraZeneca of any products from the research alliance. In December 1995, we entered into an alliance with Schering-Plough. Under this alliance, Schering-Plough can use our Staphylococcus aureus (Staph. aureus) genomic database to identify new gene targets for the development of novel antibiotics. In March 2002, we had completed our research obligations under this alliance and had turned over validated drug targets and assays to Schering-Plough for high-throughput screening. In December 1996, we entered into our second research alliance with Schering-Plough to identify genes and associated proteins that Schering-Plough can utilize to develop new pharmaceuticals for treating asthma. In December 2002, we had completed our research obligations under this alliance and the research program has advanced into high-throughput screening at Schering-Plough to identify drug candidates. In September 1997, we established our third research alliance with Schering-Plough for the development of new pharmaceutical products to treat fungal infections. In March 2002, we had completed our research obligations under this alliance and had turned over validated drug targets and assays to Schering-Plough for high-throughput screening. In September 1999, we entered into a strategic alliance with bioMerieux to develop, manufacture and sell in vitro pathogen diagnostic products for human clinical and industrial applications. As part of the strategic alliance, bioMerieux purchased a subscription to our PathoGenome(TM) Database and made an equity investment in the Company. In December 1999, we entered into a strategic alliance with Wyeth to develop drugs based on our genetic research to treat osteoporosis. In December 2002, we entered into a strategic alliance with Amgen, Inc. to identify and develop novel therapeutic agents for bone diseases, including osteoporosis. In 2002 and past fiscal years, we have also received revenues from our GenomeVision(TM) Services business from selling, as a contract service business, high quality genomic sequencing information to our customers. As part of our continued evolution into a focused biopharmaceutical company, on March 14, 2003, we completed the sale of our GenomeVision(TM) Services business to privately held Agencourt Bioscience Corporation. As part of the agreement, we transferred our sequencing operations, including certain equipment and personnel to Agencourt. We will receive a percentage of revenues from commercial and government customers, transferred to Agencourt, for a period of two years from the date of sale, as well as shares of Agencourt common stock. We retain rights to our PathoGenome(TM) Database product, including all associated intellectual property, subscriptions and royalty rights on products developed by subscribers. Furthermore, we retain the capabilities necessary to satisfy the research needs of our existing product-focused alliances, as well as potential new alliances. We do not expect the sale of the GenomeVision(TM) Services business to have a significant impact on our net loss during the next two years, as a result of reductions in costs associated with this sale and our rights to receive royalties on gene sequencing revenue earned by Agencourt that is related to the transferred business for a period of two years from the date of sale. 20 In connection with the sale of its GenomeVision(TM) Services business, we determined that certain equipment related to this segment will no longer be used and will be abandoned subsequent to the sale. As a result, we revised the estimated useful lives of this equipment and recorded additional depreciation expense of $669,000 during the fourth quarter of 2002. We also evaluated and wrote down our excess inventory of disposables related to the GenomeVision(TM) Services business by $312,000 during the fourth quarter of 2002. Additionally, through this divestiture, we eliminated approximately 60 full-time positions, of which approximately 49 employees were not offered employment with Agencourt. We will record and pay severance costs of approximately $636,000 during the first quarter of 2003 related to these employees. In May 1997, we introduced our PathoGenome(TM) Database and sold our first subscription. Since that date, we have continued to contract with subscribers on a non-exclusive basis, and, as of December 31, 2002, we had seven subscribers. In 2001, we entered into an agreement with EraGen Biosciences, under which they are responsible for the marketing, distribution and maintenance of this product, while we retain our rights to use it and receive a percentage of subscription fees and royalties from subscriber discoveries. Under our agreements, the subscribers receive non-exclusive access to information relating to microbial organisms in our PathoGenome(TM) Database. Subscriptions to the database generate revenue over the term of the subscription with the potential for royalty payments to us from future product sales. Our revenues relating to subscription fees declined in 2002, and we expect to see a further revenue decline in subscription fees over the next year as subscribers complete their data mining of the PathoGenome/TM/ Database. Since 1989, the United States government has awarded us a number of research grants and contracts related to government genomics programs. The scope of the research covered by grants and contracts encompasses technology development, sequencing production, technology automation and disease gene identification. In July 1999, we were named as one of the nationally funded DNA sequencing centers of the international Human Genome Project. We received funding from the National Human Genome Research Institute (NHGRI) of $18.4 million through June 2003, of which all funds have been appropriated and $17.4 million has been received through December 31, 2002. As part of the sale of GenomeVision/TM/ Services to Agencourt, this program, as well as follow-on work associated with this project, is expected to be transferred to Agencourt and we expect to receive royalty payments on revenues earned by Agencourt for a period of two years from the date of sale. In October 1999, the NHGRI named us as a pilot center to the Mouse (Rat) Genome Sequencing Network. We received $14.8 million in funding through February 2003 with respect to this agreement, of which all funds have been appropriated and $14.1 million had been received through December 31, 2002. In August 2000, we were named as one of two primary centers for the Rat Genome Sequencing Program and agreed to switch its research focus from the Mouse Program to the Rat Program. Remaining funds from the Mouse Program, as well as a portion of the remaining funds from the Human Genome Project, were redirected to the Rat Genome Sequencing Program. Any follow-on work associated with this grant is expected to be transferred to Agencourt and be subject to the terms of the purchase agreement with Agencourt. We receive payments under our biopharmaceutical business from our product discovery alliances based on license fees, contract research and milestone payments during the term of the alliance. We anticipate that our alliances will result in the discovery and commercialization of novel pharmaceutical, vaccine and diagnostic products. In order for a product to be commercialized based on our research, it will be necessary for our product discovery partner to conduct preclinical tests and clinical trials, obtain regulatory clearances, manufacture, sell, and distribute the product. Accordingly, we do not expect to receive royalties based upon product revenues for many years, if at all. We have incurred significant operating losses since our inception. As of December 31, 2002, we had an accumulated deficit of approximately $125.8 million. Our losses are primarily from costs associated with prior operating businesses and research and development expenses. These costs have often exceeded our revenues generated by our alliances, subscription agreements and government grants. Our results of operations have fluctuated from period to period and may continue to fluctuate in the future based upon the timing, amount and type of funding. We expect to incur additional operating losses in the future. 21 New Accounting Pronouncements In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Statement No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations," for a disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with transition provisions for assets "held for sale" that were initially recorded under previous models (APB No. 30 or SFAS No. 121) and do not meet the new "held for sale" criteria. The Company adopted SFAS No. 144 in the first quarter of 2002. In May 2002, the FASB issued Statement of Financial Accounting Standard No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other things, SFAS 145 rescinds Statement of Financial Accounting Standards No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of Debt" and eliminates the requirement that gains and losses from the extinguishment of debt be classified as an extraordinary item, net of related income tax effects, unless the criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are met. Adoption of this statement is generally required in fiscal years beginning after May 15, 2002. We do not expect the adoption of this statement to have a material impact on our consolidated financial statements. In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146 (SFAS 146), "Accounting for Costs Associated With Exit or Disposal Activities". SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Therefore, SFAS 146 eliminates the definition and requirements for recognition of exit costs in EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. We will adopt the provisions of SFAS 146 for all exit activities, if any, initiated after December 31, 2002. We do not expect the adoption of this statement to have a material impact on our consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (the Interpretation) which expands on the accounting guidance of Statements No. 5, 57 and 107 and incorporates without change the provisions of FASB Interpretation No.34, which is being superseded. The Interpretation will significantly change current practice in the accounting for and disclosure of guarantees. Guarantees meeting the characteristics described in the Interpretation are to be recognized at fair value and significant disclosure rules have been implemented even if the likelihood of the guarantor making payments is remote. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002, while the initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Certain guarantees are excluded from the initial recognition provisions of the Interpretation, however specific disclosures are still required. We do not expect the adoption of this statement to have a material impact on our consolidated financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standard No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation-- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also requires disclosure of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 is effective for fiscal 22 years ending after December 15, 2002. The disclosure requirements for interim financial statements containing condensed consolidated financial statements are effective for interim periods beginning after December 15, 2002. We adopted SFAS No. 148 in the fourth quarter of 2002 EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities and is effective for agreements entered into during fiscal periods beginning after June 15, 2003. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable, and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (that is, there are separate units of accounting). In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. The Company is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its financial position and results of operations. Critical Accounting Policies We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of this and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. Our preparation of this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Biopharmaceutical revenues consist of license fees, contract research and milestone payments from alliances with pharmaceutical companies. GenomeVision(TM) Services revenues consist of government grants, fees received from custom gene sequencing and analysis services and subscription fees from the PathoGenome(TM) Database. Revenues from contract research, government grants, the PathoGenome(TM) Database subscription fees, and custom gene sequencing and analysis services are recognized over the respective contract periods as the services are performed, provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the related receivable is probable. License fees are recognized ratably over the performance period in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition. Milestone payments will be recognized upon achievements of the milestone as long as the milestone is deemed to be substantive and we have no other performance obligations related to the milestone. Unbilled costs and fees represent revenue recognized prior to billing. Deferred revenue represents amounts received prior to revenue recognition. Clinical Trial Accrual Our clinical development trials related to Ramoplanin are primarily performed by outside parties. It is not unusual at the end of each accounting period for us to estimate both the total cost and time period of the trials and the percent completed as of that accounting date. We also adjust these estimates when final invoices are received. To date, these adjustments have not been material to our financial statements, and we believe that the estimates that we made as of December 31, 2002 are reflective of the actual expenses incurred as of that date. However, readers should be cautioned that the possibility exists that the timing or cost of the Ramoplanin clinical trials might be longer or shorter and cost more or less than we have estimated and that the associated financial adjustments would be reflected in future periods. 23 Results of Operations Years Ended December 31, 2001 and 2002 Revenues Total revenues decreased 36% from $35,741,000 in 2001 to $22,987,000 in 2002. Biopharmaceutical revenue decreased 58% from $18,438,000 in 2001 to $7,716,000 in 2002 primarily due to the absence in 2002 of milestone payments that were earned in 2001 under our product discovery alliances with Schering-Plough and Wyeth. The decrease in biopharmaceutical revenue also reflects lower sponsored research revenue as a result of the completion of our research obligations under our two anti-infective alliances with Schering-Plough in March 2002, as well as our strategic decision to seek to partner discovery programs at a later stage of development. Revenue from GenomeVision(TM) Services decreased 12% from $17,302,000 in 2001 to $15,271,000 in 2002 primarily due to lower revenues recognized under our government grants with the National Human Genome Research Institute to participate in the Human Genome and Mouse (Rat) Genome sequencing projects, as well as lower subscription fees earned under our PathoGenome(TM) Database business as a result of third parties not renewing their database subscriptions. Costs and Expenses Total costs and expenses increased 16% from $48,978,000 in 2001 to $56,836,000 in 2002. Cost of services decreased 7% from $16,153,000 in 2001 to $15,019,000 in 2002 primarily due to decreased costs and expenses associated with the above mentioned decrease in GenomeVision(TM) Services revenue. The decrease consisted primarily of lower labor and material costs. Research and development expenses include internal research and development, research funded pursuant to arrangements with our strategic alliance partners, as well as clinical development costs and expenses. Research and development expenses increased 35% from $24,058,000 in 2001 to $32,435,000 in 2002. This planned increase was primarily due to an increase in expenses incurred in the clinical development of Ramoplanin of approximately $8,349,000, as well as increased investment in our internal drug discovery programs, specifically in the area of anti-infective and chronic human diseases, of $2,105,000. These increases in research and development expenses were partially offset by a decline in research funded under our product discovery alliances of approximately $2,077,000. Selling, general and administrative expenses increased 7% from $8,767,000 in 2001 to $9,382,000 in 2002 reflecting an expansion in the areas of corporate development and sales and marketing, as well as severance related charges of approximately $350,000 associated with our decision to reduce expenditures by eliminating 34 full-time staff positions in the areas of early stage research and administration. Interest Income and Expense Interest income decreased 54% from $3,839,000 in 2001 to $1,769,000 in 2002 reflecting lower interest rate yields from investments, as well as a decrease in funds available for investment. Interest expense increased 180% from $692,000 in 2001 to $1,936,000 in 2002. The increase in interest expense was due to an increase in our outstanding balances under long-term obligations from approximately $5.6 million at December 31, 2001 to $18.3 million at December 31, 2002. The increase in our long-term obligations resulted primarily from the March 2002 sale of convertible notes payable in a private placement transaction, which resulted in gross proceeds of $15 million. Interest expense also includes approximately $774,000 related to the amortization of deferred issuance costs and warrants issued in connection with the convertible notes payable. 24 Years Ended December 31, 2000 and 2001 Revenues Total revenues increased 40% from $25,445,000 in 2000 to $35,741,000 in 2001. Biopharmaceutical revenue increased 56% from $11,851,000 in 2000 to $18,438,000 in 2001 primarily due to increased milestone payments under our product discovery alliances with Wyeth and Schering-Plough. Revenue from GenomeVision(TM) Services increased 27% from $13,594,000 in 2000 to $17,302,000 in 2001 due to increased revenue recognized under our commercial sequencing business of approximately $935,000, as well as increased revenue recognized under our government grants with the National Human Genome Research Institute to participate in the Human Genome and Mouse (Rat) Genome sequencing projects of approximately $3,175,000. Costs and Expenses Total costs and expenses increased 45% from $33,780,000 in 2000 to $48,978,000 in 2001. Cost of services increased 38% from $11,715,000 in 2000 to $16,153,000 in 2001 primarily due to increased costs and expenses associated with the above mentioned increase in GenomeVision/TM/ Services revenue. The increase consisted primarily of higher labor and material costs. Research and development expenses include internal research and development, research funded pursuant to arrangements with our strategic alliance partners, as well as clinical development costs and expenses. Research and development expenses increased 58% from $15,191,000 in 2000 to $24,058,000 in 2001. This planned increase was primarily due to costs associated with the acquisition and clinical development of Ramoplanin of approximately $5,549,000, as well as increased investment in our internal drug discovery programs of $4,138,000, specifically in the area of anti-infectives and chronic human diseases. Selling, general and administrative expenses increased 28% from $6,875,000 in 2000 to $8,767,000 in 2001 reflecting an expansion in the areas of corporate development, sales and marketing and clinical development administrative expenses. The increase consisted of an increase in payroll and related expenses, as well as recruiting and consulting expenses. Interest Income and Expense Interest income increased 15% from $3,331,000 in 2000 to $3,839,000 in 2001 reflecting an increase in funds available for investment as a result of (i) proceeds received from the sale of common stock through public offerings in 2000 and 2001, (ii) proceeds received from the exercise of stock options, and (iii) proceeds received from our employee stock purchase plan. Interest expense decreased 18% from $843,000 in 2000 to $692,000 in 2001. The decrease was due to a decrease in our outstanding balances under long-term obligations from approximately $7.8 million at December 31, 2000 to $5.6 million at December 31, 2001. Liquidity and Capital Resources Our primary sources of cash have been payments received from product discovery alliances, subscription fees, government grants, borrowings under equipment lending facilities and capital leases and proceeds from the sale of debt and equity securities. As of December 31, 2002, we had cash, cash equivalents and short-term and long-term marketable securities of approximately $50,866,000. On March 5, 2002, we sold convertible notes payable to two institutional investors in a private placement transaction, raising $15 million in gross proceeds. The convertible notes payable may be converted into shares of our common stock at the option of the holder, at a price of $8.00 per share, 25 subject to certain adjustments. The maturity date of the convertible notes payable is December 31, 2004, provided, that if any time on or after December 31, 2003 we maintain a net cash balance (i.e., cash and cash equivalents less obligations for borrowed money bearing interest) of less than $35 million, then the holders of the convertible notes payable can require that all or any part of the outstanding principal balance of the notes payable plus all accrued but unpaid interest be repaid. Interest on the notes payable accrues at 6% annually and the interest is payable, in cash or in stock, semi-annually on June 30 and December 31 of each year. As of December 31, 2002, two interest payments on the convertible notes payable had become due and were paid by issuing 494,083 shares of our common stock to the holders of the notes payable, of which 120,986 and 373,107 shares were issued in July 2002 and January 2003, respectively. The investors also received a warrant to purchase up to an aggregate of 487,500 shares of common stock at an exercise price of $8.00 per share, subject to certain adjustments. The warrant is exercisable at the time the convertible notes payable are converted or if certain other redemptions or repayments of the convertible notes payable occur and will terminate upon the earlier of four years from date of such conversion or December 31, 2008. The warrant was valued, using the Black-Scholes option pricing model, at $1,736,000. The amount was recorded as a discount to long-term debt and will be amortized to interest expense over the term of the convertible notes payable. Additionally, we are obligated to issue a warrant to purchase up to 100,000 shares of common stock at an exercise price of $15.00 per share to our placement agent in this transaction. The warrant is exercisable over a three-year term which commenced upon the closing of the notes payable transaction. This warrant was valued, using the Black-Scholes option pricing model, at $244,000. This amount is included in deferred issuance costs and will be amortized to interest expense over the term of the convertible notes payable. In 2002, we also issued 154,076 shares of common stock related to the exercise of stock options and our employee stock purchase plan, resulting in proceeds received of approximately $466,000. In 2001, we sold 127,500 shares of common stock in a series of transactions through the Nasdaq National Market, resulting in proceeds received of approximately $1,706,000, net of issuance costs. In 2001, we also issued 352,950 shares of common stock related to the exercise of stock options and our employee stock purchase plan, resulting in proceeds received of approximately $1,204,000. In 2000, we sold 1,500,000 shares of common stock in a series of transactions through the Nasdaq National Market, resulting in proceeds received of approximately $44,723,000, net of issuance costs. In 2000, we issued 1,288,943 shares of common stock related to the exercise of stock options and our employee stock purchase plan, resulting in proceeds received of approximately $3,528,000. We received payments of approximately $17,406,000, $19,500,000 and $6,454,000 in 2000, 2001 and 2002, respectively, from our product discovery partners consisting of up-front license fees, contract research funding, subscription fee, milestone payments and expense reimbursement. We have various arrangements under which we have financed certain office and laboratory equipment and leasehold improvements. We had an aggregate of approximately $4,504,000 outstanding under our borrowing arrangements at December 31, 2002. This amount is repayable over the next 26 months, with $2,624,000 repayable over the next 12 months. Under these arrangements, we are required to maintain certain financial ratios, including minimum levels of unrestricted cash. We had no additional borrowing capacity under these capital lease agreements at December 31, 2002. Our operating activities used cash of approximately $26,428,000 in 2002 primarily due to an increase in our net loss, accounts receivables, unbilled costs and fees and deferred revenue. These uses of cash were partially offset by a decrease in interest receivable, prepaid expenses and other current assets, as well as an increase in accounts payables and accrued liabilities. Our operating activities used cash of approximately $3,101,000 in 2001 and provided cash of approximately $2,506,000 in 2000. Our investing activities provided cash of approximately $1,226,000 and $17,266,000 in 2002 and 2001, respectively, through the conversion of marketable securities to cash and cash equivalents, partially offset by purchases of marketable securities, equipment and additions to leasehold improvements, as well as an increase in other assets in 2002. The increase in other assets in 2002 reflects the inclusion of deferred issuance costs 26 associated with the convertible notes payable, which will be amortized to interest expense over the term of the convertible notes payable. Our investing activities used cash of approximately $48,755,000 in 2000 to purchase marketable securities, equipment and additions to leasehold improvements, partially offset by the conversion of marketable securities to cash and cash equivalents and the sale of certain laboratory equipment. Capital expenditures totaled $3,818,000 during 2002 primarily consisting of purchases of laboratory, computer, and office equipment. We amended an existing capital lease financing arrangement to finance the majority of these capital expenditures. We currently estimate that we will acquire approximately $1,000,000 in capital equipment in 2003 consisting primarily of computers, laboratory equipment, and additions to leasehold improvements. Our financing activities provided cash of approximately $14,626,000 in 2002 primarily from proceeds received from the sale of convertible notes payable totaling $15 million in gross proceeds, proceeds received from entering into an additional credit line for $3,500,000, of which $500,000 was used to refinance a portion of an existing line of credit, as well as proceeds received from issuances of stock under the employee stock purchase plan. These proceeds from financing activities were partially offset by payments of long-term obligations of $4,629,000. Our financing activities provided cash of approximately $545,000 and $47,328,000 in 2001 and 2000, respectively, primarily from proceeds received from the sale of equity securities, exercise of stock options, and employee stock purchase plan, net of payments of long-term obligations. At December 31, 2002, we had net operating loss and tax credits (investment and research) carryforwards of approximately $120,307,000 and $9,084,000, respectively, available to reduce federal taxable income and federal income taxes, respectively, if any. Net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited, in the event of certain cumulative changes in ownership interests of significant shareholders over a three-year period in excess of 50%. Additionally, certain of our losses have begun to expire due to the limitations of the carryforward period. We believe that our existing capital resources are adequate for approximately eighteen months under our current rate of investment in research and development. There is no assurance, however, that changes in our plans or events affecting our operations will not result in accelerated, or unexpected expenditures. We plan to continue to invest in our internal research and development programs, primarily in our lead candidate, Ramoplanin, currently in a Phase III clinical trial for the prevention of bloodstream infections caused by vancomycin-resistant enterococci (VRE), and a Phase II clinical trial to assess the safety and efficacy of Ramoplanin to treat Clostridium difficile-associated diarrhea (CDAD). We expect to incur approximately $10-15 million in clinical development expenditures during 2003. We plan to seek additional funding in the next 12 months through public or private financing in order to fund our clinical development and research projects. Additional financing may not be available when needed or if available, it may not be on terms acceptable to us. Any additional capital that we raise by issuing equity or convertible debt securities will dilute the ownership of existing stockholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. As specified in our investment policy guidelines, investments are made primarily in high-grade corporate bonds with effective maturities of two years or less, and U.S. government agency securities. These investments are subject to risk of default, changes in credit rating and changes in market value. These investments are also subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 100 basis point increase in interest rates would result in an approximate $366,000 decrease in the fair value of our investments as of December 31, 2002. However, the conservative nature of our investments mitigates our interest rate exposure, and our investment policy limits the amount of our credit exposure to any one issue, issuer, and type of instrument. We do not expect any material loss from our marketable security investments and therefore believe that our potential interest rate exposure is limited. 27 We are also subject to interest rate risk through our borrowing activities. We use United States dollar denominated borrowings to fund certain investment needs. As of December 31, 2002, we had $2.6 million outstanding under our $3,500,000 line of credit that bears interest at the prevailing LIBOR rate (2.06% at December 31, 2002) plus 1.50%. A 10% increase in market rates would have increased our interest expense by approximately $9,000 in fiscal 2002. As of December 31, 2002, we did not have any financing arrangements that were not reflected in our balance sheet. In 2000, we entered into two separate interest-rate swap agreements with a bank for an aggregate amount of approximately $1,900,000. Under these agreements, we paid a fixed rate of 8.78% and received a variable rate tied to the one month LIBOR rate. As of December 31, 2001, the variable rate was 3.83%. These swap agreements met the required criteria set forth in SFAS No. 133 to use special hedge accounting, and we recorded an unrealized loss of $30,830 at December 31, 2001, through other comprehensive income, for the change in the fair value of the swap agreements. At February 28, 2002, this debt had been paid off in its entirety and the interest-rate swap agreements expired. We do not currently own any derivative financial instruments. The interest rates on our convertible notes payable and capital lease obligations are fixed and therefore not subject to interest rate risk. Item 8. Financial Statements and Supplementary Data Financial statements and supplementary data required by Item 8 are set forth at the pages indicated in Item 15(a) below. 28 PART III Pursuant to General Instruction G(3) to Form 10-K, the information required for Part III (Items 10, 11, 12, and 13) is incorporated herein by reference from the Company's proxy statement for the Annual Meeting of Shareholders to be held on May 9, 2003. Item 14. Controls and Procedures. Within the 90 days prior to the date of filing this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in our periodic SEC filings. Subsequent to the date of that evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies and material weaknesses. 29 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (1) AND (2) See "Index to Consolidated Financial Statements and Financial Statement Schedules" appearing on page F-1. (3) Exhibits
Exhibit No. Description - ------- ----------- 3 Restated Articles of Organization and By-laws(1) 3.1 Amendment dated January 5, 1982 to Restated Articles of Organization(2) 3.2 Amendment dated January 24, 1983 to Restated Articles of Organization(3) 3.3 Amendment dated January 17, 1984 to Restated Articles of Organization(4) 3.4 Amendment dated October 20, 1987 to the By-laws(8) 3.5 Amendment dated December 9, 1987 to Restated Articles of Organization(9) 3.6 Amendment dated October 16, 1989 to the By-law(11) 3.7 Amendment dated January 24, 1994 to Articles Restated Articles of Organization(14) 3.8 Amendment dated August 31, 1994 to Restated Articles of Organization(14) 3.9 Amendment dated March 15, 2001 to Restated Articles of Organization(33) 3.10 By-Laws of Genome Therapeutics Corp (as amended through July 24, 2001)(34) 4.2 Form of Note dated March 5, 2002 received by Smithfield Fiduciary LLC and the Tail Wind Fund, Ltd.(35) 4.3 Form of Warrant received by Smithfield Fiduciary LLC and The Tail Wind Fund, Ltd.(35) 10.4 Incentive Stock Option Plan and Form of Stock Option Certificate(1) 10.6 Genome Therapeutics Corp. (f/k/a Collaborative Research) Incentive Savings Plan(6) 10.7 Amendment dated November 4, 1986 to the Genome Therapeutics Corp. (f/k/a Collaborative Research) Incentive Savings Plan dated March 1, 1985(7) 10.14 1991 Stock Option Plan and Form of Stock Option Certificate(12) 10.15 Lease dated November 17, 1992 relating to certain property in Waltham, Massachusetts(13) 10.16 Lease dated June 3, 1993 relating to certain property in Waltham, Massachusetts(13) 10.19 Employment Agreement with Robert J. Hennessey(13) 10.22 Lease Amendment dated August 1, 1994 relating to certain property in Waltham, MA(14) 10.24 1993 Stock Option Plan and Form of Stock Option Certificate(14) 10.28 Agreement between the Company and AstraZeneca PLC (f/k/a Astra Hassle AB) dated August 31, 1995(16)* 10.29 Collaboration and License Agreement between the Company, Schering Corporation and Schering- Plough Ltd., dated as of December 6, 1995(18)* 10.30 Form of director Stock Option Agreement and schedule of director options granted(17) 10.37 Lease amendment dated November 15, 1996 to certain property in Waltham, MA(19)
30
Exhibit No. Description - ------- ----------- 10.38 Collaboration and License Agreement between the Company, Schering Corporation and Schering- Plough Ltd., dated as of December 20, 1996(20)* 10.39 Credit agreement between the Company and Fleet National Bank dated February 28, 1997(21) 10.40 Credit agreement between the Company and U S Trust (f/k/a Sumitomo Bank, Limited) dated July 31, 1997(22) 10.41 Collaboration and License Agreement between the Company and Schering Corporation, dated September 22, 1997(23)* 10.42 Collaboration and License Agreement between the Company and Schering-Plough Ltd. dated September 22, 1997(23)* 10.43 Credit modification agreement between the Company and Fleet National Bank, dated March 9, 1998(24) 10.44 1997 Directors' Deferred Stock Plan(25) 10.45 1997 Stock Option Plan(25) 10.46 Amended Employment Agreement with Robert J. Hennessey(26) 10.47 Collaboration and License Agreement between the Company and American Home Products, Inc., acting through its Wyeth-Ayerst Division, dated December 20, 1999(27) 10.49 Collaboration and License Agreement between Genome Therapeutics Corporation and bioMerieux Incorporated dated as of September 30, 1999(29) 10.50 Registration Rights Agreement between the Company and bioMerieux Alliance sa dated September 30, 1999(30) 10.51 Compound Discovery Collaboration Agreement, dated October 17, 2000 between the Company and ArQule, Inc.(31)* 10.52 2001 Incentive Plan(32) 10.53 Stock Option Agreements with Steven M. Rauscher(32) 10.55 Employment Letter with Steven M. Rauscher(34) 10.56 Employment Letter with Stephen Cohen(34) 10.57 Employment Letter with Richard Labaudinere PhD(34) 10.58 Purchase Agreement dated March 5, 2002 among Smithfield Fiduciary LLC, The Tail Wind Fund, Ltd. and the Company(35) 10.59 Registration Rights Agreement dated March 5, 2002 among Smithfield Fiduciary LLC, The Tail Wind Fund, Ltd. and the Company(35) 10.60 Employment Letter with Robert J. Hennessey(36) 10.61 License and Supply Agreement between the Company and Biosearch Italia, S.P.A., dated October 8, 2001(37)* 10.62 Research Collaboration and License Agreement between the Company and Amgen Inc., dated December 20, 2002(38)* 10.63 Stock Purchase Agreement between the Company and Amgen Inc., dated December 20, 2002(38)* 10.64 Letter Agreement between the Company and Biosearch Italia, S.P.A., dated October 22, 2002 (38)* 23.1 Consent of Ernst & Young LLP Independent Public Accounts(38) 99.1 Risk Factors(38) 99.2 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act(38) 99.3 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act(38)
31 - -------- * Confidential treatment requested with respect to a portion of this Exhibit. (1) Filed as exhibits to the Company's Registration Statement on Form S-1 (No. 2-75230) and incorporated herein by reference. (2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended February 27, 1982 and incorporated herein by reference. (3) Filed as exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended February 26, 1983 and incorporated herein by reference. (4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended February 25, 1984 and incorporated herein by reference. (6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1985 and incorporated herein by reference. (7) Filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1986 and incorporated herein by reference. (8) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended August 31, 1987 and incorporated herein by reference. (9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended November 28, 1987 and incorporated herein by reference. (11) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1989 and incorporated herein by reference. (12) Filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1992 and incorporated herein by reference. (13) Filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference. (14) Filed as exhibits of the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1994 and incorporated herein by reference. (16) Filed as an exhibit to the Company's Annual Report on Form 10-K/A3 for the year ended August 31, 1995 and incorporated herein by reference. (17) Filed as an exhibit to the Company Registration Statement on Forms S-8 (File No. 33-61191) and incorporated herein by reference. (18) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended November 25, 1995 and incorporated herein by reference. (19) Filed as an exhibit to the Company's 10-K for fiscal year ended August 31, 1996 and incorporated herein by reference. (20) Filed as an exhibit to the Company's 10-Q/A for the quarter ended March 1, 1997 and incorporated herein by reference. (21) Filed as an exhibit to the Company's 10-Q for the quarter ended May 31, 1997 and incorporated herein by reference. (22) Filed as an exhibit to the Company's 10-K for fiscal year ended August 31, 1997 and incorporated herein by reference. (23) Filed as exhibits to the Company's 10-Q for the quarter ended February 28, 1998 and incorporated herein by reference. (24) Filed as an exhibit to the Company's 10-Q for the quarter ended May 30, 1998 and incorporated herein by reference. (25) Filed as exhibits to the Company's Registration Statement on Forms S-8 (333-49069) and incorporated herein by reference. (26) Filed as an exhibit to the Company's 10-K for the fiscal year ended August 31, 1998 and incorporated herein by reference. (27) Filed as an exhibit to the Company's 8-K filed on March 8, 2000 and incorporated herein by reference. (29) Filed as an exhibit to the Company's 10-Q for the quarter ended November 27, 1999 and incorporated herein by reference. 32 (30) Filed as an exhibit to the Company's Registration Statement on Forms S-3 (333-32614) and incorporated herein by reference. (31) Filed as an exhibit to the Company's 10-K for the quarter ended November 25, 2000 and incorporated herein by reference. (32) Filed as an exhibit to the Company's Registration Statement on Form S-8 (333-58274) and incorporated herein by reference. (33) Filed as an exhibit to the Company's 10-Q for the quarter ended February 24, 2001 and incorporated herein by reference. (34) Filed as an exhibit to the Company's 10-Q for the quarter ended September 29, 2001 and incorporated herein by reference. (35) Filed as an exhibit to the Company's 8-K filed on March 6, 2002 and incorporated herein by reference. (36) Filed as an exhibit to the Company's 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference. (37) Filed as an exhibit to the Company's 10-K/A2 for the fiscal year ended December 31, 2001 and incorporated herein by reference. (38) Filed herewith. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Genome Therapeutics Corp. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 2003. GENOME THERAPEUTICS CORP. /s/ STEPHEN COHEN ------------------------------- Stephen Cohen Senior Vice President and Chief Financial Officer 34 GENOME THERAPEUPITCS CORP. AND SUBSIDIARY CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven M. Rauscher, President and Chief Executive Officer of Genome Therapeutics Corp., certify that: 1. I have reviewed this annual report on Form 10-K of Genome Therapeutics Corp.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ STEVEN M. RAUSCHER Steven M. Rauscher President & Chief Executive Officer Date: March 31, 2003 35 GENOME THERAPEUPITCS CORP. AND SUBSIDIARY CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Stephen Cohen, Senior Vice President & Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Genome Therapeutics Corp.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Stephen Cohen Stephen Cohen Senior Vice President & Chief Financial Officer Date: March 31, 2003 36 GENOME THERAPEUTICS CORP. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Reports of Independent Public Accountants................................................. F-2 Consolidated Balance Sheets as of December 31, 2001 and 2002.............................. F-4 Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002 F-5 Consolidated Statements of Shareholders' Equity and Comprehensive Income for Years Ended December 31, 2000, 2001 and 2002........................................................ F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002 F-7 Notes to Consolidated Financial Statements................................................ F-8
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholders of Genome Therapeutics Corp. We have audited the accompanying consolidated balance sheet of Genome Therapeutics Corp. as of December 31, 2002, and the related statements of operations, shareholders' equity and comprehensive income, and cash flows for the year then ended. 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 audit. The consolidated financial statements of Genome Therapeutics Corp. as of December 31, 2001 were audited by other auditors who have ceased operations and whose report dated June 18, 2002, except with respect to the matter discussed in note 1(m) as to which the date is June 18, 2002, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Genome Therapeutics Corp. as of December 31, 2002, and the results of its operations, stockholders' equity, and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Boston, Massachusetts February 18, 2003, except with respect to Note 13, as to which the date is March 14, 2003 F-2 This is a copy of a report previously issued by Andersen and Andersen has not reissued the report. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Genome Therapeutics Corp.: We have audited the accompanying consolidated balance sheets of Genome Therapeutics Corp. and subsidiary (the Company) as of December 31, 2000 and 2001, and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Genome Therapeutics Corp. and subsidiary as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts February 28, 2002 (except with respect to the matter discussed in Note 1(m) as to which the date is June 18, 2002) F-3 GENOME THERAPEUTICS CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, --------------------------- 2001 2002 ------------ ------------- ASSETS Current Assets: Cash and cash equivalents............................................. $ 24,805,385 $ 14,228,507 Marketable securities (held-to-maturity).............................. 29,961,540 32,584,384 Marketable securities (available-for-sale)............................ -- 485,550 Interest receivable................................................... 1,074,726 784,372 Accounts receivable................................................... 513,885 2,043,862 Unbilled costs and fees............................................... 164,465 714,468 Prepaid expenses and other current assets............................. 1,583,320 444,402 ------------ ------------- Total current assets.............................................. 58,103,321 51,285,545 Property and Equipment, at cost: Laboratory and scientific equipment................................... 20,918,535 21,906,312 Leasehold improvements................................................ 8,798,842 8,923,916 Equipment and furniture............................................... 1,267,854 1,281,932 ------------ ------------- 30,985,231 32,112,160 Less--Accumulated depreciation........................................ 19,091,703 21,973,715 ------------ ------------- 11,893,528 10,138,445 Restricted Cash (Note 2)................................................. 200,000 -- Long-term Marketable Securities (held-to-maturity)....................... 11,839,045 3,567,757 Warrant (available-for-sale)............................................. 535,279 -- Other Assets............................................................. 168,425 853,387 ------------ ------------- $ 82,739,598 $ 65,845,134 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term obligations........................... $ 3,571,578 $ 2,623,986 Accounts payable...................................................... 2,092,593 2,175,047 Accrued expenses (Note 12)............................................ 4,832,713 8,408,940 Deferred revenue...................................................... 3,449,959 1,566,145 ------------ ------------- Total current liabilities......................................... 13,946,843 14,774,118 Long-term Obligations, net of current maturities......................... 2,060,817 15,654,292 Commitments (Note 4 and 10) Shareholders' Equity: Common stock, $0.10 par value--Authorized--50,000,000 shares Issued and outstanding--22,772,170 and 23,066,072 shares in 2001 and 2002, respectively........................................................ 2,277,217 2,306,607 Additional paid-in capital............................................ 156,214,735 158,976,618 Accumulated deficit................................................... (91,758,375) (125,775,400) Deferred compensation and note receivable from officer (Note 6(e)).... (506,088) (376,490) Accumulated other comprehensive income................................ 504,449 285,389 ------------ ------------- Total shareholders' equity........................................ 66,731,938 35,416,724 ------------ ------------- $ 82,739,598 $ 65,845,134 ============ =============
The accompanying notes are an integral part of these consolidated financial statements. F-4 GENOME THERAPEUTICS CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, --------------------------------------- 2000 2001 2002 ----------- ------------ ------------ Revenues: Biopharmaceutical....................... $11,851,091 $ 18,438,286 $ 7,715,992 GenomeVision(TM) Services............... 13,594,143 17,302,239 15,270,863 ----------- ------------ ------------ Total revenues...................... 25,445,234 35,740,525 22,986,855 Costs and Expenses: Cost of services........................ 11,714,955 16,152,707 15,019,436 Research and development................ 15,190,531 24,057,760 32,435,086 Selling, general and administrative..... 6,874,579 8,767,229 9,381,931 ----------- ------------ ------------ Total costs and expenses............ 33,780,065 48,977,696 56,836,453 ----------- ------------ ------------ Loss from operations............. (8,334,831) (13,237,171) (33,849,598) Interest Income (Expense): Interest income......................... 3,330,625 3,839,260 1,768,690 Interest expense........................ (842,633) (692,391) (1,936,117) ----------- ------------ ------------ Net interest income (expense)....... 2,487,992 3,146,869 (167,427) =========== ============ ============ Net loss......................... $(5,846,839) $(10,090,302) $(34,017,025) =========== ============ ============ Net Loss per Common Share: Basic and diluted....................... $ (0.27) $ (0.45) $ (1.48) =========== ============ ============ Weighted Average Common Shares Outstanding: Basic and diluted....................... 21,376,685 22,572,427 22,920,875 =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 GENOME THERAPEUTICS CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Common Stock --------------------- Deferred Compen- sation & Note $0.10 Par Additional Paid- Accumulated Receivable From Shares Value In Capital Deficit Officer ---------- ---------- ---------------- ------------- ---------------- Balance, December 31, 1999................................ 19,499,715 $1,949,971 $103,836,131 $ (75,821,234) $(1,117,911) ========== ========== ============ ============= =========== Sale of common stock, net of issuance costs of $718,066.............................................. 1,500,000 150,000 44,572,729 -- -- Exercise of stock options.............................. 1,280,612 128,062 3,184,327 -- -- Issuance of stock under employee stock purchase plan.................................................. 8,331 833 214,723 -- -- Deferred compensation from grant of stock options...... -- -- 1,377,161 -- (1,377,161) Amortization of deferred compensation and other stock-based compensation expense...................... -- -- -- -- 1,436,660 Reversal of deferred compensation related to cancellation of stock options......................... -- -- (461,783) -- 461,783 Net loss............................................. -- -- -- (5,846,839) -- ---------- ---------- ------------ ------------- ----------- Balance, December 31, 2000................................ 22,288,658 2,228,866 152,723,288 (81,668,073) (596,629) ========== ========== ============ ============= =========== Sale of common stock, net of issuance costs of $44,622............................................... 127,500 12,750 1,693,017 -- -- Exercise of stock options.............................. 251,354 25,135 736,584 -- -- Issuance of stock under employee stock purchase plan.................................................. 74,596 7,460 434,410 -- -- Issuance of restricted common stock and loan to officer (Note 6e)..................................... 24,000 2,400 (2,400) -- (163,000) Deferred compensation from grant of stock options...... -- -- 647,942 -- (647,942) Issuance of stock under directors deferred stock plan.. 6,062 606 (606) -- -- Amortization of deferred compensation and other stock-based compensation expense...................... -- -- -- -- 883,983 Reversal of deferred compensation related to cancellation of stock options......................... -- -- (17,500) -- 17,500 Unrealized gain on long-term investment (available for sale)............................................. Unrealized loss on derivative instruments.............. Net loss............................................. -- -- -- (10,090,302) -- ---------- ---------- ------------ ------------- ----------- Balance, December 31, 2001................................ 22,772,170 2,277,217 156,214,735 (91,758,375) (506,088) ========== ========== ============ ============= =========== Exercise of stock options.............................. 10,614 1,061 11,987 -- -- Issuance of stock under employee stock purchase plan.................................................. 143,462 14,346 438,587 -- -- Issuance of stock related to interest payable under convertible notes..................................... 120,986 12,099 276,394 Deferred compensation from grant of stock options...... -- -- 300,740 -- (300,740) Issuance of stock under directors deferred stock plan.. 18,840 1,884 (1,884) -- -- Amortization of deferred compensation and other stock-based compensation expense...................... -- -- -- -- 430,338 Value of warrants issued in connection with convertible notes..................................... -- -- 1,736,059 -- Unrealized loss on short-term investment (available for sale)............................................. Reversal of unrealized loss on derivative instruments.. Net loss............................................. -- -- -- (34,017,025) -- ---------- ---------- ------------ ------------- ----------- Balance, December 31, 2002................................ 23,066,072 $2,306,607 $158,976,618 $(125,775,400) $ (376,490) ========== ========== ============ ============= ===========
Accumulated Total Other Share- Compre- Comprehensive holders' hensive Income Equity Income ------------- ------------ ------------ Balance, December 31, 1999................................ -- $ 28,846,957 $ (3,940,075) ========= ============ ============ Sale of common stock, net of issuance costs of $718,066.............................................. -- 44,722,729 Exercise of stock options.............................. -- 3,312,389 Issuance of stock under employee stock purchase plan.................................................. -- 215,556 Deferred compensation from grant of stock options...... -- -- Amortization of deferred compensation and other stock-based compensation expense...................... -- 1,436,660 Reversal of deferred compensation related to cancellation of stock options......................... -- -- Net loss............................................. -- (5,846,839) (5,846,839) --------- ------------ ------------ Balance, December 31, 2000................................ -- 72,687,452 (5,846,839) ========= ============ ============ Sale of common stock, net of issuance costs of $44,622............................................... -- 1,705,767 Exercise of stock options.............................. -- 761,719 Issuance of stock under employee stock purchase plan.................................................. -- 441,870 Issuance of restricted common stock and loan to officer (Note 6e)..................................... -- (163,000) Deferred compensation from grant of stock options...... -- -- Issuance of stock under directors deferred stock plan.. -- -- Amortization of deferred compensation and other stock-based compensation expense...................... -- 883,983 Reversal of deferred compensation related to cancellation of stock options......................... -- -- Unrealized gain on long-term investment (available for sale)............................................. 535,279 535,279 535,279 Unrealized loss on derivative instruments.............. (30,830) (30,830) (30,830) Net loss............................................. -- (10,090,302) (10,090,302) --------- ------------ ------------ Balance, December 31, 2001................................ 504,449 66,731,938 (9,585,853) ========= ============ ============ Exercise of stock options.............................. -- 13,048 Issuance of stock under employee stock purchase plan.................................................. -- 452,933 Issuance of stock related to interest payable under convertible notes..................................... 288,493 Deferred compensation from grant of stock options...... -- -- Issuance of stock under directors deferred stock plan.. -- -- Amortization of deferred compensation and other stock-based compensation expense...................... -- 430,338 Value of warrants issued in connection with convertible notes..................................... -- 1,736,059 Unrealized loss on short-term investment (available for sale)............................................. (249,890) (249,890) (249,890) Reversal of unrealized loss on derivative instruments.. 30,830 30,830 30,830 Net loss............................................. -- (34,017,025) (34,017,025) --------- ------------ ------------ Balance, December 31, 2002................................ $ 285,389 $ 35,416,724 $(34,236,085) ========= ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 GENOME THERAPEUTICS CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------- 2000 2001 2002 ------------ ------------ ------------ Cash Flows from Operating Activities: Net loss....................................................................... $ (5,846,839) $(10,090,302) $(34,017,025) Adjustments to reconcile net loss to net cash provided by (used in) operating activities-- Depreciation and amortization................................................. 4,471,722 4,807,379 5,544,813 Non-cash interest expense..................................................... -- -- 510,605 Loss (Gain) on disposal of equipment and leasehold improvements............... 160,624 29,053 (51,926) Amortization of deferred compensation......................................... 1,436,660 883,983 430,338 Changes in assets and liabilities-- Interest receivable......................................................... (612,005) 392,082 290,354 Accounts receivable......................................................... (10,787) 313,221 (1,529,977) Unbilled costs and fees..................................................... 1,220,195 631,607 (550,003) Prepaid expenses and other current assets................................... (323,730) (682,773) 1,138,918 Accounts payable............................................................ 305,954 796,082 82,454 Accrued expenses............................................................ 1,049,809 1,089,126 3,895,550 Deferred revenue............................................................ 654,545 (1,270,275) (1,883,814) ------------ ------------ ------------ Net cash provided by (used in) operating activities...................... 2,506,148 (3,100,817) (26,139,713) ------------ ------------ ------------ Cash Flows from Investing Activities: Purchases of marketable securities............................................. (69,013,466) (47,526,465) (36,730,976) Proceeds from sale of marketable securities.................................... 23,860,411 68,439,950 42,179,260 Purchases of property and equipment............................................ (4,152,675) (3,705,719) (3,817,612) Proceeds from sale of property and equipment................................... 504,583 10,302 79,807 Decrease in restricted cash.................................................... -- -- 200,000 Decrease (increase) in other assets............................................ 46,167 47,616 (684,962) ------------ ------------ ------------ Net cash (used in) provided by investing activities...................... (48,754,980) 17,265,684 1,225,517 ------------ ------------ ------------ Cash Flows from Financing Activities: Proceeds from sale of common stock............................................. 44,722,729 1,705,767 -- Proceeds from exercise of stock options........................................ 3,312,389 761,719 13,048 Proceeds from issuance of stock under the employee stock purchase plan......... 215,556 441,870 452,933 Note receivable from officer................................................... 120,000 (163,000) -- Gross proceeds from convertible notes payable.................................. -- -- 15,000,000 Proceeds from borrowings on equipment financing arrangements................... 3,691,840 2,761,441 3,500,000 Payments on long-term obligations.............................................. (4,734,876) (4,963,096) (4,628,663) ------------ ------------ ------------ Net cash provided by financing activities................................ 47,327,638 544,701 14,337,318 ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents.............................. 1,078,806 14,709,568 (10,576,878) Cash and Cash Equivalents, beginning of year...................................... 9,017,011 10,095,817 24,805,385 ------------ ------------ ------------ Cash and Cash Equivalents, end of year............................................ $ 10,095,817 $ 24,805,385 $ 14,228,507 ============ ============ ============ Supplemental Disclosure of Cash Flow Information: Interest paid during the year.................................................. $ 842,633 $ 692,391 $ 1,131,725 ============ ============ ============ Income taxes paid during the year.............................................. $ 8,231 $ 60,000 $ 50,004 ============ ============ ============ Supplemental Disclosure of Noncash Investing and Financing Activities: Equipment acquired under capital leases........................................ $ 3,691,840 $ 2,761,441 $ -- ============ ============ ============ Unrealized gain (loss) on marketable securities................................ $ -- $ 535,279 $ (249,890) ============ ============ ============ Issuance of warrant in connection with convertible notes payable............... $ -- $ -- $ 1,736,059 ============ ============ ============ Unrealized (loss) gain on derivative instruments............................... $ -- $ (30,830) $ 30,830 ============ ============ ============ Issuance of common stock related to interest payable under convertible notes... $ -- $ -- $ 288,493 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-7 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Genome Therapeutics Corp. and subsidiary (the Company) is a biopharmaceutical company focused on the discovery, development and commercialization of pharmaceutical and diagnostic products. Its strategic goal is to directly participate in the commercialization of products that are used primarily in hospitals. For diseases treated by larger physician audiences, the Company seeks to discover, develop and commercialize products through alliances with major pharmaceutical companies. The Company has nine established product development programs. The Company is managing the development and commercialization of its lead product candidate, Ramoplanin, in the United States and Canada. This product is in a Phase III clinical trial for the prevention of bloodstream infections caused by vancomycin-resistant enterococci (VRE) and a Phase II trial for the treatment of patients with Clostridium difficile-associated diarrhea (CDAD). The Company has seven product discovery and development alliances with pharmaceutical companies including Amgen, AstraZeneca, bioMerieux, Schering-Plough and Wyeth. In addition, the Company has a portfolio of internal drug discovery programs. During 2002, the Company also maintained an active service business, GenomeVision/TM/ Services, providing drug discovery services to pharmaceutical and biotechnology companies and to the National Human Genome Research Institute. (See Note 13) The Company concentrates its product discovery, development and commercialization efforts in two principal areas: (i) infectious diseases caused by bacterial and fungal pathogens, and (ii) human diseases believed to have a significant genetic component. The accompanying consolidated financial statements reflect the application of certain accounting policies, as described in this note and elsewhere in the accompanying notes to the consolidated financial statements. (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Collaborative Securities Corp. (a Massachusetts Securities Corporation). All intercompany accounts and transactions have been eliminated in consolidation. (b) Revenue Recognition Biopharmaceutical revenues consist of license fees, contract research and milestone payments from alliances with pharmaceutical companies. GenomeVision/TM/ Services revenues consist of government grants, fees received from custom gene sequencing and analysis services and subscription fees from the PathoGenome/TM/ Database. Revenues from contract research, government grants, the PathoGenome/TM/ Database subscription fees, and custom gene sequencing and analysis services are recognized over the respective contract periods as the services are performed, provided there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the related receivable is probable. License fees are recognized ratably over the performance period in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition. Milestone payments will be recognized upon achievement of the milestone as long as the milestone is deemed to be substantive and the Company has no other performance obligations related to the milestone. Unbilled costs and fees represent revenue recognized prior to billing. Deferred revenue represents amounts received prior to revenue recognition. F-8 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (c) Property and Equipment Property and equipment, including leasehold improvements, are depreciated over their estimated useful lives using the straight-line method. The estimated useful life for leasehold improvements is the lesser of the term of the lease or the estimated useful life of the assets. The majority of the Company's equipment and leasehold improvements are financed through bank lines of credit.
Estimated Useful Life --------------------- Laboratory Equipment......... 5 Years Computer Equipment & Licenses 3 Years Office Equipment............. 5 Years Furniture & Fixtures......... 5 Years
Depreciation expense was approximately $4,472,000, $4,807,000 and $5,545,000 for the years ended December 31, 2000, 2001, and 2002, respectively. (d) Net Loss Per Share Basic and diluted earnings per share were determined by dividing net loss by the weighted average shares outstanding during the period. Diluted loss per share is the same as basic loss per share for all periods presented, as the effect of the potential common stock is antidilutive. Antidilutive securities which consist of stock options, securities sold under the Company's employee stock purchase plan, directors' deferred stock, warrants and unvested restricted stock that are not included in diluted net loss per share were 3,247,316, 3,746,794 and 5,322,897 shares during the years ended December 31, 2000, 2001 and 2002, respectively. (e) Concentration of Credit Risk SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. The Company has no off-balance-sheet or concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains its cash and cash equivalents and investment balances with several nonaffiliated institutions. The Company maintains reserves for the potential write-off of accounts receivable. To date, the Company has not written off any significant accounts. The following table summarizes the number of customers that individually comprise greater than 10% of total revenues and their aggregate percentage of the Company's total revenues:
Percentage of Number of Total Revenues Significant ------------- Year ended December 31, Customers A B C ----------------------- ----------- -- -- -- 2000.......... 2 35% 36% -- 2001.......... 3 31% 36% 18% 2002.......... 2 23% 46% --
F-9 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes the number of customers that individually comprise greater than 10% of total accounts receivable and their aggregate percentage of the Company's total accounts receivable:
Percentage of Total Accounts Receivable ------------------ At December 31, B D E F G --------------- -- -- -- -- -- 2000...... 87% -- -- -- -- 2001...... -- 37% 29% -- -- 2002...... 23% -- -- 27% 37%
(f) Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (g) Financial Instruments The estimated fair value of the Company's financial instruments, which includes cash and cash equivalents, short-term and long-term marketable securities, accounts receivable, accounts payable and long-term debt, approximates the carrying values of these instruments. (h) Reclassifications The Company has reclassified certain prior-year information to conform with the current year's presentation. (i) Comprehensive Income (Loss) The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all components of comprehensive income (loss) on an annual and interim basis. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. In 2001, the Company recorded approximately $535,000 to comprehensive income related to the value of a warrant received in connection with its collaboration agreement with Versicor Inc., which subsequenty merged with Biosearch Italia S.p.A and changed its name to Vicuron Pharmaceuticals Inc. (Vicuron). In 2002, the Company recorded approximately $250,000 to comprehensive loss related to the decrease in the fair market value of common shares of Vicuron received in connection with the exercise of this warrant. These common shares are classified as available for sale short-term marketable securities in the accompanying balance sheet. See Note 2 for further discussion. (j) Segment Reporting The Company follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision F-10 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) maker, or decision-making group, in making decisions as to how to allocate resources and assess performance. The Company's chief decision makers, as defined under SFAS No. 131, are the chief executive officer and chief financial officer. To date, the Company has viewed its operations and manages its business as principally two operating segments: GenomeVision/TM/ Services and Biopharmaceutical. As a result, the financial information disclosed herein represents all of the material financial information related to the Company's two operating segments. All of the Company's revenues are generated in the United States and all assets are located in the United States.
GenomeVision(TM) Services Biopharmaceutical Total ---------------- ----------------- ----------- 2000 Revenues............................. $13,594,143 $11,851,091 $25,445,234 Gross profit......................... 1,879,188 3,715,045 5,594,233 Company-funded research & development -- 7,054,485 7,054,485 2001 Revenues............................. $17,302,239 $18,438,286 $35,740,525 Gross profit......................... 1,149,532 11,122,807 12,272,339 Company-funded research & development -- 16,742,281 16,742,281 2002 Revenues............................. $15,270,863 $ 7,715,992 $22,986,855 Gross profit......................... 251,427 2,477,466 2,728,893 Company-funded research & development -- 27,196,560 27,196,560
The Company does not allocate assets by its operating segments. (k) Recent Accounting Pronouncements In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations," for a disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with transition provisions for assets "held for sale" that were initially recorded under previous models (APB No. 30 or SFAS No. 121) and do not meet the new "held for sale" criteria. The Company adopted SFAS No. 144 in the first quarter of 2002. In May 2002, the FASB issued Statement of Financial Accounting Standard No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other things, SFAS 145 rescinds Statement of Financial Accounting Standards No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of Debt" and eliminates the requirement that gains and losses from the extinguishment of debt be classified as an extraordinary item, net of related income tax effects, unless the criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are met. Adoption of this statement is generally required in fiscal years beginning after May 15, 2002. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements. In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146 (SFAS 146), "Accounting for Costs Associated With Exit or Disposal Activities". SFAS 146 nullifies Emerging Issues Task F-11 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Force Issue No. 94-3 (EITF 94-3), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Therefore, SFAS 146 eliminates the definition and requirements for recognition of exit costs in EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. We will adopt the provisions of SFAS 146 for all exit activities, if any, initiated after December 31, 2002. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation) which expands on the accounting guidance of Statements No. 5, 57 and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. The Interpretation will significantly change current practice in the accounting for and disclosure of guarantees. Guarantees meeting the characteristics described in the Interpretation are to be recognized at fair value and significant disclosure rules have been implemented even if the likelihood of the guarantor making payments is remote. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002, while the initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Certain guarantees are excluded from the initial recognition provisions of the Interpretation, however specific disclosures are still required. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standard No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation--Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also requires disclosure of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. The disclosure requirements for interim financial statements containing condensed consolidated financial statements are effective for interim periods beginning after December 15, 2002. The Company adopted SFAS No. 148 in the fourth quarter of 2002. EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities and is effective for agreements entered into during fiscal periods beginning after June 15, 2003. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable, and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables (that is, there are separate units of accounting). In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. The Company is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its financial position and results of operations. (l) Pro Forma Disclosure of Stock-based Compensation The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations, in accounting for stock-based compensation issued to employees, rather than the alternative fair value accounting method provided for under SFAS No. 123, "Accounting for Stock-Based Compensation". Under APB 25, when the exercise price of options granted under F-12 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required. In accordance with Emerging Issues Task Force ("EITF") 96-18, the Company records compensation expense equal to the fair value of options granted to non-employees over the vesting period, which is generally the period of service. The following tables illustrate the assumptions used and the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to employee stock-based compensation. The Company has computed the pro forma disclosures required under SFAS No. 123 and SFAS No, 148 for all employee stock options granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.
2000 2001 2002 ---------- ---------- ---------- Risk-free interest rate...................... 5.36%-6.71% 4.31%-5.24% 3.50%-5.14% Expected dividend yield...................... -- -- -- Expected life................................ 5 years 5 years 5 years Expected volatility.......................... 87% 87% 84% Weighted average grant date fair market value $11.45 $6.25 $1.83
2000 2001 2002 ----------- ------------ ------------ Net loss as reported........................................... $(5,846,839) $(10,090,302) $(34,017,025) Add: Stock-based employee compensation cost, included in the determination of net loss as reported........................ 1,436,660 883,983 430,338 Less: Total stock-based compensation cost determined under fair value based method for all employee awards................... (2,765,385) (7,494,633) (4,936,526) ----------- ------------ ------------ Pro forma net loss............................................. $(7,175,564) $(16,700,952) $(38,523,213) =========== ============ ============ Basis and diluted net loss per share As reported................................................. $ (0.27) $ (0.45) $ (1.48) =========== ============ ============ Pro forma................................................... $ (0.34) $ (0.74) $ (1.68) =========== ============ ============
The Company's stock option grants vest over several years and the Company intends to grant varying levels of stock options in the future periods. Therefore, the pro forma effects on 2000, 2001, and 2002 net loss and net loss per common share of expensing the estimated fair value of stock options and common shares issued pursuant to the stock option plan are not necessarily representative of the effects on reported results from operations for future years. (m) Restatement During 2002, the Company and its previous auditors determined that an error had inadvertently been made in the accounting during 1996 and 1997 for two stock options granted to the Company's former Chief Executive Officer. Due to this error, the accounting treatment did not properly reflect that these options contained a cashless exercise provision. As a result of required non-cash adjustments, the Company's net loss for the year ended December 31, 1996 was understated and the Company's net loss for the year ended December 31, 1997 was overstated. As reflected below, these corrections have no cash impact on the Company and have no impact on Total Shareholders' Equity. F-13 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of the cumulative impact of the restatement on the Company's financial statements as of December 31, 2000 and December 31, 2001 is as follows:
As previously reported As restated ------------- ------------ December 31, 2000 Accumulated deficit....... $(71,963,333) $(81,668,073) Additional paid in capital 143,018,548 152,723,288 Total shareholders' equity 72,687,452 72,687,452 December 31, 2001 Accumulated deficit....... $(82,053,635) $(91,758,375) Additional paid in capital 146,509,995 156,214,735 Total shareholders' equity 66,731,938 66,731,938
(2) CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company applies the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. At December 31, 2001 and 2002, the Company's investments include short-term and long-term marketable securities, which are classified as held-to-maturity, as the Company has the positive intent and ability to hold these securities to maturity. Cash equivalents are short-term, highly liquid investments with original maturities of 90 days or less. Marketable securities are investment securities with original maturities of greater than 90 days. Cash equivalents are carried at cost, which approximates market value, and consist of debt securities. Marketable securities that are classified as held to maturity are recorded at amortized cost, which approximates market value and consist of commercial paper and U.S. government debt securities. The average maturity of the Company's investments is approximately 6.5 months at December 31, 2002. At December 31, 2002, the Company had an unrealized gain of approximately $99,000, which is the difference between the amortized cost and the market value of the held to maturity investments. At December 31, 2002, the Company's short-term marketable securities also includes 45,000 shares of common stock of Vicuron received in connection with its collaboration agreement with Vicuron dated March 10, 1997. The Company is accounting for the shares in accordance with SFAS No. 115 as "available-for-sale securities" and as a result, the shares are recorded at fair value. The shares are subject to restrictions under the securities regulations and cannot be liquidated until at least March 2003. F-14 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2001 and 2002, the Company's cash and cash equivalents and investments consisted of the following:
Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Loss Fair Value ----------- ---------- ---------- ----------- December 31, 2001--Held to Maturity Cash and Cash Equivalents: Cash.................................... $21,801,201 $ -- $ -- $21,801,201 Debt securities......................... 3,004,184 (84) 3,004,100 ----------- -------- ------- ----------- Total cash and cash equivalents..... $24,805,385 $ -- $ (84) $24,805,301 =========== ======== ======= =========== Investments: Short-term marketable securities........ $29,961,540 $221,183 $ -- $30,182,723 Long-term marketable securities......... 11,839,045 221,083 -- 12,060,128 ----------- -------- ------- ----------- Total investments................... $41,800,585 $442,266 $ -- $42,242,851 =========== ======== ======= =========== December 31, 2001--Available for Sale Warrant.................................... $ 535,279 $ -- $ -- $ 535,279 =========== ======== ======= =========== December 31, 2002--Held to Maturity Cash and Cash Equivalents: Cash.................................... $11,128,507 $ -- $ -- $11,128,507 Debt securities......................... 3,100,000 -- -- 3,100,000 ----------- -------- ------- ----------- Total cash and cash equivalents..... $14,228,507 $ -- $ -- $14,228,507 =========== ======== ======= =========== Investments: Short-term marketable securities........ $32,584,384 $ 89,220 $(3,067) $32,670,537 Long-term marketable securities......... 3,567,757 14,311 (1,862) 3,580,206 ----------- -------- ------- ----------- Total investments................... $36,152,141 $103,531 $(4,929) $36,250,743 =========== ======== ======= =========== December 31, 2002--Available for Sale Investment in equity securities............ $ 200,160 $285,390 $ -- $ 485,550 =========== ======== ======= ===========
The Company also has $200,000 in restricted cash at December 31, 2001 in connection with certain capital lease obligations (see Note 5). (3) INCOME TAXES The Company applies SFAS No. 109, Accounting for Income Taxes, which requires the Company to recognize deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS No. 109 requires deferred tax assets and liabilities to be adjusted when the tax rates or other provisions of the income tax laws change. At December 31, 2002, the Company had net operating loss and tax credit carryforwards of approximately $120,307,000 and $9,084,000, respectively, available to reduce federal taxable income and federal income taxes, F-15 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) respectively, if any. Net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%. The net operating loss and tax credit carryforwards expire approximately as follows:
Investment Net Operating Loss Research Tax Credit Tax Credit Expiration Date Carryforwards Carryforwards Carryforwards --------------- ------------------ ------------------- ------------- 2003........ $ -- $ -- $ -- 2004........ -- -- -- 2005........ -- 80,000 -- 2006........ 1,807,000 208,000 -- 2007-2021... 118,500,000 8,759,000 37,000 ------------ ---------- ------- $120,307,000 $9,047,000 $37,000 ============ ========== =======
The components of the Company's net deferred tax asset at the respective dates are as follows:
December 31, -------------------------- 2001 2002 ------------ ------------ Net operating loss carryforwards........ $ 37,265,000 $ 48,448,000 Research and development credits........ 6,605,000 9,047,000 Investment tax credits.................. 37,000 37,000 Capitalized research & development costs -- 4,897,000 Depreciation............................ 1,435,000 1,459,000 Other temporary differences............. 2,798,000 1,783,000 ------------ ------------ Net deferred tax asset............... 48,140,000 65,671,000 Valuation allowance..................... (48,140,000) (65,671,000) ------------ ------------ $ -- $ -- ============ ============
The valuation allowance has been provided due to the uncertainty surrounding the realization of the deferred tax assets. (4) COMMITMENTS (a) Lease Commitments At December 31, 2002, the Company has operating leases for computer equipment and office and laboratory facilities, the last of which expires on November 15, 2006. Approximate minimum lease payments and facilities charges under the operating leases at December 31, 2002 are as follows:
Year ending December 31, ------------------------ 2003.......... $1,100,000 2004.......... 1,099,000 2005.......... 1,103,000 2006.......... 1,067,000 ---------- $4,369,000 ==========
F-16 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rental expense under these operating leases was approximately $927,000, $1,007,000 and $1,020,000 for the years ended December 31, 2000, 2001 and 2002, respectively. (b) Employment Agreements The Company has employment agreements with its executive officers and several key employees, which provide for bonuses, as defined, and severance benefits upon termination of employment, as defined. (5) LONG-TERM OBLIGATIONS On March 5, 2002, the Company sold convertible notes payable to two institutional investors in a private placement transaction, raising $15 million in gross proceeds. The convertible notes payable may be converted into shares of the Company's common stock at the option of the holder, at a price of $8.00 per share, subject to certain adjustments. The maturity date of the convertible notes payable is December 31, 2004, provided, that if at any time on or after December 31, 2003, the Company maintains a net cash balance (i.e., cash and cash equivalents less obligations for borrowed money bearing interest) of less than $35 million, then the holders of the convertible notes payable can require that all or any part of the outstanding principal balance of the convertible notes payable plus all accrued but unpaid interest be repaid. Interest on the convertible notes payable accrues at 6% annually and the interest is payable, in cash or in stock, semi-annually on June 30 and December 31 of each year. As of December 31, 2002, two interest payments on the convertible notes payable had become due and were paid by issuing 494,083 shares of the Company's common stock to the holders of the notes payable, of which 120,986 and 373,107 shares were issued in July 2002 and January 2003, respectively. The investors also received a warrant to purchase up to an aggregate of 487,500 shares of common stock at an exercise price of $8.00 per share, subject to certain adjustments. The warrant is exercisable at the time the convertible notes payable are converted or if certain other redemptions or repayments of the convertible notes payable occur and will terminate upon the earlier of four years from the date of such conversion or December 31, 2008. The warrant was valued, using the Black-Scholes option pricing model, at approximately $1,736,000. The amount was recorded as a discount to long-term obligations and will be amortized to interest expense over the term of the convertible notes payable. Additionally, the Company is obligated to issue a warrant to purchase up to 100,000 shares of common stock at an exercise price of $15.00 per share to its placement agent in this transaction. The warrant is exercisable over a three-year term which commenced upon the closing of the notes payable transaction. This warrant was valued, using the Black-Scholes option pricing model, at $244,000. This amount is included in deferred issuance costs and will be amortized to interest expense over the term of the convertible notes payable. As of December 31, 2002, this warrant has not yet been issued. In February 2002, the Company entered into an additional line of credit for $3,500,000, of which $500,000 was used to refinance a portion of an existing line of credit. This line of credit is payable in twelve consecutive quarterly payments at the prevailing LIBOR rate (2.06% at December 31, 2002) plus 1.50%. The Company is required to maintain certain financial covenants pertaining to minimum cash balances. As of December 31, 2002, $2.6 million was outstanding under the credit line, and the Company was in compliance with all of the covenants. In February 2000, the Company entered into an equipment line of credit under which it may finance up to $4,000,000 of laboratory, computer and office equipment. In December 2000, the Company increased the line of credit by $2,712,000 to $6,712,000. The Company, at its discretion, can enter into either operating or capital leases. The borrowings under the operating leases are payable in 24 monthly installments and capital leases are payable in 36 monthly installments. As of December 31, 2002, the Company had approximately $6,000 outstanding under operating leases and approximately $1,904,000 outstanding under capital leases. The interest rates under the capital leases range from 7.50% to 10.37%. There are no financial covenants related to this agreement. In March 2003, this debt had been paid off in its entirety and there is no additional borrowing capacity available under this line of credit. F-17 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Minimum payments under long-term obligations at December 31, 2002 are as follows:
Year ending December 31, ------------------------ 2003....................................... $ 3,681,041 2004....................................... 17,527,720 2005....................................... 292,507 ----------- Total minimum payments.................. 21,501,268 Less--Discount to long-term obligation..... 1,225,454 Amount representing interest.......... 1,997,536 ----------- Present value of total minimum payments. 18,278,278 Less--Current portion...................... 2,623,986 ----------- $15,654,292 ===========
(6) SHAREHOLDERS' EQUITY (a) Stock Options The Company has granted stock options to key employees and consultants under its 1991, 1993, 1995 and 1997 Stock Option Plans, as well as the 2001 Incentive Plan. The Stock Option and Compensation Committee of the Board of Directors determines the purchase price and vesting schedule applicable to each option grant. In addition, under separate agreements not covered by any plan, the Company has granted certain key employees and directors of the Company, options to purchase common stock. The Company granted nonqualified stock options for the purchase of 65,000 and 10,000 shares of common stock to consultants during fiscal years 1997 and 1999, respectively. The options were granted with an exercise price equal to the fair market value price at the date of grant and vest ratably over the contract period, as defined. In accordance with Emerging Issues Task Force (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services, the Company will measure the fair value of the options as they vest using the Black-Scholes option pricing model. The Company has charged $281,636, $3,160 and $0 to operations for the years ended December 31, 2000, 2001 and 2002, respectively, related to the grant of these options. During 1999, the Company granted to certain employees the right to receive 154,616 shares of common stock. The employees received the common stock in two equal installments on the anniversary of the grant date. The Company recorded deferred compensation of $647,942 related to the grant of these rights to receive the common stock, which will be amortized to expense over the period the shares are earned. Since the inception of this program, employees who resigned from the Company forfeited 62,915 shares of the restricted stock. The Company records deferred compensation when stock options, restricted stock and other stock-based awards are granted at an exercise price per share that is less than the fair market value on the date of the grant. Deferred compensation is recorded in an amount equal to the excess of the fair market value per share over the exercise price times the number of options or shares granted. Deferred compensation is amortized over the vesting period of the underlying awards. During the years ended 2000, 2001 and 2002, the Company recorded $1,377,161, $647,942 and $300,740, respectively, of deferred compensation. The Company recorded amortization of deferred compensation of approximately $1,436,660, $883,983 and $430,338 for the years ended December 31, 2000, 2001 and 2002, respectively. During 2000 and 2001, in connection with the termination of several employees, the Company reversed $461,783 and $17,500, respectively, of unamortized deferred compensation due to the forfeiture of options. F-18 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) There were 1,571,240 common shares available for future grant at December 31, 2002. The following is a summary of all stock option activity:
Number of Exercise Weighted Shares Price Range Average Price ---------- ----------- ------------- Outstanding, December 31, 1999 3,639,358 0.00-14.50 3.45 Granted.................... 1,198,004 0.00-66.00 14.89 Exercised.................. (1,280,612) 0.00-14.72 2.59 Cancelled.................. (381,769) 0.00-66.00 4.44 ---------- ----------- ------ Outstanding, December 31, 2000 3,174,981 0.00-66.00 7.99 Granted.................... 865,640 1.80-16.08 7.87 Exercised.................. (251,354) 0.00-14.72 3.03 Cancelled.................. (143,403) 0.00-39.38 11.74 ---------- ----------- ------ Outstanding, December 31, 2001 3,645,864 $0.00-66.00 $ 8.15 Granted.................... 1,363,746 0.83-7.03 2.43 Exercised.................. (10,614) 0.00-4.42 1.23 Cancelled.................. (522,469) 0.10-48.25 7.72 ---------- ----------- ------ Outstanding, December 31, 2002 4,476,527 $0.10-66.00 $ 6.47 ========== =========== ====== Exercisable, December 31, 2002 2,238,018 $0.10-66.00 $ 6.72 ========== =========== ====== Exercisable, December 31, 2001 1,951,126 $0.10-66.00 $ 5.73 ========== =========== ====== Exercisable, December 31, 2000 1,607,085 $0.00-14.72 $ 4.10 ========== =========== ======
The range of exercise prices for options outstanding and options exercisable at December 31, 2002 are as follows:
Options Outstanding Options Exercisable ---------------------------- -------------------------- Weighted Average Remaining Contractual Range of Life of Options Weighted Average Weighted Average Exercise Prices Outstanding (In Years) Number Exercise Price Number Exercise Price - --------------- ---------------------- ----------- ---------------- --------- ---------------- $ 0.00- 3.38 5.90 1,920,017 $ 1.64 904,754 $ 1.86 $ 3.40- 4.88 7.07 433,112 4.30 328,165 4.37 $ 5.05- 7.50 8.27 533,543 6.41 133,152 6.80 $ 7.56- 9.50 4.48 415,874 8.71 330,313 8.82 $ 9.93-14.72 7.96 1,089,231 13.74 498,752 14.28 $15.97-66.00 7.54 84,750 22.82 42,882 22.88 Total 6.70 4,476,527 $ 6.47 2,238,018 $ 6.72
(b) Sale of Common Stock In June and July of 2000, the Company sold 1,500,000 shares of its common stock in a series of transactions through the Nasdaq National Market at an average price of $31.01 per share resulting in proceeds of $44,722,729, net of issuance costs of $718,066. In June and July of 2001, the Company sold 127,500 shares of its common stock in a series of transactions through the Nasdaq National Market at an average price of $13.73 per share resulting in proceeds of $1,705,767, net of issuance costs of $44,622. F-19 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (c) 1997 Directors' Deferred Stock Plan In January 1998, the Company's stockholders approved the 1997 Directors' Deferred Stock Plan (the 1997 Directors' Plan) covering 150,000 shares of common stock. The shares will be granted as services are performed by members of the Company's Board of Directors. As of December 31, 2002, the Company granted 66,002 shares of restricted common stock under the 1997 Directors' Plan. These shares are issued at the end of the three-year period or earlier if the individual ceases to serve as a member of the Company's Board of Directors. As of December 31, 2002, 25,702 shares of restricted common stock were vested but not yet issued under the 1997 Directors' Plan. (d) Note Receivable from Officer On March 28, 2001, the Company loaned $163,000 to an officer of the Company to allow him to pay income tax liabilities associated with a restricted stock grant of 24,000 shares. The loan bears interest at 4% and is payable in full on December 31, 2004 and may be extended to December 31, 2006 at the option of the officer, subject to certain conditions. The principal amount of the note is non-recourse as it is secured only by the 24,000 shares of restricted stock. The interest portion of the loan is full-recourse as it is secured by the officer's personal assets. The Company issued these shares to the officer for no consideration and as a result recorded deferred compensation of approximately $347,000, which will be amortized over the vesting period of the award, which is forty-eight months. (e) Employee Stock Purchase Plan On February 28, 2000, the Company adopted an Employee Stock Purchase Plan under which eligible employees may contribute up to 15% of their earnings toward the semi-annual purchase of the Company's common stock. The employees' purchase price will be 85% of the fair market value of the common stock at the time of grant of option or the time at which the option is deemed exercised, whichever is less. No compensation expense will be recorded in connection with the plan. As of December 31, 2002, the Company has issued 226,389 shares under this plan. (7) INCENTIVE SAVINGS 401(K) PLAN The Company maintains an incentive savings 401(k) plan (the Plan) for the benefit of all employees. In February 2002, the Company changed its match to 50% of the first 6% of salary from 100% of the first 2% of salary and 50% of the next 2% of salary, limited to the first $100,000 of annual salary. The Company contributed $201,759, $251,157 and $283,718 to the Plan for the years ended December 31, 2000, 2001 and 2002, respectively. (8) ALLIANCES--BIOPHARMACEUTICAL (a) ASTRAZENECA In August 1995, the Company entered into a strategic alliance with AstraZeneca (Astra), formerly Astra Hassle AB, to develop drugs, vaccines and diagnostic products effective against peptic ulcers or any other disease caused by H. pylori. The Company granted Astra exclusive access to the Company's H. pylori genomic sequence database and exclusive worldwide rights to make, use and sell products based on the Company's H. pylori technology. The agreement provided for a four-year research alliance (which ended in August 1999) to further develop and annotate the Company's H. pylori genomic sequence database, identify therapeutic and vaccine targets, and develop appropriate biological assays. F-20 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Under this agreement, Astra agreed to pay the Company, subject to the achievement of certain product development milestones, up to $23.3 million (and possibly a greater amount if more than one product is developed under the agreement) in license fees, expense allowances, research funding and milestone payments. The Company has received a total of $13.7 million in license fees, expense allowances, milestone payments, maintenance fees and research funding under the Astra agreement through December 31, 2002. The Company will also be entitled to receive royalties on Astra's sale of products protected by the claims of patents licensed to Astra by the Company pursuant to the agreement or the discovery of which was enabled in a significant manner by the genomic database licensed to Astra by the Company. In its development of new anti-ulcer products, Astra has selected a novel lead series from the Company's H. pylori database for advancement into lead optimization. As of March 31, 2003, Astra's exclusive access rights to the Company's H. pylori genomic sequence technology will terminate and the Company will be able to enter into alliances with other partners to develop drugs, vaccines and diagnostic products effective against peptic ulcers or any other disease caused by H. pylori. The Company recognized approximately $6,000, $0 and $172,000 in revenue under the agreement during the years ended December 31, 2000, 2001 and 2002, respectively. (b) SCHERING-PLOUGH In December 1995, the Company entered into a strategic alliance and license agreement (the December 1995 agreement) with Schering Corporation and Schering-Plough Ltd. (collectively, Schering-Plough) providing for the use by Schering-Plough of the genomic sequence of Staph. aureus to identify and validate new gene targets for development of drugs to target Staph. aureus and other pathogens that have become resistant to current antibiotics. As part of this agreement, the Company granted Schering-Plough exclusive access to the Company's proprietary Staph. aureus genomic sequence database. The Company agreed to undertake certain research efforts to identify bacteria-specific genes essential to microbial survival and to develop biological assays to be used by Schering-Plough in screening natural product and compound libraries to identify antibiotics with new mechanisms of action. Under this agreement, Schering-Plough paid an initial license fee and funded a research program through March 31, 2002. Schering-Plough paid the Company $21.5 million in an up-front license fee, research funding and milestone payments through December 31, 2002. Subject to the achievement of additional product development milestones, Schering-Plough agreed to pay the Company up to an additional $24.0 million in milestone payments. The agreement grants Schering-Plough exclusive worldwide rights to make, use and sell pharmaceutical and vaccine products based on the genomic sequence databases licensed to Schering-Plough and on the technology developed in the course of the research program. The Company will be entitled to receive royalties on Schering-Plough's sale of therapeutic products and vaccines developed using the technology licensed. The Company had completed its research obligations under this alliance and had turned over validated drug targets and assays to Schering-Plough for high-throughput screening. Under the December 1995 agreement, the Company recognized approximately $1,887,000, $1,570,000 and $127,000 in revenue during the years ended December 31, 2000, 2001 and 2002, respectively. In December 1996, the Company entered into its second strategic alliance and license agreement (the December 1996 agreement) with Schering-Plough. This agreement calls for the use of genomics to discover new F-21 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) pharmaceutical products for treating asthma. As part of the agreement, the Company employed its high-throughput disease gene identification, bioinformatics, and genomics sequencing capabilities to identify genes and associated proteins that can be utilized by Schering-Plough to develop pharmaceuticals and vaccines for treating asthma. Under this agreement, the Company has granted Schering-Plough exclusive access to (i) certain gene sequence databases made available under this research program, (ii) information made available to the Company under certain third-party research agreements, and (iii) an exclusive worldwide right and license to make, use and sell pharmaceutical and vaccine products based on the rights to develop and commercialize diagnostic products that may result from this alliance. Under this agreement (and subsequent extensions), Schering-Plough paid an initial license fee and an expense allowance to the Company and funded the research program through December 2002. In addition, upon completion of certain scientific developments, Schering-Plough has made or will potentially make milestone payments, as well as pay royalties based upon sales of therapeutic products developed from this collaboration. If all milestones are met, total payments to the Company will approximate $81.0 million, excluding royalties. Of the total potential payments, approximately $36.5 million represents license fees and research payments, and $44.5 million represents milestone payments based on achievement of research and product development milestones. In December 2002, the Company had completed its research obligations under this alliance and the research program has advanced into high-throughput screening at Schering-Plough. A total of $42.4 million has been received through December 31, 2002. Under the December 1996 agreement, the Company recognized approximately $4,711,000, $8,084,000 and $5,088,000 in revenue during the years ended December 31, 2000, 2001 and 2002, respectively. In September 1997, the Company entered into a third strategic alliance and license agreement (the September 1997 agreement) with Schering-Plough to use genomics to discover and develop new pharmaceutical products to treat fungal infections. Under this agreement, the Company employed its bioinformatics, high-throughput sequencing and functional genomics capabilities to identify and validate genes and associated proteins as drug discovery targets that can be utilized by Schering-Plough to develop novel antifungal treatments. Schering-Plough has received exclusive access to the genomic information developed in the alliance related to two fungal pathogens, Candida albicans and Aspergillus fumigatus. Schering-Plough has also received exclusive worldwide rights to make, use and sell products based on the technology developed during the course of the research program. In return, Schering-Plough agreed to fund a research program through March 31, 2002. If all milestones are met, total payments to the Company will approximate $33.2 million, excluding royalties. Of the total potential payments, approximately $10.2 million represents contract research payments and $23.0 million represents milestone payments based on achievement of research and product development milestones. The Company has completed its research obligations under this alliance and has turned over validated drug targets and assays to Schering-Plough for high-throughput screening. A total of $12.2 million has been received through December 31, 2002. Under the September 1997 agreement, the Company recognized approximately $1,912,000, $1,137,000 and $6,000 in revenue for the years ended December 31, 2000, 2001 and 2002, respectively. Under certain circumstances, the Company may have an obligation to give Schering-Plough a right of first negotiation to develop with the Company certain of its asthma and infectious disease related discoveries if it decides to seek a third party collaborator to develop such discoveries. F-22 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (c) BIOMERIEUX In September 1999, the Company entered into a strategic alliance with bioMerieux to develop, manufacture and sell in vitro diagnostic products for human clinical and industrial applications. As part of the alliance, bioMerieux purchased a subscription to the Company's PathoGenome(TM) Database (see Note 9), paid an up-front license fee, agreed to fund a research program for at least four years and pay royalties on future products. In addition, bioMerieux purchased $3.75 million of the Company's common stock. The total amount of research and development funding, excluding subscription fees, approximates $5.2 million for the four-year term of this agreement. The research and development funding will be recognized as the research services are performed over the four-year term of the agreement. Approximately $4.4 million has been received through December 31, 2002. The Company recognized approximately $1,469,000, $1,173,000 and $1,188,000 in revenue during the years ended December 31, 2000, 2001 and 2002, respectively, which consisted of alliance research revenue and amortization of the up-front license fees. (d) WYETH In December 1999, the Company entered into a strategic alliance with Wyeth to develop novel therapeutics for the prevention and treatment of osteoporosis. The alliance will focus on developing therapeutics, utilizing targets based on the characterization of a gene associated with a unique high bone mass trait. The agreement provides for the Company to employ its established capabilities in positional cloning, bioinformatics and functional genomics in conjunction with Wyeth's drug discovery capabilities and its expertise in bone biology and the osteoporotic disease process to develop new pharmaceuticals. Under the terms of the agreement, Wyeth agreed to pay an up-front license fee, milestone payments and fund a research program for a minimum of two years with an option to extend. On December 30, 2002, Wyeth exercised its option to extend the research program to December 2003. If the research program continues for its full term and substantially all of the milestone payments are met, total payments to the Company, excluding royalties, would exceed $119 million. Approximately $9.2 million has been received through December 31, 2002. The Company recognized approximately $1,640,000, $6,485,000 and $1,060,000 in revenue during the years ended December 31, 2000, 2001 and 2002, respectively, which consisted of alliance research revenue, amortization of the up-front license fees and milestone payments. (e) AMGEN In December 2002, the Company entered into a strategic alliance with Amgen, Inc. to identify and develop novel therapeutic agents for bone diseases, including osteoporosis. Both companies will participate in collaborative research efforts to discover one or more drug candidates suitable for development. The companies will, as part of the research activities, use genetic information, developed by the Company based on research conducted at the Creighton University Osteoporosis Research Center, which has been exclusively licensed to Amgen. Under the terms of the agreement, Amgen will pay the Company an up-front license fee, and fund a multi-year research program, which includes milestone payments and royalties on sales of therapeutics products developed from this alliance. Contingent upon the success of the discovery, development and commercialization activities, Amgen may also purchase common shares of the Company. Amgen's equity ownership in the Company will be limited to no more than 4.99% of the Company's outstanding shares. If all milestones are met, total payments to the Company will approximate $67 million, excluding royalties if a single product is developed and a maximum of $104 million if more than one product is developed under the agreement. Of the total potential payments, approximately $59.0 million represents research payments, milestone payments and a license fee, and $8.0 million represents an equity investment in the Company by Amgen. F-23 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company will receive royalties on product sales ranging from 4%-10% depending on the level of those sales. We may elect to participate in the funding of the clinical development program, in which case we may co-promote the product in the U.S. and Canada and receive either increased royalties on sales or participate in profits from product sales in the U.S. and Canada. The Company recognized approximately $42,000 in revenue during the year ended December 31, 2002, which consisted of amortization of an up-front license fee. (9) GENOMEVISION(TM) SERVICES GenomeVision(TM) Services revenues consist of government grants, fees received from custom gene sequencing and analysis and subscription fees from PathoGenome(TM) Database. (See Note 13) (a) DATABASE SUBSCRIPTIONS The Company has entered into a number of PathoGenome(TM) Database subscriptions. The database subscriptions provide nonexclusive access to the Company's proprietary genome sequence database, PathoGenome(TM) Database, and associated information relating to microbial organisms. These agreements call for the Company to provide periodic data updates, analysis tools and software support. Under the subscription agreements, the customer pays an annual subscription fee and will pay royalties on any molecules developed as a result of access to the information provided by the PathoGenome(TM) Database. The Company retains all rights associated with protein therapeutic, diagnostic and vaccine use of bacterial genes or gene products. In 2001, we entered into an agreement with EraGen Biosciences, under which they are responsible for the marketing, distribution and maintenance of this product, while we retain our rights to use it and receive a percentage of subscription fees and royalties from subscriber discoveries. (b) NATIONAL HUMAN GENOME RESEARCH INSTITUTE In July 1999, the Company was named as one of the nationally funded DNA sequencing centers of the international Human Genome Project. The Company is entitled to receive funding from the National Human Genome Research Institute (NHGRI) of up to $18.4 million through June 2003, of which all funds have been appropriated. As of December 31, 2002, the Company recognized approximately $17.4 million in revenue under this agreement. In October 1999, the NHGRI named the Company as a pilot center to the Mouse Genome Sequencing Network. The Company is entitled to receive $14.8 million in funding through February 2003, of which all funds have been appropriated. As of December 31, 2002, the Company recognized approximately $14.7 million in revenue under this agreement. In August 2000, the Company was named one of two primary centers for the Rat Sequencing Program from NHGRI. As part of the agreement, the Company will use remaining funding under the mouse award, as well as a portion of the remaining funding under the human award, to participate in this rat genome initiative. (10) PRODUCT DEVELOPMENT In October 2001, the Company acquired an exclusive license in the United States and Canada for a novel antibiotic, Ramoplanin, from Biosearch Italia S.p.A (which merged with Versicor in March 2003 and subsequently changed its name to Vicuron). The Company has assumed responsibility for the product development in the United States of Ramoplanin, currently in a Phase III clinical trial for the prevention of bloodstream infections caused by vancomycin-resistant enterococci (VRE), as well as a Phase II clinical trial to assess the safety and efficacy of Ramoplanin to treat Clostridium difficile-associated diarrhea (CDAD). The agreement provides the Company with exclusive rights to develop and market oral Ramoplanin in the U.S. and Canada. Vicuron will provide the bulk material for manufacture of the product and will retain all other rights to market and sell Ramoplanin. F-24 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Under the terms of this agreement, the Company paid Vicuron an initial license fee of $2 million and is obligated to make payments of up to $8 million in a combination of cash and notes convertible into Company stock upon the achievement of specified milestones. In addition, the Company is obligated to purchase bulk material from Vicuron, fund the completion of clinical trials and pay a royalty on product sales. The combined total of bulk product purchases and royalties is expected to be approximately 26% of the Company's net product sales. The Company expended approximately $5,549,000 and $13,895,000 during the years ended December 31, 2001 and 2002, respectively, which consisted of the initial license fee, milestone payment and clinical development expenses. (11) QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited quarterly statement of operations data for each of the eight quarters in the period ended December 31, 2002. In the opinion of management, this information has been prepared on the same basis as the audited financial statements appearing elsewhere in this Form 10-K, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results of operations.
Quarter Quarter Quarter Quarter One Two Three Four Year ----------- ----------- ----------- ----------- ------------ 2001 Revenues: Biopharmaceutical..................... $ 3,557,570 $ 7,459,478 $ 2,917,389 $ 4,503,849 $ 18,438,286 GenomeVision(TM) Services............. 4,532,678 3,930,400 4,460,646 4,378,514 17,302,239 ----------- ----------- ----------- ----------- ------------ Total revenues..................... 8,090,248 11,389,879 7,378,035 8,882,363 35,740,525 Costs and Expenses: Cost of services...................... 3,680,816 3,430,803 4,633,058 4,408,030 16,152,707 Research and development.............. 3,822,329 4,438,822 5,247,912 10,548,697 24,057,760 Selling, general and administrative... 1,634,922 2,190,432 2,559,004 2,382,871 8,767,229 ----------- ----------- ----------- ----------- ------------ Total costs and expenses........... 9,138,067 10,060,057 12,439,974 17,339,598 48,977,696 ----------- ----------- ----------- ----------- ------------ Loss from operations............... (1,047,819) 1,329,822 (5,061,939) (8,457,235) (13,237,171) Interest Income (Expense): Interest income....................... 1,143,795 986,723 1,055,631 653,111 3,839,260 Interest expense...................... (169,342) (212,123) (174,269) (136,657) (692,391) ----------- ----------- ----------- ----------- ------------ Net interest income................ 974,453 774,600 881,362 516,454 3,146,869 ----------- ----------- ----------- ----------- ------------ Net loss........................... $ (73,366) $ 2,104,422 $(4,180,577) $(7,940,781) $(10,090,302) =========== =========== =========== =========== ============ Net Loss per Common Share: Basic and diluted..................... $ (0.00) $ 0.09 $ (0.18) $ (0.35) $ (0.45) =========== =========== =========== =========== ============ Weighted Average Common Shares Outstanding: Basic and diluted..................... 22,409,501 22,451,753 22,685,660 22,742,794 22,572,427 =========== =========== =========== =========== ============
F-25 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarter Quarter Quarter Quarter One Two Three Four Year ----------- ----------- ------------ ----------- ------------ 2002 Revenues: Biopharmaceutical..................... $ 2,433,725 $ 1,927,960 $ 1,844,312 $ 1,509,995 $ 7,715,992 GenomeVision(TM) Services............. 3,730,792 4,056,708 3,155,353 4,328,010 15,270,863 ----------- ----------- ------------ ----------- ------------ Total revenues..................... 6,164,517 5,984,668 4,999,665 5,838,005 22,986,855 Costs and Expenses: Cost of services...................... 3,392,777 3,696,543 3,074,407 5,255,709 15,019,436 Research and development.............. 7,813,973 8,283,727 9,211,517 7,125,869 32,435,086 Selling, general and administrative... 2,057,385 2,188,430 2,629,129 2,506,987 9,381,931 ----------- ----------- ------------ ----------- ------------ Total costs and expenses........... 13,264,135 14,168,700 14,915,053 14,488,565 56,836,453 ----------- ----------- ------------ ----------- ------------ Loss from operations............... (7,099,618) (8,184,032) (9,915,388) (8,650,560) (33,849,598) Interest Income (Expense): Interest income....................... 530,932 494,671 400,636 342,451 1,768,690 Interest expense...................... (216,090) (628,126) (557,865) (534,036) (1,936,117) ----------- ----------- ------------ ----------- ------------ Net interest income (expense)...... 314,842 (133,455) (157,229) (191,585) (167,427) ----------- ----------- ------------ ----------- ------------ Net loss........................... $(6,784,776) $(8,317,487) $(10,072,617) $(8,842,145) $(34,017,025) =========== =========== ============ =========== ============ Net Loss per Common Share: Basic and diluted..................... $ (0.30) $ (0.36) $ (0.44) $ (0.38) $ (1.48) =========== =========== ============ =========== ============ Weighted Average Common Shares Outstanding: Basic and diluted..................... 22,798,224 22,812,226 23,032,463 23,040,590 22,920,875 =========== =========== ============ =========== ============
(12) ACCRUED EXPENSES Accrued expenses consist of the following:
December 31, --------------------- 2001 2002 ---------- ---------- Payroll and related expenses................. $1,990,394 $2,278,679 Facilities................................... 463,279 368,601 Professional fees............................ 108,375 180,000 Employee relocation.......................... 224,543 -- Interest related to convertible notes payable -- 453,699 Clinical development......................... 1,286,324 4,329,792 All Other.................................... 759,798 798,169 ---------- ---------- $4,832,713 $8,408,940 ========== ==========
(13) SUBSEQUENT EVENT On March 14, 2003, the Company completed the sale of its GenomeVision(TM) Services business to Agencourt Bioscience (Agencourt). As part of the agreement, the Company transferred its gene sequencing operations, including both commercial and government customer contracts and certain personnel and equipment, to Agencourt in exchange for an upfront cash payment and shares of Agencourt common stock. The Company will also receive royalties on gene sequencing revenue earned by Agencourt that is related to the transferred business for a period of two years after the date of sale. The Company retains rights to its PathoGenome(TM) Database, including all associated intellectual property, subscriptions and royalty rights on products developed by subscribers. F-26 GENOME THERAPEUTICS CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As discussed above, the Company will receive royalties on gene sequencing revenue earned by Agencourt that is related to the transferred business for a period of two years after the date of sale. Accordingly, the cash flows from the GenomeVision(TM) Services group will not have been completely eliminated from the ongoing operations of the Company as a result of the disposal transaction. As a result, the sale does not initially qualify as a "discontinued operation" as defined by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In connection with the sale of its GenomeVision(TM) Services business, the Company determined that certain equipment related to this segment will no longer be used and will be abandoned subsequent to the sale. As a result, the Company revised the estimated useful lives of this equipment and recorded additional depreciation expense of $669,000 during the fourth quarter of 2002. The Company also evaluated and wrote down its excess inventory of disposables related to the GenomeVision(TM) Services business by $312,000 during the fourth quarter of 2002. Additionally, through this divestiture, the Company eliminated approximately 60 full-time positions, of which approximately 49 employees were not offered employment with Agencourt. The Company will record and pay severance costs of approximately $636,000 during the first quarter of 2003 related to these employees. Refer to Note 1(j) for certain segment information related to GenomeVision(TM) Services. F-27 EX-10.62 3 dex1062.txt RESEARCH COLLABORATION & LICENSE AGREEMENT CONFIDENTIAL TREATMENT REQUEST EXECUTION COPY Exhibit 10.62 PORTIONS OF THIS EXHIBIT WERE OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT FILED WITH THE COMMISSION PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934. SUCH PORTIONS ARE MARKED BY ASTERISKS. RESEARCH COLLABORATION AND LICENSE AGREEMENT between GENOME THERAPEUTICS CORP. and AMGEN INC. CONFIDENTIAL PORTIONS OF THIS EXHIBIT WERE OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT FILED WITH THE COMMISSION PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934. SUCH PORTIONS ARE MARKED BY ASTERISKS. RESEARCH COLLABORATION AND LICENSE AGREEMENT This Research Collaboration and License Agreement (this "Agreement") is effective as of December __, 2002 (the "Effective Date") by and between Genome Therapeutics Corp. ("GENE"), 100 Beaver Street, Waltham, Massachusetts 02453 and Amgen Inc. ("Amgen"), One Amgen Center Drive, Thousand Oaks, California 91320-1799. Amgen and GENE are sometimes referred to herein individually as a "Party" and collectively as the "Parties." WITNESSETH: WHEREAS, GENE is engaged in the discovery of novel genes related to high bone density; WHEREAS Amgen is engaged in the discovery, development and commercialization of human therapeutics; and WHEREAS GENE and Amgen desire to enter into a collaborative relationship to discover and develop human therapeutics for the treatment of osteoporosis and other diseases, on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein, the Parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "Affiliate" means any corporation, company, partnership, joint venture and/or firm which controls, is controlled by, or is under common control with a Party. For purposes of this definition, "control" shall be presumed to exist if one of the following conditions is met: (a) in the case of corporate entities, direct or indirect ownership of at least fifty percent (50%) of the stock or shares having the right to vote for the election of directors, and (b) in the case of non-corporate entities, direct or indirect ownership of at least fifty percent (50%) of the equity interest with the power to direct the management and policies of such non-corporate entities. 1.2 "Amgen Background Know-How" means *****. 1 1.3 "Amgen Background Patent Rights" means all Patent Rights Controlled by Amgen as of the Effective Date or during the term of this Agreement that claim Amgen Background Know-How. 1.4 "Amgen Technology" means, collectively, Amgen Background Patent Rights, Amgen Background Know-How, Amgen Program Patent Rights, Amgen Program Know-How and Amgen's interest in the Joint Patent Rights and Joint Know-How. 1.5 "Calendar Quarter" means, with respect to the first such Calendar Quarter, the period beginning on the Effective Date and ending on December 31, 2002, and thereafter each successive period of three (3) consecutive calendar months ending on March 31, June 30, September 30 or December 31. 1.6 "Calendar Year" means each successive period of twelve (12) months commencing on January 1 and ending on December 31. 1.7 "Change of Control of GENE" means the acquisition, directly or indirectly, by a Competitive Entity of fifty percent (50%) or more of the shares of GENE's voting capital stock, the holders of which have general voting power under ordinary circumstances to elect at least a majority of GENE's Board of Directors or equivalent body. 1.8 "Clinical Milestone Payments" means those amounts payable by Amgen to GENE pursuant to Section 8.5. 1.9 "Co-Detail" means the employment by Amgen and GENE of Representatives to jointly Detail the same Product under the same Product Trademark in the United States and/or Canada (as appropriate), under the coordination and direction of Amgen. 1.10 "Commercialization" or "Commercialize" means any and all activities (whether before or after Regulatory Approval) directed to the marketing, Detailing and promotion of a Product after Regulatory Approval for commercial sale has been obtained and shall include ***** When used as a verb, "Commercializing" means to engage in Commercialization and "Commercialized" shall have a corresponding meaning 1.11 "Commercialization Expense" has the meaning set forth in Exhibit X. 1.12 "Commercialization Plan" means the summary plan (which shall include a summary strategy and proposed timelines), and any updates thereto, to be prepared by Amgen pursuant to Section 6.2 for the Commercialization of any Product in the United States and/or Canada (as appropriate). 1.13 "Commercially Reasonable Efforts" means a level of efforts and resources consistent with good business practice and standards that a company in the research- 2 based pharmaceutical industry would devote to research, develop or commercialize (as appropriate) a product for a similar use and of similar market potential at a similar stage in its product life as that of a Product, *****. Commercially Reasonable Efforts shall be determined on a country-by-country basis for a particular Product, and it is anticipated that the level of effort will change over time, reflecting changes in the status of the Product and the country involved. 1.14 "Competitive Entity" means a company that at the time of a Change of Control of GENE *****. 1.15 "Confidential Information" means (a) all tangible embodiments of Information produced or developed by either Party in the Research Program, and (b) all Information received by either Party (the "receiving Party") from the other Party (the "disclosing Party") pursuant to this Agreement, other than that portion of such Information which: (a) is publicly disclosed by the disclosing Party, either before or after it becomes known to the receiving Party; (b) was known to the receiving Party, without obligation to keep it confidential, prior to when it was received from the disclosing Party, as shown by written documentation; (c) is subsequently disclosed to the receiving Party by a Third Party lawfully in possession thereof without obligation to keep it confidential; (d) has been publicly disclosed other than by the disclosing Party and without breach of an obligation of confidentiality with respect thereto; or (e) has been independently developed by the receiving Party without the aid, application or use of Confidential Information, as shown by written documentation. 1.16 "Contract Year" means the period beginning on the Effective Date and ending on the first anniversary thereof, and each succeeding twelve (12) month period thereafter. 1.17 "Control" or "Controlled" means with respect to any (a) Material or Information or (b) intellectual property right, in each case the possession (whether by ownership, license or other right, other than pursuant to this Agreement) by a Party or its Affiliates of the ability to grant the other Party access and/or a license or (sublicense) to such Material or Information or intellectual property rights as provided for herein without violating the terms (in existence at the time of such Party or its Affiliates acquiring such ownership, license or other right) of any agreement or other arrangement between such Party (or its Affiliates) and any Third Party. 1.18 "Creighton License" means that certain agreement between GENE and Creighton University, effective April 3, 1997, and any amendments thereto. 1.19 "Detail" *****. 1.20 "Development" or "Develop" means, with respect to a Product, all clinical and other activities undertaken to obtain Regulatory Approval of such Product, in accordance with this Agreement, after the first filing of an IND for such Product and prior to Regulatory Approval of such Product. These activities shall include *****. When 3 used as a verb, "Developing" means to engage in Development and "Developed" shall have a corresponding meaning. 1.21 "Development Costs" means (a) with respect to Amgen, the cost of any and all activities performed by Amgen and specifically attributable to the Development of a Product consistent with the Development Plan, including, without limitation: *****. 1.22 "Development Plan" means the summary plan (which shall include a summary strategy and proposed timelines), and any updates thereto, to be prepared by Amgen for the Development of any indication for a Product pursuant to Sections 4.2, 4.3 and 4.5 including, without limitation, the research, clinical and regulatory activities required to obtain Regulatory Approval(s) in the Territory. 1.23 "Diligent Inquiry" has the meaning set forth in Section 8.4(a). 1.24 "Drug Approval Application" means an application for any Regulatory Approval required before commercial sale or use of a Product as a drug or biologic or to treat a particular indication in a regulatory jurisdiction, including: (a) (i) a Biologics License Application ("BLA") pursuant to 21 C.F.R. 601.2 (or any successor application or procedure) or a New Drug Application ("NDA") pursuant to 21 C.F.R. 314.5 (or any successor application or procedure) submitted to the FDA; and (ii) any counterpart of a U.S. BLA or NDA in any other country in the Territory; and (b) all supplements and amendments that may be filed with respect to the foregoing. 1.25 "Early Development Costs" means the Development Costs associated with Early Stage Development of a Product for an indication. Early Development Costs include *****. Early Development Costs also include *****. 1.26 "Early Stage Development" means, with respect to any indication for a Product, all post-IND filing Development commencing on the first filing of an IND for such indication and continuing up to and including the completion of Phase II Studies or commencement of Pivotal Studies, whichever is earlier for such indication. 1.27 "Effective Date" means the first date set forth hereinabove. 1.28 "Fair Market Value" means the average closing stock price over the period of time ***** for which the equity is being issued. 1.29 "FDA" means the United States Food and Drug Administration and any successor thereto. 1.30 "Field of Use" means all uses, *****. 1.31 "First Commercial Sale" means, with respect to any Product, the first sale for end-use or consumption of such Product in a country after the governing health regulatory authority of such country has granted Regulatory Approval. Sale to an Affiliate or 4 sublicensee will not constitute a First Commercial Sale unless the Affiliate or sublicensee is the last entity in the distribution chain of the Product. 1.32 "Force Majeure" means any occurrence beyond the reasonable control of a Party that prevents or substantially interferes with the performance by the Party of any of its obligations hereunder, if such occurs by reason of any act of God, flood, fire, explosion, earthquake, breakdown of plant, shortage of critical equipment, loss or unavailability of manufacturing facilities or material, strike, lockout, labor dispute, casualty or accident, or war, revolution, civil commotion, acts of public enemies, blockage or embargo, or any injunction, law, order, proclamation, regulation, ordinance, demand or requirement of any government or of any subdivision, authority or representative of any such government, inability to procure or use materials, labor, equipment, transportation or energy sufficient to meet manufacturing needs without the necessity of allocation, or any other cause whatsoever, whether similar or dissimilar to those above enumerated, beyond the reasonable control of such Party, if and only if the Party affected shall have used reasonable efforts to avoid such occurrence and to remedy it promptly if it shall have occurred. 1.33 "FTE" means the equivalent of the work of one employee working full time on the Research Program or Development of a Product *****. No one person shall be permitted to account for more than one FTE. 1.34 "FTE Cost" means, for any Calendar Quarter, the FTE Rate multiplied by the sum of the number of days (calculated by adding the full and partial percentage of days) actually spent in that Calendar Quarter by FTEs of a Party (as per their time sheets) working directly on the Research Program or Development of a Product under the terms of this Agreement and dividing the result thereof *****. 1.35 "FTE Rate" means the amount to be charged per FTE. ***** subject to adjustment on an annual basis as of January 1 of each year beginning in 2004 by a factor which reflects changes in the Consumer Price Index as reported as of January 1 in each applicable year when compared to the comparable statistic for January 1 of the preceding year. 1.36 "GAAP" means United States generally accepted accounting principles. 1.37 "GENE Background Know-How" means *****. 1.38 "GENE Background Patent Rights" means all Patent Rights Controlled by GENE as of the Effective Date or during the term of this Agreement that claim GENE Background Know-How. 1.39 ***** 1.40 ***** 5 1.41 "GENE Technology" means, collectively, ***** GENE Background Know How, GENE Program Patent Rights, GENE Program Know-How and GENE's interest in the Joint Patent Rights and Joint Know-How. 1.42 "IND" means (i) an Investigational New Drug Application (as defined in the U.S. Federal Food, Drug and Cosmetic Act, as amended from time to time, and the regulations promulgated thereunder) that is required to be filed with the FDA before beginning clinical testing of a Product in human subjects, or any successor application or procedure and (ii) any counterpart of a U.S. Investigational New Drug Application in any other country in the Territory. 1.43 "Information" means all tangible and intangible techniques, technology, practices, trade secrets, inventions (whether patentable or not), methods, knowledge, know-how, conclusions, skill, experience, test data and results (including pharmacological, toxicological and clinical test data and results), analytical and quality control data, results or descriptions, software and algorithms. 1.44 Joint Know-How means all Information and Materials characterized, conceived, developed, derived, discovered, generated or identified jointly by employees of or consultants to GENE and employees of or consultants to Amgen in the conduct of the Research Program. 1.45 "Joint Patent Rights" means Patent Rights that are Controlled during the term of this Agreement by Amgen and GENE and claim Joint Know-How. 1.46 "Joint Research Committee" means the committee formed pursuant to Section 2.1. 1.47 "Joint Steering Committee" means the committee formed pursuant to Section 2.4. 1.48 "Large Molecule" means a *****. 1.49 "Large Molecule Manufacturing Technology" means *****. 1.50 "Late Development Costs" means the Development Costs associated with Late Stage Development of a Product for an indication, other than the Development Costs explicitly included in Early Development Costs. 1.51 "Late Stage Development" means, with respect to any indication for a Product, all Development following the completion of Phase II Studies or commencement of Pivotal Studies, whichever is earlier for such indication, up to and including filing of the first Drug Approval Application for such indication in any jurisdiction and including any supplementary Development necessary or required by a Regulatory Authority (a) in order to obtain the first Regulatory Approval for such indication; or (b) to satisfy any conditions of the first Regulatory Approval in that jurisdiction. 6 1.52 "Losses" means liabilities, damages, expenses, costs and/or losses, including without limitation reasonable legal expenses and attorneys' fees for outside counsel. 1.53 "Materials" has the meaning provided in Section 3.7. 1.54 "Major Market Country" shall mean the United States, United Kingdom, Italy, Germany, France, Japan, Canada and Spain. 1.55 "Net Sales" has the meaning set forth in Exhibit X. 1.56 "Patent Rights" means (a) valid and enforceable United States patents, re-examinations, reissues, renewals, extensions and term restorations, and foreign counterparts thereof, and (b) pending applications for United States patents including, without limitation, provisional applications, continuations, continuations-in-part, divisional and substitute applications including, without limitation, inventors' certificates, and foreign counterparts thereof. 1.57 "Phase I Study" means a clinical trial that is designed to determine the metabolism, pharmacologic actions (including pharmacodynamics) and pharmacokinetics of a drug in humans, the tolerability and any potential side effects of the drug associated with increasing doses and that satisfy the requirements of 21 CFR 312.21(a), or its successor regulation, or its equivalent in any other jurisdiction. 1.58 "Phase II Study" means a clinical trial that is designed to establish the safety and preliminary efficacy of a drug for its intended use, and to define warnings, precautions and adverse reactions that are associated with the drug in the dosage range to be prescribed and that satisfy the requirements of 21 CFR 312.21(b) (or its successor regulation), or its equivalent in any other jurisdiction. 1.59 Pivotal Study(ies)" means those clinical trials on sufficient numbers of patients that, if the defined end-points are met, are designed (and agreed to by the FDA, or other Regulatory Authorities in the Territory) based upon existing data in the same patient population as of the start of the trial to definitively establish that a drug is safe and efficacious for its intended use, and to define warnings, precautions and adverse reactions that are associated with the drug in the dosage range to be prescribed, and which provide pivotal data supporting Regulatory Approval of such drug or label expansion of such drug and that satisfy the requirements of 21 CFR 321.21(c), or its successor regulation, or an equivalent foreign clinical trial. 1.60 "Product Contribution" has the meaning set forth in Exhibit X. 1.61 "Product(s)" means a Small Molecule pharmaceutical(s) and/or a Large Molecule pharmaceutical(s) ***** 1.62 "Product Trademark(s)" means any trademarks and trade names, whether or not registered, and any trademark applications, renewals, extensions or modifications 7 thereto in the Territory together with all goodwill associated therewith, trade dress and packaging which are applied to or used with Products or any promotional materials relating thereto. 1.63 "Program Know-How" means all Information and Materials characterized, conceived, developed, derived, discovered, generated or identified by employees of or consultants to either Party in the conduct of the Research Program. Amgen Program Know-How means that portion of Program Know-How characterized, conceived, developed, derived, discovered, generated or identified solely by employees of or consultants to Amgen. GENE Program Know-How means that portion of Program Know-How characterized, conceived, developed, derived, discovered, generated or identified solely by employees of or consultants to GENE. 1.64 "Program Patent Rights" means all Patent Rights that are Controlled during the Agreement by Amgen or GENE and claim Program Know-How. In particular, Amgen Program Patent Rights means that portion of Program Patent Rights Controlled by Amgen and GENE Program Patent Rights means that portion of Program Patent Rights Controlled by GENE. 1.65 "Regulatory Approval" means any approvals (including supplements, amendments, pre- and post-approvals and price approvals), licenses, registrations or authorizations (including any designations of an indication for a Product as an "Orphan Product" under the Orphan Drug Act), howsoever called, of any Regulatory Authority, which are necessary for the distribution, importation, exportation, manufacture, production, use, storage, transport or clinical testing and/or sale of a Product in a regulatory jurisdiction. Regulatory Approval shall not include any site license for an Amgen manufacturing facility. 1.66 "Regulatory Authority" means the FDA or any counterpart of the FDA outside the United States, or other national, supra-national, regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity with authority over the distribution, importation, exportation, manufacture, production, use, storage, transport or clinical testing and/or sale of a Product. 1.67 "Regulatory Filings" means, collectively, INDs, BLAs, establishment license applications (ELAs) and drug master files (DMFs), applications for designation of a Product as an "Orphan Product(s)" under the Orphan Drug Act or any other similar filings (including any foreign equivalents and further including any related correspondence and discussions), and all data contained therein, as may be required by the FDA or equivalent foreign Regulatory Authorities for the Development, manufacture or Commercialization of a Product. 1.68 "Regulatory Plan" means the list of all Regulatory Filings and Regulatory Approvals regarding Products, and any updates thereto. 1.69 "Research Field" means (i) ***** 8 1.70 "Research Plan" means the written plan for conducting the Research Program attached hereto as Exhibit 1, as amended from time to time by the Joint Research Committee. 1.71 "Research Program" means the program of collaborative research to be carried out by the Parties pursuant to Article 3 and the activities related thereto as described in the Research Plan. 1.72 ***** 1.73 "Royalty Term" means, in the case of any Product, and on a country-by-country basis, the period of time commencing on the First Commercial Sale of such Product and ending upon the later of *****. 1.74 "Small Molecule" means a *****. 1.75 "Territory" means worldwide. 1.76 "Third Party(ies)" means any entity(ies) other than Amgen and its Affiliates or GENE and its Affiliates. ARTICLE 2 GOVERNANCE 2.1 Joint Research Committee. Promptly after the Effective Date, the Parties will form a Joint Research Committee ("JRC") comprised of ***** representatives each of Amgen and GENE. ***** A reasonable number of additional representatives of a Party may attend meetings of the JRC in a non-voting capacity. The JRC will meet at least quarterly, on reasonable written notice, during the Research Program (in person, by teleconference or otherwise). If in person, such meetings shall alternate between the offices of the Parties, with the first meeting at the offices of Amgen. *****. Promptly following the Effective Date, the JRC shall hold an organizational meeting to establish the operational requirements of the JRC, which shall include the methods whereby decisions of the JRC are recorded. 2.2 Joint Research Committee Responsibilities. The JRC generally shall have the responsibility of managing, directing and coordinating the Research Program, including, without limitation, the following responsibilities: a. managing and monitoring the progress and results of the Research Program and the Parties' diligence in carrying out their responsibilities thereunder; b. determining future Research Program activities to be conducted under the Research Plan; 9 c. allocating responsibility for the various Research Program activities between the Parties; d. *****; e. reviewing and approving modifications of the Research Plan from time to time *****; and f. *****. 2.3 Excepted Items. Excepted Items are the following: a. ***** b. ***** c. ***** d. ***** *****. 2.4 Joint Steering Committee. Promptly after the Effective Date, GENE and Amgen shall establish a Joint Steering Committee ("JSC") comprised of ***** members from each of GENE and Amgen. Members from each of the Parties will include the respective Senior Vice Presidents of Research of each of the Parties or other Vice Presidents appointed by such respective Senior Vice Presidents. The JSC shall be responsible for managing the relationship between the Parties *****. Each member of the JSC will have equal voting authority and the agreement of the majority of the members of the JSC shall be required for all matters considered, except for any disagreements arising under Section 2.3.c. in which instances *****. The JSC shall meet at least once every ***** on reasonable written notice in person, by teleconference or as mutually agreed by the JSC, or, in the event of a disagreement between members of the JRC with respect to Excepted Items or other matters referred by the Parties to the JSC to resolve, within ***** following notice by the chair of the JRC of such disagreement. *****. 2.5 Dispute Resolution. If the JSC is unable to resolve any disagreement ***** within ***** business days of notification of such disagreement to the JSC, the matter shall be referred to *****. If such persons cannot resolve such matter within ***** of commencing such negotiations, then the matter shall be referred within *****, then either Party may at any time thereafter pursue any legal or equitable remedy available to it. Notwithstanding the above, either Party shall be entitled at all times and without delay to seek equitable relief. 10 ARTICLE 3 COLLABORATION RESEARCH 3.1 Conduct of Research Program. The Parties hereby agree to conduct the Research Program in accordance with the terms of this Agreement with the goal of identifying one or more Small Molecules and/or one or more Large *****. The Parties shall conduct the studies outlined in the Research Plan, as set forth in attached Exhibit 1. 3.2 Performance Standards. GENE shall *****. Amgen will *****. Each Party will conduct its activities under the Research Program in good scientific manner and in compliance in all material respects with applicable laws and regulations. Each Party will prepare and maintain complete and accurate written records with respect to its activities under the Research Plan consistent with industry standards including, for purposes of patent and regulatory matters, prompt signing and corroboration of laboratory notebooks and conception documents. 3.3 Research Reports. Each Party will keep the other Party fully informed as to all discoveries and technical developments (including, without limitation, any inventions) made in the course of performing activities under the Research Program. In particular, prior to each JRC meeting GENE and Amgen each will prepare and distribute to all members of the JRC (no later than five (5) business days prior to each such JRC meeting) a reasonably detailed written summary report setting forth the results and progress of performance of the Research Program since the last report. The format and content of such report shall be determined by the JRC. The information contained in the report shall be accurate in the reporting Party's best scientific judgment. 3.4 GENE Researchers. Amgen and GENE acknowledge the importance of having personnel suitably qualified and devoted full-time to work in the Research Program. Accordingly, in order to maximize the effective conduct of the Research Program, the Parties shall ***** of their respective researchers conducting the Research Program and GENE shall devote suitably qualified personnel to the Research Program who *****. 3.5 Employee Obligations. Prior to beginning work on the Research Program and/or being given access to Confidential Information, each employee, consultant or agent of GENE and Amgen shall have signed or shall be required to sign a non-disclosure and invention assignment agreement pursuant to which each such person shall agree to comply with all of the obligations of GENE or Amgen under this Agreement, as appropriate, substantially including: (a) promptly reporting any invention, discovery, process or other intellectual property right; (b) assigning to GENE or Amgen, as appropriate, all of his or her right, title and interest in and to any such invention, discovery, process or other intellectual property right; (c) cooperating in the preparation, filing, prosecution, maintenance and enforcement of any patent rights; (d) performing all acts and signing, executing, acknowledging and delivering any and all papers, documents and instruments required for effecting the obligations and 11 purposes of this Agreement and (e) abiding by the obligations of confidentiality and non-use set forth in this Agreement. It is understood and agreed that any such non-disclosure and invention assignment agreement need not be specific to this Agreement. The Parties agree that each such employee, consultant or agent may sign the respective Party's standard form of non-disclosure and invention assignment agreement, provided that such standard form substantially contains the requirements set forth in subparts (a) to (e) above. 3.6 Technical Assistance. In addition to other assistance explicitly set forth in this Agreement, during the term of this Agreement, GENE shall provide Amgen with reasonable technical assistance relating to the use of GENE Background Know-How, *****, GENE Program Know-How and Joint Know-How solely to the extent permitted under the license(s) granted to Amgen. In addition, during the term of this Agreement, GENE shall make its employees, consultants and agents reasonably available upon reasonable notice during normal business hours at GENE's facilities to consult with Amgen on issues relating to any aspect of the subject matter of this Agreement and in connection with any request from any Regulatory Authority, including those relating to regulatory, scientific and technical issues. If such consultation occurs after the completion of the Research Program, Amgen will pay GENE's reasonable costs in providing such consultation unless *****. 3.7 Materials Transfer. In order to facilitate the Research Program, either Party may provide to the other Party certain materials, including, without limitation, biological materials, chemical compounds, screens, databases, animal models, cell lines, cells, nucleic acids, receptors and reagents (collectively, "Materials") for use by the other Party in furtherance of the Research Program. All such Materials delivered to the other Party shall remain the sole property of the supplying Party and, except to the extent permitted by applicable law and permitted by the licenses granted hereunder, shall be used only in furtherance of the Research Program in accordance with this Agreement and remain solely under the control of the other Party, shall not be used or delivered to or for the benefit of any Third Party without the prior written consent of the supplying Party, and shall not be used in research or testing involving human subjects. Except as expressly set forth in this Agreement (including, without limitation, Section 14.3), THE MATERIALS ARE PROVIDED "AS IS" AND WITHOUT ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR ANY PARTICULAR PURPOSE. 3.8 Materials for Subcontractors. Notwithstanding the previous paragraph, without the prior approval of GENE, Amgen may transfer Materials to any Third Party engaged as a subcontractor pursuant to Section 17.7; provided however, that any such subcontractor shall be bound by conditions of confidentiality and non-use at least equivalent to those herein, including that such Materials shall not be transferred to another Third Party and that any such unused Materials shall be returned or destroyed upon completion of the activity for which such Materials were provided, and that 12 Amgen shall be responsible for the performance of each such subcontractor in fulfilling Amgen's obligation under the Research Plan. ARTICLE 4 DEVELOPMENT OF PRODUCTS 4.1 Responsibility. Amgen shall have the sole right and responsibility for all aspects of Developing Products and obtaining regulatory approval of such Products in the Territory, including making all strategic and tactical decisions with respect thereto, undertaking all necessary Development and establishing the methods and means by which it performs such activities under this Agreement (including the management of permitted subcontractors, pursuant to Section 17.7), and shall ***** in doing so. 4.2 Early Stage Contribution Option. Amgen shall promptly notify GENE in writing when it files the first IND for a Product, which notice will include a Development Plan for Early Stage Development together with Amgen's non-binding, ***** estimate, in ***** detail, of the Development Costs of such Development Plan. Within ***** days of GENE's receipt of such notice from Amgen, GENE shall notify Amgen in writing whether it elects to contribute to Early Development Costs for the first indication of that Product and if so, at what level (GENE's "Early Contribution Level"). GENE shall have the option to contribute ***** of such Early Development Costs. During such *****, and upon GENE's request, Amgen shall promptly provide GENE with an explanation in reasonable detail of the Development Plan *****. The Parties hereby agree that such Development Plan and estimate of such Development Costs as well as the explanation and information-providing obligations of Amgen set forth in this Section 4.2 are not subject to the dispute resolution mechanism set forth in Sections 2.4 and 2.5. 4.3 Late Stage Contribution Option. Upon completion of Early Stage Development, and only if GENE *****, Amgen shall promptly notify GENE in writing that Amgen intends to commence Late Stage Development for such Product, which notice shall include a Development Plan for Late Stage Development together with Amgen's non-binding, ***** estimate, in ***** detail, of the Development Costs of such Development Plan. Within ***** days of GENE's receipt of such notice from Amgen, GENE shall notify Amgen in writing whether GENE elects to contribute to Late Development Costs for such indication and, if so, at what level (GENE's "Late Contribution Level"). *****. During such *****, and upon GENE's request, Amgen shall promptly provide GENE with an explanation in reasonable detail of the Development Plan *****. The Parties hereby agree that such Development Plan and estimate of such Development Costs as well as the explanation and information-providing obligations of Amgen set forth in this Section 4.3 are not subject to the dispute resolution mechanism set forth in Sections 2.4 and 2.5. *****. 4.4 Differential Payment. ***** 13 4.5 Additional Indications. a. Early Stage Contribution Option. After filing the first IND for a Product, Amgen may, at its sole discretion, file additional IND's for the same Product for additional indications. If GENE *****, on filing such an additional IND, Amgen shall notify GENE in writing of such filing, which notice will include a Development Plan for Early Stage Development for such indication together with Amgen's non-binding, ***** estimate, in ***** detail, of the Development Costs of such Development Plan. Within ***** days of GENE's receipt of such notice from Amgen, GENE shall notify Amgen in writing whether it elects to contribute to Early Development Costs for the additional indication of that Product and if so, at what level. During such *****, and upon GENE's request, Amgen shall promptly provide GENE with an explanation in reasonable detail of the Development Plan *****. The Parties hereby agree that such Development Plan and estimate of such Development Costs as well as the explanation and information-providing obligations of Amgen set forth in this Section 4.5.a. are not subject to the dispute resolution mechanism set forth in Sections 2.4 and 2.5. GENE shall have the option to contribute to Early Stage Development for such additional indications at *****. b. Late Stage Contribution Option. Upon completion of Early Stage Development for an additional indication for a Product, and only if GENE has elected to contribute to Early Development Costs for that indication and has not elected a ***** Late Contribution Level with respect to an earlier indication for such Product, Amgen shall promptly notify GENE in writing that Amgen intends to commence Late Stage Development for such indication, which notice shall include a Development Plan for Late Stage Development for such indication together with Amgen's non-binding, ***** estimate, in ***** detail, of the Development Costs of such Development Plan. Within ***** days of GENE's receipt of such notice from Amgen, GENE shall notify Amgen in writing whether GENE elects to contribute to Late Development Costs for such indication and, if so, at what level. During such *****, and upon GENE's request, Amgen shall promptly provide GENE with an explanation in reasonable detail of the Development Plan *****. The Parties hereby agree that such Development Plan and estimate of such Development Costs as well as the explanation and information-providing obligations of Amgen set forth in this Section 4.5.b. are not subject to the dispute resolution mechanism set forth in Sections 2.4 and 2.5. *****. c. Calculation of Development Contribution Royalty. For the purposes of calculating the Development Contribution Royalty pursuant to Section 8.6.b in the case of multiple indications for a Product, the following shall apply: i. ***** aa. ***** 14 ab. ***** ac. ***** ad. ***** ae. ***** af. ***** ii. ***** aa. ***** ab. ***** ac. ***** ad. ***** ae. ***** iii. ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** d. Formulations and Presentations. The Parties hereby agree that, for each indication of a Product, GENE's Early Contribution Level or Late Contribution Level, as the case may be, shall remain the same for any presentation or formulation of a Product containing the same Small Molecule or Large Molecule. 4.6 Multiple Products Contribution. If more than one Product is developed, GENE shall have the option to contribute to Development Costs *****. 4.7 Up-dating of Development Plan. If GENE contributes to Early Development Costs and/or Late Development Costs for a Product, Amgen shall (i) provide GENE with an update of the Development Plan for such Product ***** (which shall not be less than annually), together with Amgen's revised non-binding, ***** estimate of Development Costs and (ii) provide GENE, on an annual basis, with a written summary of all clinical data generated by Amgen with respect to Products. 15 4.8 Sharing of Development Costs. All Development Costs incurred by Amgen and GENE *****. By way of example, should *****. 4.9 Quarterly Reconciliation of Development Costs. Within ***** days following the end of each Calendar Quarter, Amgen shall submit to GENE a written report setting forth in reasonable detail its Development Costs for such Calendar Quarter. Within ***** days following the end of each Calendar Quarter, GENE shall submit to Amgen a written report setting forth in reasonable detail its Development Costs for such Calendar Quarter. Within ***** days following the end of each Calendar Quarter, Amgen shall submit to GENE a written report setting forth in reasonable detail the calculation of all Development Costs of both Parties and the calculation of the net amount owed by GENE to Amgen in order to ensure the appropriate sharing of Development Costs in accordance with the provisions of Section 4.8. The net amount payable shall be paid by GENE within ***** days after receipt of such written report. If, in any Calendar Year, the actual Development Costs for that Calendar Year are *****. The Early Contribution Level or Late Contribution Level, as the case may be, to be applied ***** shall be the Early Contribution Level or Late Contribution Level applicable at the time ***** Development Costs were incurred. 4.10 Joint Development Committee. If GENE elects to contribute to Early Development Costs in accordance with Section 4.2 above, a U.S. and/or Canadian Joint Development Committee (the "JDC") comprised of ***** representatives each of Amgen and GENE, including at least one marketing representative, shall be formed. Amgen shall appoint the chair of this committee and the *****. The purpose of the JDC is to inform GENE of the progress of Development and to enable GENE to comment on Amgen's intended Development program. Notwithstanding the above, Amgen shall, however, retain full right and responsibility for all aspects of Development as set forth in Section 4.1. If and when GENE elects not to contribute to Development Costs pursuant to Sections 4.2, 4.3 or 4.5 above, the JDC shall be disbanded. The JDC shall meet once every Calendar Quarter on reasonable written notice, in person or by teleconference, or as otherwise mutually agreed by the JDC. *****. ARTICLE 5 REGULATORY 5.1 Ownership. Amgen shall own all Regulatory Filings and Regulatory Approvals. 5.2 Responsibility. Amgen shall have the sole right to monitor, review and direct all aspects of regulatory matters regarding Products in the Territory, including making all strategic and tactical decisions with respect thereto and establishing the methods and means by which it performs such activities (including the management of permitted subcontractors, pursuant to Section 17.7). Amgen shall have sole responsibility for 16 (a) the filing of Regulatory Filings and the seeking of Regulatory Approvals, as well as all associated official correspondence and communications with Regulatory Authorities regarding such matters and (b) reporting to Regulatory Authorities any adverse experience and safety issues for such Product in compliance with the requirements of the U.S. Food, Drug and Cosmetic Act, 21 USC Section321 et seq., the Public Health Service Act, 42 USC Section201 et seq., the regulations promulgated thereunder, and the equivalent laws, rules and regulations in the Territory and, if GENE elects to Co-Detail pursuant to Section 6.3, promptly thereafter provide GENE with a copy of such report. Notwithstanding the foregoing, following the first Regulatory Filing, Amgen shall promptly prepare and provide to GENE with respect to each Product a Regulatory Plan, which shall be updated as necessary on at least an annual basis. 5.3 Adverse Event Reporting. Amgen shall maintain a record of all non-medical and medical product-related complaints and reports of adverse events that it receives with respect to any Product. If GENE elects to Co-Detail pursuant to Section 6.3, each Party will notify the other Party of any complaint received by it with respect to any Product and, within ten (10) days (but, in the event of serious adverse events, five (5) days) of the initial receipt, provide the other Party with a copy of such complaint(s) and adverse event reports. ARTICLE 6 COMMERCIALIZATION 6.1 Responsibility. Subject only to GENE's right to Co-Detail in the USA and/or Canada, Amgen shall have the sole right and responsibility for all aspects of Commercializing Products in the Territory, including making all strategic and tactical decisions with respect thereto, including the appointment of sub-licensees, distributors and agents, and establishing the methods and means by which it performs such activities under this Agreement (including the management of permitted subcontractors, pursuant to Section 17.7), and shall ***** in doing so. 6.2 Profit Sharing Option. If GENE *****, Amgen shall promptly provide written notice to GENE of Amgen's filing of a first Drug Approval Application for such Product in the United States or Canada, which notice shall include the Commercialization Plan for the United States and Canada together with Amgen's non-binding, ***** estimate, in ***** detail, of the Product Contribution for that Commercialization Plan. Within ***** of GENE's receipt of such notice from Amgen, GENE may elect to share profits (and losses) in the United States and/or Canada pursuant to Section 6.6 below in lieu of receiving any royalty payments in those countries, by providing written notice thereof to Amgen. During such *****, and upon GENE's request, Amgen shall promptly provide GENE with an explanation in reasonable detail of the Commercialization Plan *****. The Parties hereby agree that such Commercialization Plan and estimate of such Product Contribution as well as the explanation and information-providing obligations of Amgen set forth in this 17 Section 6.2 are not subject to the dispute resolution mechanism set forth in Sections 2.4 and 2.5. 6.3 Co-Detailing Option. If GENE*****, If GENE elects to Co-Detail a Product in the United States and/or Canada, a Joint Sales and Marketing Committee (the "JSMC") comprised of ***** representatives each of Amgen and GENE shall be formed. Amgen shall appoint the chair of this committee and the chair shall have the casting vote in all matters where there is a disagreement between the Parties. The purpose of the JSMC is *****. Notwithstanding the above, Amgen shall, however, retain full right and responsibility for all aspects of Commercialization as set forth in Section 6.1. The JSMC shall meet ***** on reasonable written notice in person or by teleconference, or as otherwise mutually agreed by the JSMC. *****. 6.4 Co-Detailing Rights. GENE shall be responsible for ensuring that its Representatives Detail a Product in a manner consistent with the decisions of the JSMC. The number of Representatives that GENE may employ in Co-Detailing shall be determined *****. All such GENE Representatives shall be full-time employees of GENE. *****. For the purposes of this Section 6.4, *****. If a Product is Developed for multiple indications, *****. 6.5 Up-dating of Commercialization Plan. If GENE elects to share profits pursuant to Section 6.2, Amgen shall provide GENE with an update of the Commercialization Plan for Canada and/or the United States *****, at least once per Calendar Year, together with Amgen's non-binding, good faith estimate, in ***** detail, of the Product Contribution for that Commercialization Plan. 6.6 Product Contribution. a. The Parties shall *****: (A) GENE shall be allocated a percentage of the Product Contribution from sales of Products for the United States and/or Canada (as appropriate) *****: ***** ***** b. In the event that Losses are incurred in any legal proceeding not subject to Sections 13.1 or 13.2 alleging personal injury resulting from or arising in connection with the Development, manufacture or Commercialization for the United States and Canada (as appropriate) of Product, such Losses shall be treated as a Commercialization Expense. Notwithstanding the foregoing, *****. c. In the event that GENE's share of the cumulative Product Contribution losses for a given Product exceed US$*****, GENE may, at its sole discretion, by providing written notice to Amgen, *****. Notwithstanding the above, GENE 18 shall not be excused from its obligation to pay its share of any Product Contribution *****. d. Any Commercialization Expenses incurred prior to Regulatory Approval of a Product shall be charged to the Product Contribution and be borne by the Parties on the same basis. 6.7 Calculation and Duration of Product Contribution. The Product Contribution shall be payable in respect of sales for the United States and/or Canada as appropriate, on a country-by-country and Product-by-Product basis, for so long as there are sales by Amgen, its Affiliates or sublicensees of each such Product in that country. The Product Contribution shall be *****. 6.8 Quarterly Reconciliation of Product Contribution. If GENE elects to Co-Detail as set forth in Section 6.3 within ***** days following the end of the second month of each Calendar Quarter, GENE shall submit to Amgen a written calculation of its actual Detailing Costs for the first two months of such Calendar Quarter, calculated according to Exhibit Y, together with (i) its best estimate of the Detailing Costs it expects to incur in the third month of such Calendar Quarter and (ii) the actual Detailing Costs (calculated according to Exhibit Y) incurred during the third month of the preceding Calendar Quarter (for which GENE has previously provided its best estimate), for the United States and/or Canada as appropriate. Within ***** days following the end of each Calendar Quarter, Amgen shall submit to GENE a written report setting forth the calculation of total Product Contribution, calculated as set forth in Exhibit X, for each Product in the United States and/or Canada as appropriate for that Calendar Quarter and the calculation of any net amount owed by Amgen to GENE or by GENE to Amgen. With respect to GENE's Detailing Costs, Amgen shall base such calculation on the actual Detailing Costs submitted by GENE for the first two months of such Calendar Quarter, together with (i) GENE's best estimate of the Detailing Costs for the third month of such Calendar Quarter and (ii) any adjustment (positive or negative) required as a consequence of any difference between GENE's best estimate of the Detailing Costs for the third month of the previous Calendar Quarter and GENE's actual Detailing Costs for the same period. Amgen shall pay GENE the net amount owed by Amgen to GENE or GENE shall pay Amgen the net amount owed by GENE to Amgen, as the case may be, within ***** of issuance of such report. If in any Calendar Year Amgen's ***** estimate of Product Contribution is a *****, and the actual Product Contribution in such Calendar Year is a ***** that is *****, GENE may delay payment of its share of any such ***** estimate ***** until the subsequent Calendar Year. If in any Calendar Year Amgen's *****, GENE may delay payment of its share of any ***** until the subsequent Calendar Year. Such delayed payments shall be paid within ***** days of receipt of Amgen's calculation of the Product Contribution for the last Calendar Quarter of the Calendar Year in which ***** occurs. 19 6.9 Negotiation of Profit Sharing as a Royalty Calculation. The Parties hereby agree to negotiate in good faith sufficiently in advance of the first filing of a Drug Approval Application in the United States or Canada of a Product for which GENE may elect to Co-Detail pursuant to Section 6.3, an equitable way to calculate profit sharing as a royalty payment by Amgen to GENE. ARTICLE 7 MANUFACTURE AND SUPPLY 7.1 Supply of Product. Amgen shall have the sole right and responsibility for all aspects of manufacturing Products, including making all strategic and tactical decisions with respect thereto and establishing the methods and means by which it performs such activities (including the management of permitted subcontractors, pursuant to Section 17.7). ARTICLE 8 PAYMENTS AND FUNDING 8.1 Upfront Fee. Within five (5) business days following the Effective Date, Amgen will pay to GENE a non-refundable, non-creditable fee of US$***** by wire transfer of immediately available funds to such bank account as may be designated in writing by GENE to Amgen. 8.2 Research Funding. Amgen will fund and GENE will conduct the Research Program at the following effort levels: ***** during the first Contract Year of the Research Program, ***** during the second Contract Year of the Research Program and three ***** per Contract Year thereafter for a maximum of three additional Contract Years or until the initiation of pre-clinical toxicology on a clinical candidate, whichever is earlier. The JRC may ***** in order to more rapidly progress the Research Program. Such request shall be made in writing and shall state *****, the reason for such request and *****. 8.3 Payment of Research Funding. Promptly after the Effective Date, and on the first day of each subsequent Calendar Quarter, GENE shall notify Amgen in writing of the number of FTE's required by GENE to undertake its obligations under the Research Plan for the next Calendar Quarter. Amgen will pay GENE within ***** days of such notification the FTE Costs of such FTE's; provided however, Amgen shall not be obligated to pay, in any given Contract Year, for more than the number of FTE's agreed to for any such Contract Year (plus any additional FTE's approved by Amgen and GENE pursuant to Section 8.2). GENE shall ensure that all such FTEs are fully engaged in the Research Program and to such end, GENE shall deliver written reports ***** to Amgen within ***** days after each Calendar Quarter, setting forth the number of FTEs actually devoted by GENE to Research Program activities and a summary of all such FTE-funded activities during such period. To the extent that, in any Calendar Quarter, the number of GENE FTEs actually engaged in the Research Program ("Actual FTEs") is less than the number that GENE has notified Amgen will 20 be required for that Calendar Quarter ("Expected FTEs") Amgen shall have the right to deduct the balance of the FTE Costs of Expected FTEs less the FTE Costs of Actual FTEs from any payments for FTE Costs due to GENE in subsequent Calendar Quarters until such balance is zero; provided however, that GENE shall promptly remit to Amgen any balance outstanding upon expiration of the Research Program. 8.4 Research Milestones. Amgen shall pay to GENE the following one-time, non-refundable, non-creditable payments via wire transfer to an account designated by GENE within ***** days following the achievement of the below-identified research milestones as determined by the JRC in accordance with Sections 2.2-2.4: a. *****. Payment of ***** upon identification of the *****, i.e., the achievement of each of the following: ***** b. ***** Functional Validation. Payment of ***** upon either (a) ***** (to be determined by the JRC). c. ***** Validation. Payment of ***** 8.5 Clinical Milestones. a. With respect to a first Product, Amgen shall pay to GENE the following one-time, non-refundable, non-creditable payments via wire transfer to an account designated by GENE within ***** days following the achievement by Amgen, its Affiliates or sublicensees, of each of the clinical milestones set forth below: MILESTONE EVENT MILESTONE PAYMENT ***** US$***** ***** US$***** ***** US$***** ***** US$***** ***** US$***** Total US$ b. If the first Product to obtain approval by a Regulatory Authority of a Drug Approval Application is a ***** via wire transfer to an account designated by GENE within ***** days following the achievement by Amgen, its Affiliates or sublicensees, of each of the clinical milestones set forth below: MILESTONE EVENT MILESTONE PAYMENT ***** US$***** ***** US$***** Total US$ 21 c. Amgen shall provide GENE with prompt written notice upon its achievement of each of the milestones set forth in this Section 8.5. In the event that, notwithstanding the fact that Amgen has not given any such notice, GENE reasonably believes any such milestone payment is due, it shall so notify Amgen and members of the JSC in writing, *****. Any negative determination shall be accompanied by a detailed explanation of the reasons therefore. 8.6 Global Royalty Rates. Amgen shall pay to GENE *****. If GENE *****. In addition, Net Sales of a Product beyond the Royalty Term of such Product in a country *****. a. Baseline Royalty. During the Royalty Term of each Product, the Baseline Royalty shall be paid at the following rates: i. *****; ii. *****; iii. *****; and iv. *****. b. Development Contribution Royalty. If GENE has elected to contribute to Development Costs for a Product, Amgen shall pay to GENE, from the date of First Commercial Sale of such Product until such Product is no longer sold, an additional royalty on annual Net Sales in the Territory ("Development Contribution Royalty") based on GENE's Early Contribution Level and Late Contribution Level, as set forth below: GENE'S EARLY GENE'S LATE DEVELOPMENT CONTRIBUTION CONTRIBUTION LEVEL CONTRIBUTION LEVEL ROYALTY i ***** ***** ***** ii ***** ***** ***** iii ***** ***** ***** iv ***** ***** ***** v ***** ***** ***** vi ***** ***** ***** vii ***** ***** ***** viii ***** ***** ***** ix ***** ***** ***** x ***** ***** ***** xi ***** ***** ***** xii ***** ***** ***** ***** 22 8.7 Anti-Stacking Royalty Reduction. If, in Amgen's reasonable opinion, Amgen is required to enter into any agreement with Third Parties for rights under patents for which but for a license the sale, manufacture or use of any Product by Amgen, its Affiliates and sublicensees would infringe one or more claims of said licensed patent(s), ***** by Amgen, its Affiliates or sublicensees *****, Amgen shall provide written notice thereof to GENE, *****. With respect to any formulation or presentation of such Product which, but for such license would infringe such Third Party patent(s), GENE's Baseline Royalty with respect to such formulation or presentation shall *****. With respect to any formulation or presentation of such Product which, but for such license would infringe such Third Party patent(s), Amgen shall *****. *****. If GENE ***** (pursuant to Sections 4.2, 4.3 and 4.5) ***** (pursuant to Section 6.2), *****. 8.8 Cross License. In the event that Amgen shall determine in its sole discretion that it is necessary to grant a sublicense, or a covenant not to sue under *****, to any Third Party in a country in the Territory in order for Amgen to make, have made, use, sell, lease, offer to sell or lease, import, export (within the Territory) or otherwise exploit, or transfer physical possession of or title in, Product(s) in the Field of Use in a country in the Territory, Amgen shall have the exclusive right and discretion to grant such sublicense or covenant not to sue to such Third Party for such country. For purposes of this Section 8.8, the determination of Net Sales of said Product for purposes of calculating the royalties otherwise payable by Amgen to GENE under Section 8.6 shall not include sales of any Product by such Third Party receiving such sublicense or such a covenant not to sue. If, as part of any sublicense or covenant not to sue, Amgen receives payments then such payments shall be included within the definition of Net Sales and the royalty rates as set forth in Section 8.6 shall be applied. 8.9 Equity Investment. Subject to the terms and conditions set forth below and in that certain stock purchase agreement executed on the same date herewith ("Stock Purchase Agreement"), GENE may, at its sole discretion, sell a certain number of shares of GENE's Common Stock to Amgen within ***** days following the achievement of certain milestones as set forth below, all as more fully described in the Stock Purchase Agreement. If GENE decides not to sell equity to Amgen at the time that any particular milestone set forth below is achieved, then Amgen shall have no further obligation to acquire the stock at a later date or of any other form of payment to GENE with respect to that particular milestone. The Parties acknowledge and agree that at no time shall Amgen's equity interest in ***** of the outstanding shares of GENE common stock. If the requirement to purchase stock in accordance with any one of the milestones set forth below would result in Amgen acquiring an equity interest equal to ***** or greater, Amgen's obligation to purchase such stock shall be limited to that amount of stock that would result in the cumulative purchase of an equity interest of ***** of outstanding shares in GENE's common stock, and Amgen shall have no further obligation to purchase additional stock at a later date or of any other form of payment to GENE with respect to that particular milestone. A copy of the Stock Purchase Agreement, in the form to be executed and delivered by each of Amgen and GENE on the Effective Date, is attached hereto as Exhibit Z. 23 MILESTONE PURCHASE PRICE ***** ***** ***** ***** ***** ***** 8.10 Paid-Up License. Upon the expiration of Amgen's obligation under this Article 8 to pay royalties on Net Sales of a Product in a country, Amgen shall have a fully paid-up, non-exclusive license, with the right to sublicense, to make, have made, use, sell, lease, offer to sell or lease, import, export or otherwise exploit, transfer physical possession of or otherwise transfer title in such Product in the Field of Use in that country. 8.11 No Other Compensation. Other than as explicitly set forth (and as applicable) in this Article 8, and in Sections 3.6, 6.8, 10.5, 13.1 and 16.5, Amgen shall not be obligated to pay any additional fees, milestone payments, royalties or any additional payments to GENE under this Agreement. ARTICLE 9 INTELLECTUAL PROPERTY 9.1 Ownership of Inventions. Ownership of inventions shall be determined in accordance with the rules of inventorship under United States patent laws. Subject to the licenses granted in Section 9.2(a) below, as between the Parties, Amgen shall own all right, title and interest in and to Amgen Technology, and any Confidential Information contained therein shall be considered the Confidential Information of Amgen. Subject to the licenses granted in Section 9.2(b) below, as between the Parties, GENE shall own all right, title and interest in and to GENE Technology, and any Confidential Information contained therein shall be considered the Confidential Information of GENE. All right, title and interest in and to Joint Know-How (which shall be considered the joint Confidential Information of the Parties) and Joint Patent Rights shall be owned, as between the Parties, jointly by GENE and Amgen. Other than with respect to the rights and licenses granted under this Agreement to Joint Know-How, each Party shall have the unrestricted, royalty-free, worldwide right to make, have made, use, sell, lease, offer to sell or lease, import, export or otherwise exploit, or transfer physical possession of or title in Joint Know-How, without accounting. All right and interest in and to Product Trademarks shall be owned by Amgen, and any Confidential Information related thereto shall be considered the Confidential Information of Amgen. 9.2 Patent Licenses. 24 a. Amgen hereby grants to GENE a non-exclusive, royalty-free license, without the right to sublicense, under the Amgen Technology solely to perform GENE's responsibilities under the Research Plan and, subject to GENE's election in accordance with Section 6.3, to Co-Detail Products in the U.S. and/or Canada. b. GENE hereby grants to Amgen an exclusive (subject to GENE's option to Co-Detail in the U.S. and Canada as set forth in Section 6.3), royalty-bearing license, with a right to sublicense, under the *****, GENE Program Patent Rights related to the Research Field, GENE Program Know-How related to the Research Field, and GENE's interest in Joint Patent Rights and Joint Know-How, and a non-exclusive, royalty-free license, with a right to sublicense, under GENE Background Patent Rights and GENE Background Know-How to make, have made, use, sell, offer to sell, import, export or otherwise transfer physical possession of or otherwise transfer title in Products in the Field of Use in the Territory. Amgen hereby agrees that any sublicensee shall as a condition of such sublicense agree to be bound by the terms and conditions of this Agreement. c. The Parties agree that GENE shall have the sole right to commercialize the ***** for any and all diagnostic uses other than diagnostic uses directed to Products ("Diagnostic Uses") only upon the prior written approval of Amgen, which may be withheld if in Amgen's sole opinion the commercialization of such Diagnostic Uses would be detrimental to the Development or Commercialization of any Product, and retain any financial benefit realized in connection with such commercialization. Upon GENE's receipt of such written approval, Amgen shall be deemed to have granted to GENE an *****, under the Amgen Program Patent Rights related to the Research Field and Amgen's interest in Joint Patent Rights to commercialize such Diagnostic Uses. Notwithstanding the above, the parties hereby agree that Amgen, its Affiliates and sublicensees have the right to develop Diagnostic Uses for the purposes of conducting human clinical trials and obtaining Regulatory Approvals of any Product. 9.3 Other Intellectual Property Licenses. a. Amgen hereby grants to GENE a ***** license under Amgen's entire right, title and interest in any copyrights and any other intellectual property rights in promotional materials relating to Products, *****, to distribute copies of and publicly perform and display such promotional materials in connection with Products in the United States and Canada solely in compliance with the terms and conditions of this Agreement. 9.4 Patent Prosecution. a. Amgen shall have the first right (using mutually acceptable outside counsel), but not the obligation, for the preparation, filing, prosecution, maintenance and defense before all patent offices (and courts to the extent an appeal is taken from a patent office decision) of ***** and Joint Patent Rights at Amgen's expense. 25 Amgen shall have the sole right, but not the obligation, to prepare, file, prosecute, maintain and defend before all patent offices all Amgen Background Patent Rights and Amgen Program Patent Rights not related to the Research Field at Amgen's expense. GENE shall have the sole right, but not the obligation, to prepare, file, prosecute, maintain and defend before all patent offices all GENE Background Patent Rights and GENE Program Patent Rights not related to the Research Field at GENE's expense. b. With respect to its activities pursuant to Section 9.4.a., Amgen shall instruct such outside counsel in writing to act in the best interests of both Parties under this Agreement and Amgen will keep GENE informed of the progress with regard to the preparation, filing, prosecution, maintenance and defense before all patent offices (and courts to the extent an appeal is taken from a patent office decision) of ***** and Joint Patent Rights and instruct such outside counsel to furnish to GENE copies of all relevant documents filed with the various patent offices around the world. GENE shall have the right to review and comment on any papers pertaining to proposed applications, responses, interferences and oppositions before the filing thereof by such outside counsel with any such patent office and Amgen will instruct such outside counsel to timely provide such papers and consider in good faith such comments of GENE relating to ***** and Joint Patent Rights. c. GENE shall cooperate with Amgen and such outside counsel and render all reasonable assistance in filing, prosecuting, maintaining and defending all intellectual property licensed under this Agreement and shall sign any necessary legal papers and provide such outside counsel with data or other information in GENE's Control which is reasonably requested by Amgen in support thereof (and use its reasonable best efforts to ensure the cooperation of any of its employees, consultants and agents as might reasonably be requested). d. If Amgen determines in its sole discretion not to file, prosecute, defend or maintain any Patent Right within ***** and Joint Patent Rights referred to in Section 9.4.a. above in any country, and further providing that no other patent applications or patents claiming the same or similar subject matter are then pending or issued in that same country, then Amgen shall provide GENE with thirty (30) days prior written notice of such determination and GENE shall have the right and opportunity to file, prosecute, defend and/or maintain such Patent Right on behalf of the Parties at GENE's expense. 9.5 Trademark Prosecution. Amgen shall be responsible (using mutually acceptable outside counsel) for the filing, prosecution, defense and maintenance before all trademark offices of the Product Trademarks at Amgen's expense. 9.6 Patent and Trademark Prosecution Expenses. With respect to carrying out the activities under Sections 9.4 and 9.5, Amgen shall have the right to charge all of Amgen's external costs, expenses and fees (as documented by written invoices for 26 legal services and receipts for filing, maintenance and other fees paid) to have outside counsel prepare, file, prosecute, maintain and/or defend *****, Joint Patent Rights, Amgen Background Patent Rights related to Products and Product Trademarks before all patent and trademark offices (and courts to the extent an appeal is taken from a patent office decision) as a Development Cost if incurred during Development and, if GENE elects to share profits pursuant to Section 6.2, to the extent such costs, expenses and fees pertain to such activities in the U.S. and/or Canada (as appropriate) as a Commercialization Expense. 9.7 Patent Infringement by Third Parties. a. GENE and Amgen will promptly notify the other in writing after becoming aware of any alleged or threatened infringement of any patent included in ***** and Joint Patent Rights or any right relating to ***** and Joint Know-How. b. By counsel of its own choice, Amgen shall have the sole right but not the obligation to bring, defend, control and maintain (including the right to settle or compromise) any suit or action against a Third Party for infringement or declaratory relief of a claim of an issued patent within *****, Joint Patent Rights and Amgen Background Patent Rights and any right relating to ***** and Joint Know-How. In the event Amgen shall so engage in any such litigation, Amgen shall seek and reasonably consider GENE's comment before determining the strategy with respect to any such litigation. GENE shall cooperate and, if Amgen finds it necessary or desirable, join Amgen as a party in any such litigation (at Amgen's expense with respect to external costs and expenses incurred by GENE), including the signing of any necessary legal papers, and shall provide Amgen with data or other information in support thereof, and shall use reasonable best efforts to ensure the cooperation of any of its personnel as might reasonably be requested in any such matters. Notwithstanding the above, in any such settlement or compromise of any such litigation, Amgen will not admit the invalidity of any claim within ***** and Joint Patent Rights without the prior written approval of GENE, which approval shall not be unreasonably withheld or delayed. c. Without the prior written approval of Amgen, GENE shall not bring any suit or action against a Third Party developing or commercializing any product which interacts with *****. 9.8 Trademark Infringement by Third Parties. At its own expense and by counsel of its own choice, Amgen shall have the sole right but not the obligation to enforce the Product Trademarks against any actual, alleged or threatened infringement by Third Parties or from any unfair trade practices, trade dress imitation, passing off of counterfeit goods or like offenses. GENE shall cooperate in any such enforcement or defense and shall use reasonable best efforts to ensure the cooperation of any of its personnel as might reasonably be requested in any such matters. 9.9 Infringement of Third Party Rights. 27 a. Each Party will promptly notify the other in writing of any allegation by a Third Party that the activity of either of the Parties pursuant to this Agreement infringes or may infringe the intellectual property rights of such Third Party. b. Amgen shall have the sole right and responsibility to defend any actual, alleged or threatened claim or action which names Amgen and/or GENE and which claims the infringement of (i) Third Party Patent Rights or other intellectual property rights through the making, having made, using, selling, offering to sell, importing exporting or otherwise transferring physical possession of or otherwise transferring title in a Product or (ii) any Third Party trade name, service mark, logo or trademark by the use of Product Trademark(s). In the event that GENE is a named Party in any such defense, Amgen shall seek and reasonably consider GENE's comment before determining the strategy of such defense. If necessary, GENE will assist and cooperate with Amgen in any such defense (at Amgen's expense with respect to external costs and expenses incurred by GENE). 9.10 Infringement Expenses. Amgen, in bringing or defending a suit against infringers under Sections 9.7 and 9.8 and defending a suit pursuant to Section 9.9, shall be entitled to charge all external costs, fees and expenses (including attorneys' fees of outside counsel) incurred by such Party to carry out the activities described in Sections 9.7-9.9 as a Development Cost if incurred during Development and, if GENE elects to share profits pursuant to Section 6.2, to the extent such costs, expenses and fees pertain to such activities in the U.S. and/or Canada (as appropriate) as a Commercialization Expense. Each Party shall bear its own internal costs and expenses incurred in carrying out the activities described in Sections 9.7-9.9. ***** 9.11 Third Party Licenses. Amgen shall have final decision making authority with respect to determining whether to enter into any agreement it (in its sole discretion) deems necessary for a license or other rights or to incur an obligation for any Third Party payments for a license to any Third Party of Patent Rights and other intellectual property rights necessary or useful to make, have made, use, sell, offer to sell, import, export or otherwise transfer physical possession of or otherwise transfer title in Products in the Field of Use in the Territory. 9.12 Waiver. GENE, on behalf of itself and its directors, employees, officers, shareholders, agents, successors and assigns hereby waives any and all actions and causes of action, claims and demands whatsoever, in law or equity, of any kind it or they may have against Amgen, its directors, employees, officers, shareholders, agents, successors and assigns which may arise in any way in the performance of its rights or obligations under Sections 9.4, 9.5, 9.7, 9.8 and 9.9, except as a result of Amgen's gross negligence, recklessness or willful misconduct. 28 ARTICLE 10 PAYMENTS; RECORDS; AUDIT 10.1 Payment; Reports. Beginning with ***** the First Commercial Sale of the first Product occurs until the expiration of Amgen's obligation to pay royalties, royalty payments and reports of the sale of Products for each ***** will be calculated and delivered to GENE under this Agreement within ***** days of the end of each such *****, unless otherwise specifically provided herein. Each payment of royalties will be made by wire transfer of immediately available funds to such bank account as may be designated in writing by GENE to Amgen and followed up with a report of Net Sales of Products in sufficient detail to permit confirmation of the accuracy of the royalty payment made, including, without limitation and on a country-by-country basis, the number of Products sold, the gross sales and Net Sales of Products, the royalties payable (in U.S. dollars), the method used to calculate the royalty and the exchange rates used. Amgen will keep complete and accurate records pertaining to the sale or other disposition of Products in sufficient detail to permit GENE to confirm the accuracy of all payments due hereunder. 10.2 Exchange Rate. All payments hereunder will be payable in U.S. dollars. With respect to each *****, for countries other than the United States, whenever conversion of payments from any foreign currency will be required, such conversion will be made at the rate of exchange at the close of business on the 25th day (or the next business day thereafter) of each month in the ***** (or such other day as Amgen subsequently uses in consolidating its corporate accounts) for that particular month's Net Sales, as reported in Bloomberg Professional (a service of Bloomberg L.P.), or in the event Bloomberg Professional is not available then The Wall Street Journal, for the currency of the country in which the sale is made. 10.3 Tax Withholding. If laws, rules or regulations require withholding of income taxes or other taxes, assessments and/or imposed upon payments set forth in Article 8, Amgen will make such withholding payments as required and will subtract such withholding payments from the payments set forth in Article 8. Amgen will promptly submit proof of payment of the withholding taxes to GENE in a form sufficient to permit GENE to document such tax withholding for purposes of claiming foreign tax credits and similar benefits. 10.4 Blocked Currency. With respect to receipt of a foreign currency for sales of Products, if Amgen or its Affiliates are unable to convert such foreign currency into United States Dollars for reasons beyond their respective control, or are restricted by law or regulation from remitting funds from any country of sale, Amgen shall promptly notify GENE and cause such payment to be made by deposit to the credit and account of GENE (or their respective nominee(s)) in any commercial bank designated by GENE in the applicable country or if none is designated by GENE within thirty (30) days of such notice from Amgen, in a recognized banking institution selected by Amgen and identified in a written notice to GENE. Amgen shall promptly deliver to GENE proper evidence of such deposit. 29 10.5 Audits. Each Party will keep complete and accurate records pertaining to, with respect to Amgen, (i) the sale or other disposition of Products including payments pursuant to the Product Contribution, (ii) Development Costs and (iii) Detailing Costs, and with respect to GENE, (i) the number of FTEs actually engaged in activities under the Research Program, (ii) Development Costs and (iii) Detailing Costs, in each case in sufficient detail to permit the other Party to confirm the accuracy of all payments due hereunder, and such records will be open to inspection for ***** years following the end of the period to which they pertain. Not more than once per year, each Party will have the right, upon at least ***** business days' prior written notice, to cause an independent, certified public accountant reasonably acceptable to the other Party to audit such records to confirm such payments and associated costs therewith for a period covering not more than the preceding ***** years, such audit to be conducted during normal working hours on any business day. Such audit may take place no more than ***** during usual business hours for the sole purpose of and only to the extent necessary to verify the completeness and accuracy of the records and payments made under this Agreement. The independent certified public accountant(s) shall keep confidential any information obtained during such inspection and shall report to the Party conducting the audit (the "Auditing Party") only the amount of payment due and payable related to the subject matter of the audit, but may include, in the event the accountant shall be unable to verify the correctness of any or all of such payment, the unverifiable amount of such payment and information relating to why any or all of such payment is unverifiable. The Party being audited (the "Audited Party") shall receive a copy of each such report concurrently with receipt by the Auditing Party. The Auditing Party shall pay the fees and expenses of the accountant engaged to perform the audit, unless such audit reveals a net discrepancy of ***** or more for the period examined which is to the disadvantage of the Auditing Party, in which case the Audited Party shall pay such fees and expenses and any other payment due within thirty (30) days following the completion of such audit; provided however, that any estimates of revenues, costs, fees or expenses later reconciled to actuals shall not count toward such discrepancy. Upon the expiration of ***** years following the end of any particular Calendar Year, the calculation of any such amounts payable with respect to such particular Calendar Year shall be binding and conclusive upon the Auditing Party, and the Audited Party (and its Affiliates in the case of Amgen) shall be released from any liability or accountability with respect to such amounts for such Calendar Year, other than any liability related to fraudulent records or records fraudulently withheld by the Audited Party (and its Affiliates in the case of Amgen). 10.6 Confidentiality. Each Party shall treat all financial information subject to review under Article 8 as the other Party's Confidential Information. Both Parties shall cause their respective accounting firm to be bound to obligations of confidentiality at least as restrictive as such Party's obligations of confidentiality in this Agreement. 30 ARTICLE 11 PUBLICATIONS 11.1 Publications. a. The Parties hereby acknowledge the publication rights granted pursuant to the *****. Amgen agrees that as between the Parties, GENE shall have the sole right to publish the identification of the ***** with the consultation of Amgen; provided however, GENE shall use its best efforts to prevent the publication of such results in a manner which would jeopardize Amgen's proprietary position in the Research Field such as *****. b. Amgen shall have the sole right to publish the results of any and all pre-clinical and clinical studies of Products without the consultation of GENE, subject to its confidentiality obligations under Article 12. c. Subject to Section 11.2.a. below, both Parties shall have the right to publish scientific results and other related Information of any and all work conducted during the Research Program related to the Research Field, excluding the results of pre-clinical studies of Products, which are publishable pursuant to Section 11.1.b. d. Subject to Section 11.2.b. below, each Party shall have the sole right to publish their respective Program Know-How not related to the Research Field. 11.2 Procedure. a. For purposes of publication pursuant to Section 11.1.c. above, neither Party will publish without the prior review and written approval of *****. Each Party will submit to ***** any paper proposed for publication by such Party that relates to both the Research Program and to the Research Field, including oral presentations and abstracts. Before any such paper is submitted for publication or an oral presentation is made, the Party publishing or presenting will deliver a complete copy of the paper or abstract or materials for oral presentation to ***** at least ***** days prior to submitting the paper to a publisher or making the presentation. Notwithstanding the prior written approval of ***** to publish, upon the request of the other Party, the publishing Party will delete references to the other Party's Confidential Information in any such paper, materials and abstracts and agrees to withhold publication of same for an additional ***** days in order to permit the Parties to obtain patent protection, if either of the Parties deems it necessary, in accordance with the terms of this Agreement. b. For purposes of publication pursuant to Section 11.1.d. above, each Party will have the right to review any paper proposed for publication by the other Party that relates to the other Party's Program Know-How not related to the Research Field, including oral presentations and abstracts. Before any such paper is submitted for 31 publication or an oral presentation is made, the Party publishing or presenting will deliver a complete copy of the paper or abstract or materials for oral presentation to the other Party at least ***** days prior to submitting the paper to a publisher or making the presentation. The other Party will review any such paper and give its comments to the publishing Party within ***** days after the delivery of such paper to the other Party. Amgen may request, and GENE shall comply with such request, that any such publication or oral presentation of GENE is delayed, modified or withheld if it reasonably considers that such publication or oral presentation would be detrimental to Patent Rights or would have other detrimental consequences on the Development or Commercialization of any Product. With respect to oral presentation materials and abstracts, the other Party will make reasonable efforts to expedite review of such materials and abstracts, and will return such items as soon as practicable to the presenting Party with appropriate comments, if any, but in no event later than ***** days after the delivery to the other Party. The publishing Party will comply with the other Party's request to delete references to the other Party's Confidential Information in any such paper, materials and abstracts and agrees to withhold publication of same for an additional ***** days in order to permit the Parties to obtain patent protection, if either of the Parties deems it necessary, in accordance with the terms of this Agreement. 11.3 Acknowledgment. Any such publication or presentation subject to Sections 11.1 and 11.2 will include recognition of the contributions of the other Party according to standard practice for assigning scientific credit, either through authorship or acknowledgment, as may be appropriate. ARTICLE 12 CONFIDENTIALITY 12.1 Treatment of Confidential Information. The Parties agree that during the Term, and for a period of five (5) years after this Agreement expires or terminates, with respect to the other Party's Confidential Information, each Party shall (a) maintain in confidence such Confidential Information to the same extent such Party maintains its own confidential or proprietary information or trade secrets of similar kind and value (but at a minimum each Party shall use reasonable best efforts to maintain such Confidential Information in confidence); (b) not disclose such Confidential Information to any Third Party without prior written consent of the other Party, except for disclosures to its Affiliates and, pursuant to Section 17.7, to authorized subcontractors who agree to be bound by obligations of non-disclosure and non-use at least as stringent as those contained in this Article 12; and (c) not use such Confidential Information for any purpose except those purposes permitted by this Agreement. Neither Party shall knowingly disclose to the other Party any Third Party information or know-how that such Party does not have the legal right to disclose to the other Party and/or has a contractual obligation not to disclose to the other Party. 32 12.2 Authorized Disclosure. Notwithstanding any other provision of this Agreement, unless otherwise specified below, each Party may disclose Confidential Information of the other Party: a. to the extent and to the persons and entities as required by an applicable law, rule, regulation, legal process, court order or the rules of the National Association of Securities Dealers or of a Regulatory Authority; b. as necessary to file, prosecute or defend those patent applications or patents for which such Party has the right to assume filing, prosecution, defense or maintenance, pursuant to Section 9.4 of this Agreement; c. to prosecute or defend litigation or otherwise establish rights or enforce obligations pursuant to its rights under this Agreement, but only to the extent that any such disclosure is necessary; d. (solely with respect to Amgen) in the event of a recall of a Product; or e. to such Party's employees, consultants and agents who have a need to know and who have an obligation to treat such information as confidential. The Party required or intending to disclose the other Party's Confidential Information under Section 12.2.c. shall first have given prompt notice to such other Party to enable it to seek any available exemptions from or limitations on such disclosure requirement and shall reasonably cooperate in such efforts by the other Party. 12.3 Publicity; Terms of Agreement. The Parties agree that the existence of and the material terms of this Agreement shall be considered Confidential Information of both Parties, subject to the special authorized disclosure provisions set forth below in this Section 12.3 (in lieu of the authorized disclosure provisions set forth in Section 12.2, to the extent of any conflict) and without limiting the generality of the definition of Confidential Information. The Parties will mutually agree on the text of a press release announcing the execution of this Agreement. Thereafter, if either Party desires to make a public announcement concerning this Agreement or the terms hereof, such Party shall give reasonable prior advance notice of the proposed text of such announcement to the other Party for its prior review and approval, such approval not to be unreasonably withheld or delayed. With respect to GENE's public announcement of the achievement of each of the milestones set forth in Section 8.9, GENE shall make such announcement within ***** working days of the achievement of such milestone as determined in accordance with the provisions of this Agreement. A Party shall not be required to seek the permission of the other Party to repeat any information as to the terms of this Agreement that has already been publicly disclosed by such Party in accordance with the foregoing or by the other Party. Either Party may disclose the terms of this Agreement to potential investors who agree to be bound by obligations of non-disclosure and non-use at least as stringent as those contained in this Agreement. The Parties acknowledge that Amgen and/or GENE 33 may be obligated to file a copy of this Agreement and/or the Stock Purchase Agreement with the U.S. Securities and Exchange Commission with its next quarterly report on Form 10-Q, an annual report on Form 10-K or a current report on Form 8-K or with any registration statement filed with the U.S. Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, and each such Party shall be entitled to make such filing, provided however, that it requests confidential treatment of the more sensitive terms hereof to the extent such confidential treatment is reasonably available to the filing Party under the circumstances then prevailing. In the event of any such filing, the filing Party will provide the non-filing Party with an advance copy of this Agreement or the Stock Purchase Agreement marked to show provisions for which the filing Party intends to seek confidential treatment, and the filing Party shall reasonably consider the non-filing Party's timely comments thereon. 12.4 Prohibition on Solicitation. Without the written consent of the other Party, neither Party nor its Affiliates shall, during the term of this Agreement or for a period of one year following the expiration or termination of this Agreement, solicit (directly or indirectly) any person who was employed by such Party or its Affiliates and participated in the Research Program at any time during the term of this Agreement. This provision shall not restrict either Party or its Affiliates from advertising employment opportunities in any manner that does not directly target the other Party or its Affiliates. ARTICLE 13 INDEMNIFICATION 13.1 Indemnification by Amgen. Except for claims defended pursuant to Section 9.10, Amgen hereby agrees to defend, hold harmless and indemnify (collectively "Indemnify" or "Indemnified") GENE and its agents, directors, officers and employees (the "GENE Indemnitees") from and against any and all Losses resulting directly or indirectly from any Third Party (which, for the avoidance of doubt, shall exclude employees, agents or independent contractors of Amgen and/or GENE) claims, suits, actions or demands arising out of (a) any of Amgen's representations and warranties set forth in this Agreement being untrue in any material respect when made; (b) any material breach or material default by Amgen of its covenants and obligations under this Agreement; (c) Amgen's negligence or intentional misconduct (or the negligence or intentional misconduct of any agent, independent contractor, Third Party engaged by Amgen, Affiliate or sublicensee of Amgen) in carrying out its activities set forth in the Research Plan and in Developing and Commercializing Product(s); and (d) the Development, manufacture, import, use or sale of any Product(s) by Amgen or any Affiliate, sublicensee, distributor or agent of Amgen, but excluding any Product(s) for which GENE shall have elected to contribute to any Development Costs pursuant to Sections 4.2, 4.3, 4.4 and 4.5 or share profits pursuant to Section 6.2. 13.2 Indemnification by GENE. GENE hereby agrees to Indemnify Amgen and its Affiliates, agents, directors, officers and employees (the "Amgen Indemnitees") from 34 and against any and all Losses resulting directly or indirectly from any Third Party (which, for the avoidance of doubt, shall exclude employees, agents or independent contractors of Amgen and/or GENE) claims, suits, actions or demands arising out of (a) any of GENE's representations and warranties set forth in this Agreement being untrue in any material respect when made; (b) any material breach or material default by GENE of its covenants and obligations under this Agreement; (c) GENE's negligence or intentional misconduct (or the negligence or intentional misconduct of any agent, independent contractor, Third Party engaged by GENE or Affiliate of GENE) in carrying out its activities set forth in the Research Plan and in Co-Detailing Product(s); and (d) the development, manufacture, import, use or sale of any product(s) related to Diagnostic Uses by GENE or any Affiliate, sublicensee, distributor or agent of GENE. 13.3 Indemnification Procedure. To be eligible to be so Indemnified as described in Section 13.1 or Section 13.2 above, each of the GENE Indemnitees or Amgen Indemnitees, as the case may be (the "Indemnitee(s)"), seeking to be Indemnified, shall provide the Party required to Indemnify the Indemnitee(s) (the "Indemnifying Party") with prompt notice of any claim (with a description of the claim and the nature and amount of any such Loss) giving rise to the indemnification obligation pursuant to Section 13.1 or Section 13.2, as the case may be, and the exclusive ability to defend such claim but for the differing interests exception set forth below (with the reasonable cooperation of Indemnitee(s)); provided however, that the failure to provide notice shall not relieve the Indemnifying Party of its obligations except to the extent any failure by the Indemnitee(s) to deliver prompt notice shall have been prejudicial to its ability to defend such action. Each Indemnitee(s) shall have the right to retain its own counsel, at its own expense, if representation of the counsel of the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnitee(s) and the Indemnifying Party. Neither the Indemnitee(s) nor the Indemnifying Party shall settle or consent to the entry of any judgment with respect to any claim for Losses for which indemnification is sought, without the prior written consent of the other Party (not to be unreasonably withheld); provided however, the Indemnifying Party shall have the right to settle or compromise any claim for Losses without such prior written consent if the settlement or compromise provides for an unconditional release of the Indemnitee(s). The Indemnifying Party's obligation to Indemnify the Indemnitee(s) pursuant to this Section 13.3 shall not apply to the extent of any Losses (i) that arise from the negligence or intentional misconduct of any Indemnitee (including but not limited to, in the case of GENE Indemnitees, those Losses arising from Research Plan activities and the Co-Detailing of Product(s) by GENE, or, in the case of Amgen Indemnitees, those Losses arising from Research Plan activities and the Development or Commercialization of Product(s) by Amgen); or (ii) that, in the case of GENE Indemnitees, arise from the breach by GENE or, in the case of Amgen Indemnitees, arise from the breach by Amgen, of any representation, warranty, covenant or obligation under this Agreement; or (iii) that arise from the failure of the Indemnitee(s) to take reasonable action to mitigate any Losses. 35 13.4 Insurance. Within thirty (30) days after the Effective Date, each Party shall at its own expense procure and maintain during the term of this Agreement insurance adequate to cover its obligations hereunder and which is consistent with normal business practices of prudent companies similarly situated. Amgen may self-insure all or part of such insurance. GENE may self-insure part of any such insurance; provided however, that GENE shall at all times maintain the following minimum Third Party insurance coverage: TYPE OF COVERAGE AMOUNT (AGGREGATE) ***** Commercial General Liability Insurance ***** Excess Liability Insurance Worker's Compensation ***** Employer's Liability ***** The Parties hereby agree to negotiate in good faith the amount of product liability insurance that GENE shall maintain in the event that GENE elects to Co-Detail pursuant to Section 6.3. Each insurance policy required by and procured by a Party under this Section 13.4 shall name the other Party as an additional insured except for Worker's Compensation. Such insurance shall not be construed to create a limit of the insuring Party's liability with respect to its indemnification obligations under this Article 13. Each Party shall provide the other Party with a certificate of insurance or other evidence of such insurance and/or self-insurance, upon request. Each Party shall provide the other Party with written notice at least thirty (30) days prior to the cancellation, non-renewal or a material change in such insurance or self-insurance, which materially adversely affects the rights of the other Party hereunder. An Indemnifying Party's insurance shall be primary and non-contributing. 13.5. Pre-Effective Date Losses. In connection with this Agreement, Amgen shall not assume or be liable for any Losses resulting from or arising in connection with the activities of GENE (or any agent, independent contractor or Third Party engaged by GENE) relating to Research Field on or prior to the Effective Date. 13.6 Limitation of Liability. NEITHER PARTY NOR ITS RESPECTIVE AFFILIATES SHALL BE LIABLE FOR SPECIAL, EXEMPLARY, CONSEQUENTIAL OR PUNITIVE DAMAGES, WHETHER IN CONTRACT, WARRANTY, TORT, STRICT LIABILITY OR OTHERWISE INCURRED BY THE OTHER PARTY IN CONNECTION WITH THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO DAMAGES MEASURING LOST PROFITS OR BUSINESS OPPORTUNITIES. 36 ARTICLE 14 REPRESENTATIONS AND WARRANTIES 14.1 Mutual Representations and Warranties. Each Party represents and warrants to the other that: a. it is a corporation duly organized and validly existing under the laws of its jurisdiction of incorporation, and has full power and authority to enter into this Agreement and to carry out the provisions hereof; b. the execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly authorized by all necessary corporate action of such Party, and the person executing this Agreement on behalf of each Party has been duly authorized to do so by requisite corporate action; c. the execution and delivery of this Agreement and the performance of the transactions contemplated hereby will not violate such Party's corporate charter, bylaws or any other organizational document, other contractual obligations (express or implied) it has or may have, or any judgment of any court or governmental body applicable to such Party or its properties or, to such Party's knowledge, any statute, decree, order, rule or regulation of any court or governmental agency or body applicable to such Party or its properties, in each case, which violation, individually or in the aggregate, would reasonably likely have a materially adverse effect on its business or financial condition or its ability to perform its obligations hereunder; d. the execution and delivery of this Agreement does not and will not require any consent or approval of any governmental entity or person; e. this Agreement is a legally binding obligation of such Party and enforceable against such Party according to 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 and public policy constraints (including those pertaining to limitations and/or exclusions of liability, competition law, penalties and jurisdictional issues including conflicts of law); and f. except as disclosed in any documents filed with the Securities and Exchange Commission pursuant to the Exchange Act as of the Effective Date, such Party is not aware of any facts or circumstances, individually or in the aggregate, which would be reasonably expected to have a material adverse effect on such Party's ability to perform its obligations under this Agreement. 14.2 Mutual Covenants. Each Party covenants to the other that: 37 a. all activities conducted by that Party under the Research Program will comply in all material respects with all applicable government laws, regulations and guidelines, including those relating to work with recombinant DNA; b. it shall not enter into any collaboration with, or render services for, a Third Party whereby such collaboration or services with or for such Third Party will negatively impact the timely accomplishment of the goals and objectives of the Research Program; and c. it shall not knowingly misappropriate the trade secret of a Third Party in connection with the performance of its activities under the Research Program. 14.3 Additional Representations, Warranties and Covenants of GENE. a. As of the Effective Date, GENE has provided Amgen with all Material Information (as defined below) which is necessary for Amgen to decide the merits of entering into this Agreement, including without limitation, all Material Information relating to the representations and warranties of this Section 14.3 and all Material Information concerning the ***** and GENE's efforts to date in identifying and characterizing the *****, and all such provided Material Information is, to the best knowledge of GENE, true in all material respects. For purposes of this Section 14.3, the term "Material Information" means all information required to make the disclosed information substantially complete and not misleading which is in GENE's possession and control and which GENE is permitted to share with Amgen without violating the terms of any agreement between GENE and any Third Party. b. As of the Effective Date, and with respect to Material Information as defined in Section 14.3.a. above, GENE is not aware of any Third Party information that it has not disclosed to Amgen that would materially affect Amgen's decision regarding the merits of entering into this Agreement. c. As of the Effective Date, GENE has sufficient legal and/or beneficial title and ownership under, or sufficient rights to use and license, the *****, GENE Background Patent Rights and GENE Background Know-How as is necessary to fulfill its obligations under this Agreement and to grant the licenses to Amgen pursuant to this Agreement. As of the Effective Date GENE has not granted, and shall not during the term of this Agreement, grant any right, license, covenant, consent or privilege to any Third Party or otherwise undertake any action, either directly or indirectly, which would conflict in a material respect with the rights granted to Amgen or interfere in any material respect with any obligations of GENE set forth in this Agreement. d. ***** 38 e. GENE has maintained and shall maintain and keep in full force and effect all agreements (including license agreements, e.g. *****) and filings (including patent filings) necessary to perform its obligations hereunder. GENE (i) shall not consent to any termination, modification, amendment or waiver of any of its rights under ***** that may materially and adversely affect Amgen's rights under this Agreement, without first obtaining Amgen's prior written consent, which, with respect to matters not related to the Research Field, such consent shall not be reasonably withheld or delayed, (ii) has not and will not take or fail to take any action that may lead to the termination, modification, amendment or waiver of its rights under ***** that would materially and adversely affect Amgen's rights under this Agreement, and (iii) has and will take all necessary actions, including without limitation payment of all fees to timely exercise its option with respect to the subject matter of this Agreement under *****. As of the Effective Date, GENE has not received any notice of default, and, to the best of its knowledge, is not in default of its obligations under *****. f. As of the Effective Date, there is no pending or, to the best knowledge of GENE, threatened litigation, and GENE has not received any communication which alleges that GENE's activities with respect to the ***** or proposed activities under this Agreement would infringe or misappropriate any intellectual property rights of any Third Party. g. GENE has disclosed to Amgen all Material Information (as defined above) of which GENE is aware and which GENE reasonably believes to be material to the validity of the *****. Exhibit 2 contains the complete list of ***** as of the Effective Date. h. GENE has provided Amgen with a *****. i. GENE covenants that during the term of this Agreement GENE shall work exclusively with Amgen regarding the Research Field. 14.4 Disclaimer of Representations and Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHER PARTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF THE PATENT RIGHTS LICENSED HEREUNDER, OR NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. Nothing in this Agreement shall be construed as a representation or warranty by either Party that any Product Developed or Commercialized is or will be effective, valuable, safe, non-toxic or patentable. 39 ARTICLE 15 TERM AND TERMINATION 15.1 Term. This Agreement shall become effective on the Effective Date and shall remain in full force and effect, unless earlier terminated pursuant to this Article 15, until such time as Amgen provides written notice to GENE that it no longer (i) intends to Develop or Commercialize Products or (ii) is Developing or Commercializing Products. 15.2 Termination by Amgen. a. If the ***** has not been identified, as that research milestone is defined in Section 8.4.a., on or before ***** months from the Effective Date, Amgen may, at its option, provide written notice of termination to GENE at any time thereafter until such time as the ***** is identified or Amgen elects to advance the Research Program to the ***** of the Research Plan pursuant to Section 8.4.a., and the Agreement shall automatically terminate ***** days after such prior written notice of termination is provided to GENE. b. At any time after the ***** has been identified, Amgen shall have the right, in its sole discretion, to terminate this Agreement by providing ***** days prior written notice of termination to GENE. c. The effects of any such termination under this Section 15.2 will occur in accordance with Section 15.6. 15.3 Termination for Default. a. In the event any material representation or warranty made hereunder by either Party shall have been untrue in any material respect ("Representation Default"), or upon any material breach or material default of a material obligation under this Agreement a Party ("Performance Default"), the Party not in default ("Non-Defaulting Party") must first give the other Party ("Defaulting Party") written notice thereof ("Notice of Default"), which notice must state the nature of the Representation Default or Performance Default in reasonable detail and must request that the Defaulting Party cure such Representation Default or Performance Default within ***** days. During any such ***** after receipt or delivery of a Notice of Default under this Section 15.3.a. for which termination of this Agreement is a remedy under Sections 15.3.b. and 15.3.c., all of the Party's respective rights and obligations under the affected parts of this Agreement, including but not limited to Development, manufacture and Commercialization, shall (to the extent applicable) remain in force and effect. If the Defaulting Party shall dispute the existence, extent or nature of any default set forth in a Notice of Default, the Parties shall use good faith efforts to resolve the dispute in accordance with Sections 2.4 and 2.5. 40 b. GENE Default. In the event of a Performance Default by GENE that shall not have been cured within the period set forth in Section 15.3.a. above after receipt of a Notice of Default, Amgen may, at its option, but in lieu of any right to terminate this Agreement, exercise the rights set forth in Section 15.4 upon prior written notice to GENE. In the event of a Representation Default by GENE that shall not have been cured within the period set forth in Section 15.3.a. above after receipt of a Notice of Default, Amgen may, at its option, terminate this Agreement upon ***** days prior written notice to GENE and, in addition to any other remedies which may be available at law or equity, Amgen shall have the right to (i) *****, each with respect to a representation(s) other than the representations set forth in subparts a., c., e. and h. of Section 14.3, provided however, that Amgen shall have provided such Notice of Default within ***** months after the Effective Date or before the identification of the *****, whichever is later; (ii) *****, each with respect to a representation(s) set forth in subpart a. of Section 14.3, provided however, that Amgen shall have provided such Notice of Default ***** months after the Effective Date or before the identification of the *****, whichever is later; and (iii) *****. c. Amgen Default. In the event of a Representation Default by Amgen that shall not have been cured within the period set forth in Section 15.3.a. above after receipt of a Notice of Default, GENE, at its option, may terminate this Agreement upon ***** days prior written notice to Amgen. In the event that any Performance Default by Amgen arises out of (i) *****; (ii) *****; (iii) *****; or (iv) *****, that in each case shall not have been cured within the period set forth in Section 15.3.a. above after receipt of a Notice of Default, GENE, at its option, may terminate this Agreement upon ***** prior written notice to Amgen. The effects of such termination will occur in accordance with Section 15.6. In the event of a Performance Default by Amgen other than regarding subsections (i) through (iv) of this Section 15.3.c. that shall not have been cured within the period set forth in Section 15.3.a. above after receipt of a Notice of Default, GENE shall only be entitled to seek legal remedies, but shall not be entitled to terminate or seek termination of this Agreement, and all of Amgen's rights and obligations under this Agreement shall remain in full force and effect. 15.4 Effects of GENE Default. In addition to any other remedies which may be available at law or equity, but not the right to terminate or seek termination of this Agreement, upon any uncured Performance Default by GENE under Section 15.3(b), the following rights and obligations of the Parties shall apply: a. In the event that such uncured Performance Default arises out of GENE's obligation to conduct the Research Program, (i) GENE's rights and obligations to participate in the Research Program pursuant to Articles 2 and 3 (including GENE's rights to participate in the Joint Research Committee and Joint Steering Committee to the extent that the JSC shall no longer have any oversight responsibility with respect to the Research Program) shall terminate, (ii) Amgen shall have the sole right and responsibility for all aspects of the Research Program 41 going forward, and (iii) Amgen's obligations to fund GENE FTEs pursuant to Section 8.2 and pay GENE research milestone payments pursuant to Section 8.4 shall terminate. b. In the event that such uncured Performance Default arises out of GENE's obligation to participate in Co-Detailing any Product, GENE's right to Co-Detail such Product pursuant to Sections 6.3 and 6.4 (including its right to participate in the Joint Sales and Marketing Committee) shall terminate. c. In the event that such uncured Performance Default arises out of GENE's failure to pay its share of Development Costs pursuant to Section 4.9, GENE's right to a Development Contribution Royalty under Section 8.6.b. shall terminate (but not its right to a Baseline Royalty under Section 8.6.a.). In addition, GENE's rights and obligations to contribute to Development Costs pursuant to Article 4 (including GENE's right to participate in the Joint Development Committee), GENE's right to share profits pursuant to Sections 6.5, 6.6, 6.7 and 6.8 and GENE's right to Co-Detail pursuant to Sections 6.3 and 6.4 shall terminate. d. In the event that such uncured Performance Default arises out of GENE's failure to pay its share of Product Contribution pursuant to Section 6.8, GENE's right to share profits pursuant to Sections 6.5, 6.6, 6.7 and 6.8 shall terminate and GENE shall have no right to any royalty payments pursuant to Sections 8.6.a and 8.6.b with respect to the United States and/or Canada (as appropriate). 15.5 Bankruptcy. All rights and licenses granted under or pursuant to this Agreement by GENE are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of rights to "intellectual property" as defined under Section 101 of the U.S. Bankruptcy Code. The Parties agree that Amgen shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against GENE under the U.S. Bankruptcy Code, Amgen shall be entitled to a complete duplicate of (or complete access to, as appropriate) any intellectual property and all embodiments of such intellectual property, and same, if not already in Amgen's possession, shall be promptly delivered to Amgen (i) upon any such commencement of a bankruptcy proceeding, upon Amgen's written request therefor, unless Gene (or a trustee on behalf of GENE) elects to continue to perform all of its obligations under this Agreement or (ii) if not delivered under (i) above, upon the rejection of this Agreement by or on behalf of GENE, upon written request therefor by Amgen. 15.6 Effects of Termination. In addition to any other remedies which may be available at law or equity, upon termination of this Agreement under Section 15.2, Section 15.3.b. (except as specifically provided in Section 15.4) or Section 15.3.c., the following rights and obligations of the Parties shall apply: 42 a. In the event that Amgen terminates this Agreement (i) at any time as a consequence of an uncured Representation Default by GENE or (ii) in the event that GENE terminates this Agreement as a consequence of an uncured Performance Default by Amgen in accordance with Section 15.3.c. or Amgen terminates this Agreement in accordance with Sections 15.2.a or 15.2.b, which termination in any case occurs prior to the administration by Amgen of any Product to human subjects under a Phase I Study (the "Phase I Study Initiation"), the license granted by Amgen under Section 9.2.a. to GENE shall terminate. b. In the event that GENE terminates this Agreement as a consequence of an uncured Performance Default by Amgen in accordance with Section 15.3.c. or Amgen terminates this Agreement in accordance with Section15.2.b, which termination in any case occurs after Phase I Study Initiation has occurred and no serious adverse events have been reported to Amgen, GENE may notify Amgen in writing, within thirty (30) days following any such termination, of its desire to obtain an *****, under the Amgen Technology to make, use or sell only Product which is identified as the clinical candidate in the applicable IND. Notwithstanding the above, Amgen shall be under no obligation to license to GENE *****. c. Should GENE so notify Amgen pursuant to Section 15.6.b. above, the parties will negotiate in good faith commercially reasonable terms for such ***** days based upon terms and conditions applicable to a product for a similar use and of similar market potential at a similar stage in its product life as that of such Product, taking into account *****. Such terms shall include, without limitation, *****, for all of which Amgen will be reasonably compensated. If the Parties are unable to agree upon such terms within said ***** days in the event that (i) Amgen terminates pursuant to Section 15.2.b., Amgen shall be free to dispose of such rights; *****. d. Amgen shall within ***** days destroy (and provide GENE with a certification of such destruction signed by an officer of Amgen) all of GENE's Confidential Information (other than with respect to maintaining one (1) archival copy of Confidential Information related thereto for its legal files, for the sole purpose of determining its obligations under this Agreement) and Materials, and shall provide GENE with certification by an officer of Amgen that all such Confidential Information and Materials have been destroyed or returned to Amgen, as appropriate. e. In the event that (i) GENE does not notify Amgen of its desire to obtain a license pursuant to Section 15.6.b.; or (ii) the parties are unable to agree upon the terms of such license pursuant to Section 15.6.c, GENE shall, within ***** days of the occurrence of either of such events in (i) or (ii) above, destroy (and provide Amgen with a certification of such destruction signed by and officer of GENE) all of Amgen's Confidential Information (other than with respect to maintaining one (1) archival copy of Confidential Information related thereto for its legal files, for the sole purpose of determining its obligations under this Agreement) and Materials, and shall provide Amgen with certification by an officer of GENE that 43 all such Confidential Information and Materials have been destroyed or returned to Amgen, as appropriate. f. The Parties shall immediately conduct a final accounting to reconcile and calculate Development Costs in accordance with Section 4.9 and/or Product Contribution in accordance with Section 6.8. g. The following provisions shall remain in full force and effect after the expiration or termination of this Agreement: Article 1, Section 5.1 (unless negotiated otherwise between the Parties pursuant to subpart c. above), Article 8 (only with respect to payments due by Amgen at the time of termination), Section 9.1, Section 9.4 (with respect to Joint Patent Rights), Section 9.5, Section 9.7 (with respect to Joint Patent Rights and Joint Know-How), Section 9.8, Section 9.9 (with respect to GENE, only such claims or actions relating to matters prior to termination in which GENE is also named), Section 9.12, Article 10 (only with respect to accrued rights pursuant to Section 15.7), Article 12, Article 13, Article 14 (subject to the time restrictions set forth in Section 15.3.b), Article 15 and Article 17. h. Except as expressly set forth in this Section 15.6, all other rights and obligations shall terminate. 15.7 Accrued Rights. Termination, relinquishment or expiration of this Agreement for any reason in accordance with this Article 15 shall be without prejudice to any rights which shall have accrued to the benefit of either Party or any liability incurred by either Party prior to the effective date of such termination, relinquishment or expiration and shall not preclude either Party from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement nor prejudice either Party's right to obtain performance of any obligation. ARTICLE 16 CHANGE OF CONTROL 16.1 Change of Control. If GENE enters into or proposes to enter into a transaction which will result in a Change of Control of GENE during the term of this Agreement, GENE may notify Amgen of such transaction at any time prior to entering into such transaction and if GENE does not notify Amgen of such transaction prior to entering into it, GENE shall promptly notify Amgen of such transaction upon entering into it. Within ***** days of such notice, Amgen shall have the right to send written notice ***** and Amgen's obligation to fund GENE FTEs pursuant to Section 8.2) and Amgen shall have the sole right and responsibility for all aspects of the ***** going forward; (ii) GENE's rights and obligations under Sections *****; (iii) if Amgen exercises its termination right prior to or during the notice period set forth in Section 6.2, GENE's right to *****; (iv) GENE's right to ***** pursuant to Sections *****; (v) GENE's right to *****; and/or (vi) Amgen's obligation to ***** pursuant to Section *****. Unless explicitly set forth otherwise in such notice, such notice shall 44 be effective to ***** all rights and obligations set forth in subsections (i)-(vi) hereinabove upon the occurrence of the Change of Control. Should Amgen fail to notify GENE within such ***** period, Amgen shall have no further rights under this Section 16.1 as a result of the Change of Control of GENE identified in GENE's notice to Amgen. 16.2 Effect on Royalty Rates. In the event Amgen exercises its termination right pursuant to Section 16.1, GENE shall be entitled to the following royalties *****: a. ***** as follows: GENE'S ACTUAL CONTRIBUTION TO TOTAL APPLICABLE DEVELOPMENT CONTRIBUTION EARLY DEVELOPMENT COSTS ROYALTY ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** b. *****: GENE'S EARLY GENE'S ACTUAL CONTRIBUTION TO APPLICABLE CONTRIBUTION TOTAL LATE DEVELOPMENT COSTS DEVELOPMENT LEVEL CONTRIBUTION ROYALTY ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** ***** c. *****. 16.3 Effect on Profit Share. In the event Amgen exercises its ***** right pursuant to Section 16.1 after GENE has elected to share profits in accordance with Section 6.2, 45 with respect to sales of Product in the United States and/or Canada (as appropriate), *****. 16.4 Effect on Milestone Payments. Any such ***** under Section 16.1 above shall not relieve Amgen from its obligation to pay GENE milestone payments in accordance with Section 8.4 and Section 8.5. 16.5 Wind Down. In the event Amgen exercises its termination right pursuant to Section 16.1, the Parties shall cooperate to ensure an orderly wind down of related activities as soon as practicable. In particular, should Amgen exercise its termination right pursuant to Section 16.1(i), GENE shall provide Amgen with reasonable technical assistance in transferring the activities of GENE researchers involved in the Research Program to Amgen, including any Materials Controlled by GENE necessary or desirable for Amgen to continue the Research Plan and Amgen shall pay for the FTE Costs associated with transferring such Research Program activities to Amgen as set forth in this Section 16.5; provided however, GENE shall not be required to provide such technical assistance for more than ***** days following the effective date of such termination. Should Amgen exercise its termination right pursuant to Section 16.1(iv), the Parties shall cooperate to ensure an orderly wind down of all Co-Detailing in the United States and/or Canada as soon as practicable. ARTICLE 17 GENERAL 17.1 Conditions to Closing. The obligations of each Party to the other Party under this Agreement are subject to fulfillment, on or before the Effective Date, of the execution and delivery of the Stock Purchase Agreement. 17.2 Force Majeure. Both Parties shall be excused from the performance of their obligations under this Agreement to the extent that such performance is prevented by Force Majeure and the nonperforming Party promptly provides notice of the prevention to the other Party. Such excuse shall be continued so long as the condition constituting Force Majeure continues. When such circumstances arise, the Parties shall discuss what, if any, modification of the terms of this Agreement may be required in order to arrive at an equitable solution. 17.3 Notices. Any notice required or permitted to be given under this Agreement shall be in writing, shall specifically refer to this Agreement and shall be deemed to have been sufficiently given for all purposes if mailed by first class certified or registered mail, postage prepaid, express delivery service or personally delivered, or if sent by facsimile, electronic transmission confirmed. Unless otherwise notified in writing, the mailing addresses and fax numbers for notice of the Parties shall be as described below. 46 For GENE: Genome Therapeutics Corporation 100 Beaver Street Waltham, Massachusetts 02453 Facsimile: ***** Attention: 1. Martin Williams, Senior Vice President, Corporate Development; 2. General Counsel With a copy to: Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C. One Financial Center Boston, MA 02111 Facsimile: (617) 542-2241 Attention: 1. Thomas R. Burton, III, Esq.; 2. John J. Cheney, III, Esq. For Amgen: Amgen Inc. One Amgen Center Drive Thousand Oaks, CA 91320-1799 Facsimile: (805) 499-8011 Attention: Vice President, Licensing With a copy to: Corporate Secretary 17.4 Maintenance of Records. Each Party shall keep and maintain all records required by law or regulation with respect to Products and shall make copies of such records available to the other Party upon request. 17.5 No Strict Construction. This Agreement has been prepared jointly and shall not be strictly construed against either Party. 17.6 Performance by Affiliates. GENE acknowledges that obligations under this Agreement may be performed by Affiliates of Amgen and that Amgen may grant its Affiliates a license or sublicense to (or covenant not to sue) under GENE Technology, Joint Patent Rights and Joint Know-How, as applicable. Amgen guarantees performance of this Agreement by its Affiliates, notwithstanding any assignment to Affiliates in accordance with Section 17.8 below. Wherever in this Agreement Amgen delegates responsibility to Affiliates or local operating entities, Amgen agrees that such entities may neither make decisions inconsistent with this Agreement, amend the terms of this Agreement nor act contrary to its terms in any way. 17.7 Subcontracting. GENE acknowledges and agrees that Amgen may subcontract any or all portions of its work involved in the Research Program and the Development, manufacture and Commercialization of Products to a Third Party, and that Amgen may as part of such subcontract grant to such Third Party a *****; provided however, that Amgen remains responsible for the satisfactory accomplishment of such work in 47 accordance with the terms and conditions of this Agreement and that the subcontractor shall enter into a written agreement binding such subcontractor to the obligations Amgen has to GENE (and containing any other provisions normal and customary for similar types of agreements). GENE may subcontract certain support functions related to its work involved in the Research Program, including any work to be performed by *****, only upon the prior written approval of *****; provided however, that GENE remains responsible for the satisfactory accomplishment of such work in accordance with the terms and conditions of this Agreement and that the subcontractor shall enter into a written agreement binding such subcontractor to the obligations GENE has to Amgen (and containing any other provisions normal and customary for similar types of agreements). 17.8 Assignment. Except as set forth in Sections 17.6 and 17.7, neither Party may assign or transfer this Agreement or any rights or obligations hereunder without the prior written consent of the other, except that a Party may make such an assignment without the other Party's consent to Affiliates or to an entity that acquires all or substantially all of the business of such Party or the business of such Party to which this Agreement relates, whether in a merger, consolidation, reorganization, acquisition, sale or otherwise. This Agreement shall be binding on the successors and assigns of the assigning Party, and the name of a Party appearing herein shall be deemed to include the name(s) of such Party's successors and permitted assigns to the extent necessary to carry out the intent of this Agreement. Any assignment or attempted assignment by either Party in violation of the terms of this Section 17.8 shall be null and void and of no legal effect. The assigning Party shall forward to the other Party a copy of those portions of each fully executed assignment agreement which relate to the assumption of the rights and responsibilities of the assigning Party, within sixty (60) days of the execution of such assignment agreement. 17.9 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17.10 Severability. If any one or more of the provisions of this Agreement are held to be invalid or unenforceable by any court of competent jurisdiction from which no appeal can be or is taken, the provision shall be considered severed from this Agreement and shall not serve to invalidate any remaining provisions hereof. The Parties shall make a good faith effort to replace any invalid or unenforceable provision with a valid and enforceable one such that the objectives contemplated by the Parties when entering this Agreement, as evidenced by the terms of this Agreement in accordance with Section 17.19, may be realized. 17.11 Headings. The headings for each Article and Section in this Agreement have been inserted for convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular Article or Section. Unless otherwise specified, (a) references in this Agreement to any Article, Section, Exhibit or Schedule shall mean references to such Article, Section, Exhibit or Schedule of 48 this Agreement, (b) references in any Section to any clause are references to such clause of such Section, and (c) references to any agreement, instrument or other document in this Agreement refer to such agreement, instrument or other document as originally executed or, if subsequently varied, replaced or supplemented from time-to-time, as so varied, replaced or supplemented and in effect at the relevant time of reference thereto. 17.12 Further Actions. Each Party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of the Agreement. 17.13 Independent Contractors. The relationship between GENE and Amgen created by this Agreement is solely that of independent contractors. This Agreement does not create any agency, distributorship, employee-employer, partnership, joint venture or similar business relationship between the Parties. Neither Party is a legal representative of the other Party, and neither Party can assume or create any obligation, representation, warranty or guarantee, express or implied, on behalf of the other Party for any purpose whatsoever. Each Party shall use its own discretion and shall have complete and authoritative control over its employees and the details of performing its obligations under this Agreement. 17.14 No Benefit of Third Parties. The representations, warranties, covenants and agreements set forth in this Agreement are for the sole benefit of the Parties hereto and their successors and permitted assigns, and they shall not be construed as conferring any rights on any Third Parties. 17.15 Use of Names, Logos or Symbols. No Party hereto shall use, and no rights are granted in or to, the names or trademarks (including the names "Amgen" and "GENE"), physical likeness, employee names or other symbols of the other Party for any purpose (including, without limitation, private or public securities placements) without the prior written consent of the affected Party, such consent not to be unreasonably withheld or delayed so long as such use is limited to objective statement of fact rather than for endorsement or publicity purposes. Neither Party shall use any trademark which either substantially resembles or is confusingly similar to, misleading or deceptive with respect to, or which dilutes any of the other Party's trademarks in connection with the subject matter of this Agreement. 17.16 No Waiver. Any delay in enforcing a Party's rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such Party's rights to the future enforcement of its rights under this Agreement, except with respect to an express written and signed waiver relating to a particular matter for a particular period of time. 17.17 Offset. Either Party shall be entitled to offset, against any payments due and payable to the other Party hereunder, all such amounts due and payable hereunder but not yet paid by the other Party to the Party seeking such offset. Prior to applying an offset 49 under this Section 17.17, the Party seeking such offset shall first give the other Party written notice of such due and payable amounts and shall request the other Party to pay all such due and payable amounts within thirty (30) days from the date of such notice. 17.18 Export Requirements. It is understood and acknowledged that the transfer of certain commodities and technical data is subject to United States laws and regulations controlling the export of such commodities and technical data, including all Export Administration Regulations of the United States Department of Commerce. Each Party hereby agrees and by entering into this Agreement gives written assurance that it shall comply with all United States laws and regulations controlling the export of commodities and technical data within Information and Materials, that it will be solely responsible for any violation of any such laws and regulations by itself, its Affiliates or its sublicensees, and that it will Indemnify, defend and hold the other Party harmless from any liability in the event of any legal action of any nature occasioned by such violation, pursuant to Section 13.1 (in the case of Amgen) or Section 13.2 (in the case of GENE). 17.19 Entire Agreement; Amendment. This Agreement (including all Exhibits and Schedules, including the Stock Purchase Agreement) set forth the complete, final and exclusive agreement and all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto and supersedes and terminates all prior agreements and understandings between the Parties; on the Effective Date of this Agreement, the Confidential Disclosure Agreement dated March 11, 2002 (Amgen Reference No. 200201526) is hereby superseded, provided that all Confidential Information disclosed therein shall be treated as if disclosed under, and shall be subject to the terms of, this Agreement. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as are set forth herein and therein. This Agreement may only be modified or supplemented in a writing expressly stated for such purpose and signed by an authorized officer of each Party (i.e., it may not be modified by any purchase order, change order, acknowledgment, order acceptance, standard terms of sale, invoice or the like); except that the Joint Research Committee may amend or update the Research Plan as expressly permitted hereby. 17.20 Exhibits and Schedules. All Exhibits and Schedules referenced herein and attached hereto are incorporated in this Agreement by reference. In case of any discrepancies between the language incorporated from the Exhibits and Schedules and the terms of the Sections, the terms of the Sections shall prevail; provided however, where Sections of the Agreement make explicit reference to a substantive matter contained in an Exhibit or Schedule, or with respect to definitions set forth in the Exhibits or Schedules, the substantive matter or definitions contained in such Exhibit and Schedules shall prevail. 50 17.21 Applicable Law. This Agreement shall be governed by and interpreted in accordance with the substantive laws of the State of Delaware, without reference to the conflicts of law principles thereof. The parties hereby acknowledge their diversity (GENE having its principal place of business in Massachusetts and Amgen having its principal place of business in California) and each of the Parties hereby submits to the jurisdiction of the courts of the State of Delaware, both state and federal. The venue for such proceedings shall be the state of Delaware. As between the Parties, any dispute, controversy or claim relating to the scope, validity, enforceability or infringement of any licensed Patent Rights shall be submitted to a court of competent jurisdiction in the Territory in which such licensed Patent Rights were granted or arose. 51 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in duplicate by proper persons thereunto duly authorized. AMGEN INC. GENOME THERAPEUTICS CORP. Kevin W. Sharer Steven M. Rauscher Chairman of the Board, Chief Executive President and Chief Executive Officer Officer and President 52 EXHIBIT 1 RESEARCH PLAN ***** EXHIBIT 1 RESEARCH PLAN ***** EXHIBIT 1 RESEARCH PLAN ***** EXHIBIT 1 RESEARCH PLAN ***** EXHIBIT 1 RESEARCH PLAN ***** EXHIBIT 1 RESEARCH PLAN ***** EXHIBIT 2 ***** 2-1 EXHIBIT X ***** Y-1 EXHIBIT Y ***** Y-2 S-1 EX-10.63 4 dex1063.txt STOCK PURCHASE AGREEMENT CONFIDENTIAL TREATMENT REQUEST EXECUTION COPY EXHIBIT 10.63 PORTIONS OF THIS EXHIBIT WERE OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT FILED WITH THE COMMISSION PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934. SUCH PORTIONS ARE MARKED BY ASTERISKS. STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") is made as of December 20, 2002 by and between Genome Therapeutics Corp., a Massachusetts corporation (the "Company"), and Amgen Inc., a Delaware corporation ("Purchaser"). RECITALS a. The Company and Purchaser have entered into a research collaboration and license agreement dated the date hereof (the "Collaboration Agreement") related to the discovery and development of human therapeutics for the treatment of osteoporosis and other diseases; b. In connection with the Collaboration Agreement, the Company and the Purchaser have agreed that the Purchaser will purchase up to an aggregate value of ***** of the Company's common stock, par value $0.10 per share (the "Common Stock"); and c. The Company and Purchaser are executing and delivering this agreement in reliance upon the exemption from registration under the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof and Regulation D, as promulgated thereunder by the U.S. Securities and Exchange Commission. NOW, THEREFORE, in consideration of the premises and mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged the parties hereto, intending to be legally bound, hereby confirm their respective agreements as follows: 1. AUTHORIZATION AND PURCHASE OF THE SHARES. 1.1 Authorization of the Shares. The Company's Board of Directors has authorized the issuance by the Company and the sale to the Purchaser of fully paid and nonassessable shares of Common Stock, all as more fully described, and subject to the conditions set forth, below (the "Shares"). 1.2 Purchase of Shares. Subject to the terms and conditions set forth below, the Company agrees to issue to Purchaser, and Purchaser hereby agrees to purchase from the Company, the Shares in consideration for the rights granted to the Company under the Collaboration Agreement and for cash consideration at such times and in the amounts as more fully described, and subject to the conditions set forth, below. A copy of the Collaboration 1 CONFIDENTIAL TREATMENT REQUEST EXECUTION COPY Agreement, in the form to be executed and delivered by each of Purchaser and the Company on the date hereof, is annexed hereto as Exhibit 1. 2 CONFIDENTIAL TREATMENT REQUEST 2. THE CLOSING. 2.1 Closing Dates. Each closing of the purchase and sale of the Shares to Purchaser hereunder (the "Closings") shall be held at the offices of the Company, within thirty (30) days of the achievement of each of the milestones referenced in Section 2.2 hereof, at 5:00 p.m., Massachusetts time, or at such other date, time and place as the Company and Purchaser mutually agree upon, orally or in writing (the "Closing Dates"). On each Closing Date, the Company shall deliver to Purchaser the Shares registered in the name of Purchaser. 2.2 Schedule of Closings. Purchaser shall purchase at the Fair Market Value per share (a) that number of shares equal to ***** upon satisfaction of the *****; (b) that number of shares ***** upon satisfaction of *****; and (c) that number of shares equal to *****. For the purposes of this Agreement, "Fair Market Value" means 125% of the average closing stock price over the period of time *****. The Company and Purchaser acknowledge and agree that at no time shall Purchaser's equity interest in the Company ***** of the outstanding shares of the Company's Common Stock. If, at the time of a Closing, the requirement to purchase Shares at such Closing, in accordance with the milestones set forth above would result in Purchaser owning an equity interest ***** of the outstanding shares of the Company's Common Stock at such time, Purchaser's obligation to purchase such Shares as such Closing shall be limited to that amount of Common Stock that would result in the cumulative purchase of an equity interest of ***** of the Company's Common Stock, and Purchaser shall have no further obligation to purchase additional stock at a later date or of any other form of payment to the Company with respect to that particular milestone. 2.3 Option of the Company. Notwithstanding anything in this Agreement to the contrary, the obligation of the Company to sell Shares to Purchaser upon satisfaction of the conditions set forth above will be at the option of the Company. If the Company elects not to sell Shares to Purchaser, then it must deliver written notice to Purchaser of such election within ten business days of the date the Company is notified of satisfaction of the applicable milestone. If the Company so elects, Purchaser will be relieved of its obligation to purchase such Shares and will be under no further obligation to purchase such Shares at a future date or make any other form of payment to the Company with respect to that particular milestone. 3 CONFIDENTIAL TREATMENT REQUEST 3. CONDITIONS OF THE PURCHASER'S OBLIGATIONS. The obligations of Purchaser to the Company under this Agreement are subject to the fulfillment, on or before each Closing, of each of the following conditions, unless otherwise waived by Purchaser: 3.1 Representations and Warranties. The representations and warranties of the Company contained in Section 5 shall be true and correct in all material respects on and as of such Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 3.2 Performance. The Company shall have performed and complied in all material respects with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before such Closing. 3.3 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state or other self-regulatory body that are required to be in effect as of such Closing in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be obtained and effective as of such Closing. 3.4 Consents and Waivers. The Company shall have obtained any and all consents and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement (except as such as may be properly obtained subsequent to such Closing). 3.5 Compliance Certificate. The President of the Company shall deliver to Purchaser at each Closing a certificate certifying that the conditions specified in Sections 3.1, 3.2, 3.3, 3.4, 3.6, 3.9 and 3.10 have been fulfilled. 3.6 Collaboration Agreement. Purchaser and the Company shall have executed and delivered the Collaboration Agreement and the Collaboration Agreement shall be in full force and effect. Purchaser shall have made the applicable milestone payment under the Collaboration Agreement corresponding to such Closing, whether by payment or pursuant to any offset provided under the Collaboration Agreement. 3.7 Opinion of Company Counsel. Purchaser shall have received from outside counsel for the Company a legal opinion, dated as of the applicable Closing Date, containing the opinions attached hereto as Exhibit 3.7, subject, in each case, to such outside counsel's customary exceptions, qualifications and assumptions. 3.8 Bankruptcy Proceeding. Neither the Company nor any of its Subsidiaries (as defined below) (a) has instituted or consented to the institution of any proceeding under a Debtor Relief Law relating to it or to all or any material part of its respective property; (b) is unable or has admitted in writing its inability to pay its debts as they mature; (c) has made an assignment for the benefit of creditors; or (d) applied for or consented to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; nor has any receiver, trustee, custodian, conservator, 4 CONFIDENTIAL TREATMENT REQUEST liquidator, rehabilitator or similar officer been appointed without the application or consent of the Company or any of its Subsidiaries. No proceeding under a Debtor Relief Law relating to the Company or any of its Subsidiaries or to all or any part of their respective property has been instituted without the consent of the Company or any of its Subsidiaries and continued undismissed or unstayed for 30 days. For the purposes of this Agreement, "Debtor Relief Laws" means the Bankruptcy Code of the United States of America, as amended from time to time, and all other applicable liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. 3.9 Nasdaq Listing. The Shares to be purchased at such Closing shall have been listed on The Nasdaq Stock Market, Inc. Nation Market. 3.10 Change of Control. Between the date hereof and the applicable Closing, there shall not have been a Change of Control of the Company. For the purposes of this Agreement, "Change of Control" shall have the meaning set forth in the Collaboration Agreement. 4. CONDITIONS OF THE COMPANY'S OBLIGATIONS. The obligations of the Company to Purchaser under this Agreement are subject to the fulfillment, on or before each Closing, of each of the following conditions, unless otherwise waived by Company: 4.1 Representations and Warranties. The representations and warranties of Purchaser contained in Section 6 shall be true and correct in all material respects on and as of such Closing with the same effect as though such representations and warranties had been made on and as of such Closing. 4.2 Performance. Purchaser shall have performed and complied in all material respects with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before such Closing. 5 CONFIDENTIAL TREATMENT REQUEST 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to Purchaser as follows: 5.1 Organization. The Company is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization. Each of the Company and its Subsidiaries (as defined in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act")) has full power and authority to own, operate and occupy its properties and to conduct its business as presently conducted and as described in the SEC Documents (hereinafter defined) and is registered or qualified to do business and in good standing in each jurisdiction in which it owns or leases property or transacts business and where the failure to be so qualified would have a material adverse effect upon the business, financial condition, properties or operations of the Company and its Subsidiaries, considered as one enterprise. The Company has no subsidiaries other than Collaborative Securities Corp. and Collaborative Genetics, Inc. (each, a "Subsidiary"). 5.2 Due Authorization; Consents. The Company has all requisite corporate power and has taken all requisite corporate action to execute and deliver each of this Agreement and the Collaboration Agreement (collectively, the "Transaction Agreements"), to sell and issue the Shares and to carry out and perform all of its obligations hereunder and thereunder. Each of the Transaction Agreements has been duly authorized, executed and delivered on behalf of the Company and constitutes the valid and binding agreement of the Company, enforceable in accordance with its terms. All consents, approvals and authorizations of, and registrations, qualifications and filings with, any federal or state governmental agency, authority or body, or any third party, required in connection with the execution, delivery and performance of this Agreement and the Collaboration Agreement, the valid issuance and sale of the Shares to be sold pursuant to this Agreement and the consummation of the transactions contemplated hereby and thereby have been obtained or will be obtained as of each Closing and are effective as of each Closing, except for any securities filings required to be made under federal or state securities laws. 5.3 Validity of Securities. The Shares, when sold against the consideration therefore as provided herein, will be duly authorized and validly issued, fully paid and nonassessable and free of any liens or encumbrances arising through the Company. The issuance and delivery of the Shares is not subject to preemptive or any similar rights of the stockholders of the Company or any liens or encumbrances arising through the Company. 5.4 SEC Documents; Financial Statements. Each of (a) the Company's Annual Report on Form 10-K for the most recently completed fiscal year, (b) the Company's most recently filed Notice of Annual Meeting of Stockholders and Proxy Statement and (c) the Company's Quarterly Reports on Form 10-Q, and all other documents, if any, filed by the Company since the date of the most recently filed Annual Report on Form 10-K pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act;" collectively, the above documents shall be referred to hereinafter as the "SEC Documents"), as filed by the Company with the Securities and Exchange Commission (the "SEC") or incorporated by reference therein complied in all material respects to the requirements of the Exchange Act, and the rules, regulations and instructions of the SEC thereunder. Each of 6 CONFIDENTIAL TREATMENT REQUEST the SEC Documents, as of its respective filing date, contained no untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances in which they were made, not misleading. The financial statements of the Company included in the SEC Documents (the "Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. Except as may be indicated in the Financial Statements or the notes thereto, the Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied and fairly present the consolidated financial position and operating results of the Company and its Subsidiaries as of the dates, and for the periods, indicated therein. 5.5 Non-Contravention. The execution and delivery of the Agreement, the issuance and sale of the Shares to be sold by the Company under this Agreement, the fulfillment of the terms of the Transaction Agreements and the consummation of the transactions contemplated hereby and thereby will not (A) conflict with or constitute a violation of, or default (with the passage of time or otherwise) under, (i) any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or any Subsidiary is a party or by which it or any of its Subsidiaries or their respective properties are bound, (ii) the charter, by-laws or other organizational documents of the Company or any Subsidiary, or (iii) any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company or any Subsidiary or their respective properties, except where, in the cases of clauses (i) and (iii) of this Section 5.5, any such conflict, violation, or default would not, individually or in the aggregate have a material adverse effect on the Company, or (B) result in the creation or imposition of any lien, encumbrance, claim, security interest or restriction whatsoever upon any of the properties or assets of the Company or any Subsidiary or an acceleration of indebtedness pursuant to any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or any indenture, mortgage, deed of trust or any other agreement or instrument to which the Company or any Subsidiary is a party or by which any of them is bound or to which any of the property or assets of the Company or any Subsidiary is subject. 5.6 Liabilities. Except as set forth in the SEC Documents, the Company has no material indebtedness for borrowed money that the Company has directly or indirectly created, incurred, assumed, or guaranteed, or with respect to which the Company has otherwise become directly or indirectly liable. 7 CONFIDENTIAL TREATMENT REQUEST 5.7 Capitalization. The capitalization of the Company is as set forth in the SEC Documents. Since the date of the most recent SEC Document which includes a full description of the capitalization of the Company, the Company has not issued any capital stock other than pursuant to (i) employee benefit plans disclosed in the SEC Documents, or (ii) outstanding warrants or options disclosed in the SEC Documents. The outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and were not issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. Except as a result of the purchase and sale of the Shares and except as disclosed in Schedule 5.7, which schedule shall only be required to be provided at each Closing, or as set forth in or contemplated by the SEC Documents, there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any unissued shares of capital stock or other equity interest in the Company or any Subsidiary, or any contract, commitment, agreement, understanding or arrangement of any kind to which the Company is a party or of which the Company has knowledge and relating to the issuance or sale of any capital stock of the Company or any Subsidiary, any such convertible or exchangeable securities or any such rights, warrants or options. Without limiting the foregoing, no preemptive right, co-sale right, right of first refusal, registration right, or other similar right exists with respect to the Shares or the issuance and sale thereof. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Shares. The Company owns the entire equity interest in each of its Subsidiaries, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than as described in the SEC Documents. Except as disclosed in the SEC Documents, there are no stockholders agreements, voting agreements or other similar agreements with respect to the Common Stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company's stockholders. 5.8 Legal Proceedings. There is no material legal or governmental proceeding pending or, to the knowledge of the Company, threatened to which the Company or any Subsidiary is or may be a party or of which the business or property of the Company or any Subsidiary is subject that is not disclosed in the SEC Documents. 5.9 No Violations. Neither the Company nor any Subsidiary is in violation of its charter, bylaws, or other organizational document, or in violation of any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company or any Subsidiary (including without limitation, all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters), which violation, individually or in the aggregate, would be reasonably likely to have a material adverse effect on the business or financial condition of the Company and its Subsidiaries, considered as one enterprise, or is in default (and there exists no condition which, with the passage of time or otherwise, would constitute a default) in any material respect in the performance of any bond, debenture, note or any other evidence of indebtedness in any indenture, mortgage, deed of trust or any other material agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound or by which the properties of the Company or any Subsidiary are bound. 8 CONFIDENTIAL TREATMENT REQUEST 5.10 Title to Properties and Assets. Except as set forth in the SEC Documents, the Company has good and marketable title to its properties and assets held in each case subject to no lien of any kind except for liens for taxes that are not yet due and payable or, in the case of leased real property, easements and other rights or restrictions of record that do not materially impair the use or value of such property to the Company. With respect to the property and assets it leases, the Company is in material compliance with such leases and, to the Company's knowledge, the Company holds valid leasehold interests in such assets free of any liens, encumbrances, security interests or claims of any party other than the lessors of such property and assets. 5.11 Intellectual Property. (i) Each of the Company and its Subsidiaries owns or possesses sufficient rights to use all patents, patent rights, trademarks, copyrights, licenses, inventions, trade secrets, trade names and know-how (collectively, "Intellectual Property") described or referred to in the SEC Documents as owned by it or that are necessary for the conduct of its business as now conducted or as proposed to be conducted as described in the SEC Documents except where the failure to currently own or possess would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiaries considered as one enterprise, and (ii) neither the Company nor any of its Subsidiaries has received any notice of, or has any knowledge of, any violation or infringement by a third party of any Intellectual Property that, individually or in the aggregate, would have a material adverse effect on the financial condition or business of the Company and its Subsidiaries considered as one enterprise. 5.12 No Infringement. Except as disclosed in the SEC Documents, to the Company's knowledge, the Company has not violated or infringed, and, to the Company's knowledge, is not currently violating or infringing, and the Company has not received any communications alleging that the Company (or any of its employees or consultants) has violated or infringed or, by conducting its business as currently proposed, would violate or infringe, any Intellectual Property of any other person or entity. 5.13 No Material Adverse Change. Since the date of the latest Annual Report on Form 10-K or Quarterly Report on Form 10-Q, there has not been (i) any material adverse change in the financial condition or operating results of the Company or its Subsidiaries, (ii) any material adverse event affecting the Company or its Subsidiaries, (iii) any obligation, direct or contingent, that is material to the Company and its Subsidiaries considered as one enterprise, incurred by the Company or any Subsidiary, except obligations incurred in the ordinary course of business (iv) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its Subsidiaries, or (v) any loss or damage (whether or not insured) to the physical property of the Company or any of its Subsidiaries which has been sustained which has a material adverse effect on the condition (financial or otherwise), operating results, operations or business of the Company and its Subsidiaries considered as one enterprise. 5.14 Disclosure. No representation or warranty by the Company in the Transaction Agreements or in any statement or certificate signed by any officer of the Company furnished or to be furnished to the Purchaser pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to 9 CONFIDENTIAL TREATMENT REQUEST be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they are made, not misleading. 5.15 Exchange Market Compliance. The Company's Common Stock is listed on the Nasdaq Stock Market, Inc. National Market (the "Nasdaq National Market") or such other nationally recognized exchange or quotation system, including, but not limited to, the Nasdaq SmallCap Market or the OTC Bulletin Board. The Company has taken no action that is likely to have the effect of causing the Common Stock to be delisted from the Nasdaq National Market or such other nationally recognized exchange or quotation system. The Company's Common Stock is registered pursuant to Section 12(g) of the Exchange Act, and the Company has taken no action that is likely to have the effect of terminating the registration of the Common Stock under the Exchange Act, nor has the Company received any notification that the SEC is contemplating terminating such registration. 5.16 Listing. The Company shall comply with all requirements of the National Association of Securities Dealers, Inc. ("NASD") with respect to the issuance of the Shares and the listing thereof on the Nasdaq National Market or other trading market on which the Common Stock is listed or quoted, if applicable. 6. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby represents and warrants to the Company as follows: 6.1 Investment Experience. Purchaser is an "accredited investor" within the meaning of Rule 501 under the Securities Act. Purchaser is aware of the Company's business affairs and financial condition and has, in reliance upon the representations and warranties contained in this Agreement, acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. Purchaser has such business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the Shares. Purchaser has had the opportunity to ask questions and receive answers concerning the terms and conditions of its purchase of the Shares and to obtain any additional information from the Company that is necessary to verify the information furnished in the SEC Documents. 6.2 Investment Intent. Purchaser is purchasing the Shares for investment for its own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. Purchaser understands that the Shares have not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of Purchaser's investment intent as expressed herein. 6.3 Due Authorization. Purchaser has all requisite corporate power and has taken all requisite corporate action to execute and deliver this Agreement and to carry out and perform all of its obligations hereunder. This Agreement has been duly authorized, executed and delivered on behalf of Purchaser and constitutes the valid and binding agreement of Purchaser, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, 10 CONFIDENTIAL TREATMENT REQUEST insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) as limited by equitable principles generally. 6.4 No Legal, Tax or Investment Advice. Purchaser understands that nothing in this Agreement or any other materials presented to Purchaser in connection with the purchase and sale of the Shares constitutes legal, tax or investment advice. Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Shares. 7. RESTRICTIONS ON TRANSFER OF SECURITIES; REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT. 7.1 Restrictions on Transferability Prior to Registration. The Securities shall not be offered, resold, pledged or otherwise transferred from Purchaser to a transferee other than (i) in accordance with the provisions of this Section 7 or (ii) in a transaction meeting the requirements of Rule 144 under the Securities Act ("Rule 144") or otherwise in accordance with the Securities Act and the applicable securities laws of any state of the United States or any other applicable jurisdiction, provided that Purchaser provides prior notice to the Company and, if reasonably requested by the Company, delivers to the Company an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration under the Securities Act. Notwithstanding the foregoing, the Company hereby consents to and agrees to register on the books of the Company and with any transfer agent for the securities of the Company, any transfer of Shares by Purchaser to an "affiliate" (as such term is defined in Rule 144) of such Purchaser, provided that the transferee certifies to the Company that it is an "accredited investor" within the meaning of Rule 501 under the Securities Act and that it is acquiring the Shares solely for investment purposes. As a condition of such transfer, any such transferee shall agree in writing to be bound by the terms of Section 7 of this Agreement and, so long as Purchaser transfers ***** of the Shares held by it at such time to the transferee, such transferee shall have the rights of Purchaser under Section 7 of this Agreement; provided, however, with respect to any subsequent transfer of Shares by any such subsequent transferee, such Shares shall not be considered Registrable Securities (as defined below) under this Agreement. Purchaser will be required to notify any subsequent transferee of any then existing resale restrictions as set forth above and to comply with the provisions of this Section 7. 11 CONFIDENTIAL TREATMENT REQUEST 7.2 Restrictive Legends. Each certificate representing any of the Shares (or any other securities issued in respect of the Shares upon any stock split or stock dividend) shall (unless otherwise permitted by the provisions hereof) be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required under applicable federal or state securities laws): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE HOLDER HEREOF ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND OTHER RESTRICTIONS, AND THE HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE (INCLUDING ANY FUTURE HOLDER) IS BOUND BY THE TERMS OF A STOCK PURCHASE AGREEMENT BETWEEN THE ORIGINAL PURCHASER AND THE COMPANY (COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY). Such legend shall be removed by delivery of substitute certificates without legend: (i) if the Shares have been sold pursuant to an effective registration statement, or (ii) if Rule 144(k) may be utilized by the seller of such security, or (iii) if such legend is not required under applicable requirements of the Securities Act. 7.3 Registration Procedures and Expenses. (a) Shelf Registration. (i) Shelf Registration Statement. Upon the request of the Holders of a majority of Registrable Securities (as defined below), the Company shall prepare and file or cause to be prepared and filed with the SEC promptly, but in no event later than ten business days, after receipt of such request a Registration Statement (as defined below) for an offering to be made on a delayed or continuous basis pursuant to Rule 415 of the Securities Act registering the resale from time to time by the Holders (as defined below) of all of the Registrable Securities acquired by the Holders at such Closing (each a "Shelf Registration Statement"). *****. For the purposes of this Agreement, "Registration Statement" shall mean any registration statement under the Securities Act of the Company that covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the related Prospectus, all amendments and supplements to such registration statement, including pre- and post-effective amendments, all exhibits thereto and all material incorporated by reference or deemed to be incorporated by reference in such registration statement; "Registrable Securities" shall mean the Shares and any shares of common stock which may be issued or distributed with respect to, or in exchange for, such Registrable Securities pursuant to a stock dividend, stock split or other distribution, merger, consolidation, recapitalization or reclassification or similar transaction; "Holders" shall mean any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Sections 7.1 or 9.4; and "Prospectus" shall mean the prospectus included in any Registration Statement (including a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A), 12 CONFIDENTIAL TREATMENT REQUEST as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and all other amendments and supplements to such prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such prospectus. The Shelf Registration Statement shall be on Form S-3 or, if Form S-3 is unavailable, another appropriate form permitting registration of such Registrable Securities for resale by such Holders in accordance with the methods of distribution set forth in the Shelf Registration Statement (such methods of distribution to include underwritten offerings and other methods designated in writing by the Holders pursuant to Section 7.3(d)). The Company shall not permit any securities other than the Registrable Securities to be included in the Shelf Registration Statement. The Company shall use commercially reasonable efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act by the date (the "Shelf Effectiveness Deadline Date") that, if the Registration Statement is to be filed on Form S-3, is thirty (30) days after receipt of the request for such filing, and, if the Registration Statement is to be filed on Forms S-1, S-2, or any other appropriate form permitting registration of such Registrable Securities for resale by such Holders, is ninety (90) days after receipt of the request for such filing. The Company shall use commercially reasonable efforts to keep the Shelf Registration Statement continuously effective under the Securities Act (subject to Section 7.3(a)(v)) until the earlier of (x) the second anniversary of the date such Shelf Registration Statement is declared effective and (y) the sale of all of the Registrable Securities included in the Shelf Registration Statement (such period as may be extended in accordance with the proviso in Section 7.3(a)(ii), the "Shelf Effectiveness Period"). Each Holder agrees that if such Holder wishes to sell Registrable Securities pursuant to the Shelf Registration Statement and related Prospectus, it will do so only in accordance with this Section 7.3(a). (ii) Subsequent Shelf Registrations. If the initial Shelf Registration Statement or any Subsequent Shelf Registration Statement ceases to be effective for any reason at any time during the Shelf Effectiveness Period (other than because of the sale of all of the Registrable Securities), the Company shall use commercially reasonable efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof, and in any event shall within twenty (20) days of such cessation of effectiveness (or, if the cessation of effectiveness occurs during a Deferral Period, within five Business Days of the end of such Deferral Period) amend the Shelf Registration Statement in a manner reasonably expected by the Company to obtain withdrawal of the order suspending the effectiveness thereof, or file an additional "shelf" Registration Statement pursuant to Rule 415 of the Securities Act covering all of the Registrable Securities (a "Subsequent Shelf Registration Statement") to permit registration of the Registrable Securities. If a Subsequent Shelf Registration Statement is filed, the Company shall use its commercially reasonable efforts to cause the Subsequent Shelf Registration Statement to be declared effective under the Securities Act as soon as reasonably practicable after such filing or, if filed during a Deferral Period, immediately after completion of the Deferral Period, and to keep such Registration Statement continuously effective until the end of the Shelf Effectiveness Period; provided, however, that, unless all Registrable Securities included on the Shelf Registration Statement have been sold, the Shelf Effectiveness Period shall be extended by the aggregate number of days such Registration Statement was not effective as a result of Deferral Periods or Transaction Delay Periods. As used herein, the term "Shelf Registration Statement" means the Shelf Registration Statement and any Subsequent Shelf Registration Statement. 13 CONFIDENTIAL TREATMENT REQUEST (iii) Amendments to Shelf Registration Statement. The Company shall promptly supplement and amend the Shelf Registration Statement and any related Prospectus if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement, if required by the Securities Act or as requested by Purchaser or by the Shelf Underwriter. (iv) Underwritten Syndicated Offerings. (A) If one or more Holders proposes to sell Registrable Securities in an underwritten syndicated offering pursuant to the Shelf Registration Statement, such Holder or Holders may request the Company in writing to effect such underwritten syndicated offering by supplement or amendment to the Shelf Registration Statement, stating the number of Registrable Securities proposed to be sold. The Company and all Holders proposing to distribute Registrable Securities through such underwritten syndicated offering shall enter into an underwriting agreement in customary form with the underwriters for the offering. (B) Any underwritten syndicated offering requested pursuant to this Section 7.3(a)(iv) shall be underwritten by an underwriter selected by the Holders (the "Shelf Underwriter"). (C) Notwithstanding any provision of this Agreement to the contrary, the Company shall not be required to effect an offering pursuant to this Section 7.3(a)(iv) during any Transaction Delay Period (as defined below) if, promptly, but in no event later than three business days, following the Company's receipt of a request from a Holder to effect an offering pursuant to this Section 7.3(a)(iv), the Company furnishes such Holder with a certificate signed by an executive officer of the Company (a "Transaction Delay Notice") to the effect that the Company prior to the Company's receipt of such request, had commenced preparations for the filing of a registration statement pertaining to a public offering of securities of the Company for the account of the Company (a "Company Offering"). Any "Transaction Delay Period" shall be the period commencing on the day the Company furnishes a Transaction Delay Notice and continuing until the ***** following the effectiveness of the registration statement relating to the applicable Company Offering, (B) promptly after the abandonment of the applicable Company Offering, or (C) ***** after the date of the Transaction Delay Notice. The Company may deliver no more than ***** Transaction Delay Notices in any twelve-month period, and the aggregate duration of all Transaction Delay Periods shall not exceed ***** in any twelve-month period. The Company shall use commercially reasonable efforts to cause any such registration statement relating to any such Company Offering to become effective as soon as possible. (D) ***** (E) If in an underwritten syndicated offering requested pursuant to this Section 7.3(a)(iv), the Shelf Underwriter reasonably advises the Company in writing that, in its opinion, the number of Registrable Securities requested to be included in such offering exceeds the number that can be sold in such offering at a price reasonably related to the then current market value of such securities, there shall be included in such offering only the 14 CONFIDENTIAL TREATMENT REQUEST Registrable Securities that the Shelf Underwriter so advises may be sold at a price reasonably related to the then current market value of such securities. (v) Suspension of Shelf Registration Statement. Upon (A) the issuance by the SEC of a stop order suspending the effectiveness of the Shelf Registration Statement or the initiation of proceedings with respect to the Shelf Registration Statement under Section 8(d) or 8(e) of the Securities Act or (B) the occurrence of a Material Event (as defined below) or the non-availability of financial statements required in the Shelf Registration Statement, the Company shall (i) in the case of clause (B) above, subject to the next to last sentence of this Section 7.3(a)(v), as promptly as practicable prepare and file a post-effective amendment to the Shelf Registration Statement or a supplement to the related Prospectus or any document incorporated therein by reference or file any other required document that would be incorporated by reference into the Shelf Registration Statement and Prospectus so that such Shelf Registration Statement does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and the related Prospectus does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, and, in the case of a post-effective amendment to the Shelf Registration Statement, subject to the next to last sentence of this Section 7.3(a)(v), use commercially reasonable efforts to cause it to be declared effective as soon as possible, and (ii) give notice to the Holders named as selling security holders in the Prospectus that the availability of the Shelf Registration Statement is suspended (a "Deferral Notice"). Upon receipt of any Deferral Notice, each Holder agrees not to sell any Registrable Securities pursuant to the Registration Statement until such Holder's receipt of copies of the supplemented or amended Prospectus provided for in clause (i) above, or until it is advised in writing by the Company that the Prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in such Prospectus. The Company will use commercially reasonable efforts to ensure that the use of the Prospectus may be resumed (x) in the case of clause (A) above, as promptly as is practicable, but ***** after the Deferral Notice is given to the Holders, or (y) in the case of clause (B) above, as soon as in the good faith judgment of the Company the public disclosure of such Material Event would not be prejudicial to or contrary to the interests of the Company, but ***** after the Deferral Notice is given to the Holders. The period during which the availability of the Shelf Registration Statement and any related Prospectus is suspended pursuant to Section 7.3(a)(v) (the "Deferral Period") shall not exceed ***** in any three (3) month period and ***** during the Shelf Effectiveness Period. For the purposes of this Agreement, a "Material Event" shall mean any event or the existence of any fact as a result of which the Company shall determine in its reasonable discretion that a Registration Statement shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or any Prospectus shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (including, in any such case, as a result of the non-availability of financial statements). 15 CONFIDENTIAL TREATMENT REQUEST (b) Holders Incidental Registration. Subject to Section 7.3(f), the Company determines, in its sole discretion, that it shall file a registration statement under the Securities Act (other than (i) a registration statement providing for an offering on a delayed or continuous basis pursuant to Rule 415 of the Securities Act or (ii) a registration statement on Form S-4 or S-8 or any successor or similar forms) registering an underwritten offering of Common Stock for cash consideration on any form that also would permit the registration of the Registrable Securities and such filing is to be on its behalf and/or on behalf of selling holders of the Company's securities, the Company shall each such time promptly give each Holder written notice of such determination setting forth the date on which the Company proposes to file such registration statement, and advising each Holder of its right to have Registrable Securities included in such registration. The Company will select the managing underwriter and all other underwriters in any underwritten offering pursuant to this Section 7.3(b). Upon the written request of any Holder received by the Company no later than ten (10) days after the date of the Company's notice, the Company shall use commercially reasonable efforts to cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has so requested to be registered; provided that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, the Company may, at its election, give written notice of such determination to each Holder of Registrable Securities and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the registration expenses pursuant to Section 7.3(e) in connection therewith). If, in the written opinion of the managing underwriter, the total amount of such securities to be so registered, including such Registrable Securities, will exceed the maximum amount of the Company's securities that can be marketed either (a) at a price reasonably related to the then current market value of such securities, or (b) without otherwise materially and adversely affecting the entire offering, then the Company shall include in such registration first (1st), all the securities the Company proposes to sell for its own account or is required to register on behalf of any third party exercising demand registration rights and without having the adverse effect referred to above, and second (2nd), all Registrable Securities requested to be included in such registration by the Holders pursuant to this Section 7.3(b) and all shares of Common Stock requested to be included by third parties exercising the rights similar to those granted in this Section 7.3(b) up to the number which the Company has been advised can be sold in such offering without having either of the adverse effects referred to above. The number of such Registrable Securities requested to be included in such registration by the Holders pursuant to this Section 7.3(b) shall be limited to such extent and shall be allocated pro rata among all such requesting Holders and third parties exercising rights similar to those granted in this Section 7.3(b) on the basis of the relative number of Registrable Securities each such Holder has requested to be included in such registration and the number of shares of Common Stock requested to be included in such registration by such third parties. (c) Obligations of the Company. Whenever required under Section 7.3(a) or Section 7.3(b) to use commercially reasonable efforts to effect the registration of any Registrable Securities, the Company shall, as expeditiously as possible: (i) prepare and file with the SEC a Registration Statement with respect to such Registrable Securities and use commercially reasonable efforts to cause such 16 CONFIDENTIAL TREATMENT REQUEST Registration Statement to become and remain effective for the period of the distribution contemplated thereby; (ii) prepare and file with the SEC such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the Shelf Effectiveness Period in the case of the Shelf Registration Statement or for a period not in excess of sixty (60) days (or such shorter period during which the distribution of securities thereunder continues) in the case of all other Registration Statements contemplated by this Agreement, cause the related Prospectus to be supplemented by any Prospectus supplement required by applicable law, and as so supplemented to be filed pursuant to the Securities Act and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Registration Statement in accordance with the intended methods of disposition by the seller or sellers thereof, and furnish to the Holders of the Registrable Securities copies of any such amendments and supplements prior to their being used or filed with the SEC, which amendments and supplements will be subject to the review of the Holders and their counsel; 17 CONFIDENTIAL TREATMENT REQUEST (iii) furnish to the Holders such reasonable numbers of copies of the Registration Statement and any Prospectus included therein (including each preliminary Prospectus and any amendments or supplements thereto (including all exhibits and documents incorporated by reference) in conformity with the requirements of the Securities Act) and such other documents and information as they may reasonably request and make available for inspection by the parties referred to in Section 7.3(c)(iv) below such financial and other information and books and records of the Company, and cause the officers, directors, employees, counsel and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the respective counsel referred to in such Section 7.3(c)(iv); (iv) provide (1) the Holders of the Registrable Securities to be included in such Registration Statement, (2) the Shelf Underwriter or Demand Underwriter, as applicable, (3) the sales or placement agent, if any, therefor, (4) counsel for the Shelf Underwriters or Demand Underwriters or agent, as applicable, and (5) not more than one outside counsel for all the Holders of such Registrable Securities the opportunity to participate in the preparation of such Registration Statement, each Prospectus included therein or filed with the SEC, and each amendment or supplement thereto, and (a) promptly incorporate in a Prospectus supplement or post-effective amendment such information as the Shelf Underwriter or Demand Underwriter, as applicable, its counsel, or such Holders' counsel reasonably determine is necessary and appropriate to be included therein, (b) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment, and (c) supplement or make amendments to such Registration Statement; (v) use commercially reasonable efforts to register or qualify the Registrable Securities covered by such Registration Statement under such other securities or Blue Sky laws of such jurisdictions within the United States as the Holders shall request for the distribution of the Registrable Securities covered by the Registration Statement; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business in or to file a general consent to service of process in any jurisdiction wherein it would not but for the requirements of this paragraph (v) be obligated to do so; (vi) promptly notify the selling Holders, the sales or placement agent, if any, and the Shelf Underwriter or Demand Underwriter, as applicable, (1) when such Registration Statement, amendment, supplement or post-effective amendment has been filed, and, with respect to such Registration Statement or any post-effective amendment, when the same has become effective, (2) of any comments by the SEC or by any Blue Sky or securities commissioner or regulator of any state with respect thereto, (3) of the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceedings for that purpose, or (4) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; 18 CONFIDENTIAL TREATMENT REQUEST (vii) subject to Sections 7.3(a)(v) use commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of such Registration Statement and use its commercially reasonable efforts to cause such Registrable Securities covered by any such Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Holders to consummate the disposition of such Registrable Securities; (viii) furnish on the date that the Registrable Securities are delivered to the Shelf Underwriter or Demand Underwriter, as applicable, for sale pursuant to such registration, (1) a signed opinion, dated such date, of the outside legal counsel representing the Company for the purpose of such registration, addressed to the Shelf Underwriter or Demand Underwriter, as applicable, as to such matters as such underwriters may reasonably request and as would be customary in such a transaction; and (2) letters dated such date and the date the offering is priced from the independent certified public accountants of the Company, addressed to the Shelf Underwriter or Demand Underwriter, as applicable, (i) stating that they are independent certified public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements and other financial data of the Company included in the Registration Statement or the Prospectus, or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Securities Act and (ii) covering such other financial matters with respect to the registration in respect of which such letter is being given as the Shelf Underwriter or Demand Underwriter, as applicable, may reasonably request and as would be customary in such a transaction; (ix) enter into customary agreements (including, without limitation, an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities to be so included in the Registration Statement; (x) cooperate with the Holders of the Registrable Securities and the Shelf Underwriter or Demand Underwriter, as applicable, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, and enable such Registrable Securities to be in such denominations and registered in such names as the Shelf Underwriter or Demand Underwriter, as applicable, may request at least five Business Days prior to any sale of the Registrable Securities; (xi) otherwise comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, but not later than eighteen months after the effective date of the Registration Statement, an earnings statement covering the period of at least twelve months beginning with the first full month after the effective date of such Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (xii) use commercially reasonable efforts to list the Registrable Securities covered by such Registration Statement with any securities exchange on which the Common Stock of the Company is then listed; and 19 CONFIDENTIAL TREATMENT REQUEST (xiii) use commercially reasonable efforts to make available appropriate senior executive officers of the Company to participate in customary "road show" presentations that may be reasonably requested by the Holders in any underwritten syndicated offering; provided that the participation of such senior executive officers shall not interfere with the conduct of their duties to the Company. With respect to registration required pursuant to Section 7.3(a), the period of distribution of Registrable Securities in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it but in no event longer than forty-five (45) days from the effective date. (d) Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement that the Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as the Company shall reasonably request in writing and as shall be required in connection with the action to be taken by the Company. (e) Expenses of Registration. (i) Shelf and Requested Registration. All expenses incurred in connection with each registration pursuant to Section 7.3(a), including without limitation all registration, filing and qualification fees, word processing, duplicating, printers' and accounting fees (including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance), fees of the NASD or listing fees, messenger and delivery expenses, all fees and expenses of complying with state securities or Blue Sky laws, and fees and disbursements of counsel for the Company and one outside legal counsel for the Holders (if such Registration Statement is on Form S-3, such fees and disbursements for outside legal counsel for the Holders shall *****, or, if such Registration Statement is on another form permitting registration of such Registrable Securities for resale by such Holders, such fees and disbursements shall be limited to reasonable fees and disbursements), hired to review and oversee any offering, shall be borne by the Company. The Holders shall bear and pay the underwriting commissions and discounts applicable to the Registrable Securities offered for their account in connection with any regulations, filings and qualifications made pursuant to this Agreement. (ii) Incidental Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications of Registrable Securities pursuant to Section 7.3(b) for each Holder, including without limitation all registration, filing and qualification fees, word processing, duplicating, printers' and accounting fees (including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance), fees of the NASD or listing fees, messenger and delivery expenses, all fees and expenses of complying with state securities or Blue Sky laws, and fees and disbursements of counsel for the Company, shall be paid by the Company. The Holders shall bear and pay the underwriting commissions and discounts applicable to the Registrable Securities offered for their account in connection with any regulations, filings and qualifications 20 CONFIDENTIAL TREATMENT REQUEST made pursuant to this Agreement, as well as related fees and disbursements of counsel or other advisors to Holders. (f) Underwriting Requirements. In connection with any underwritten offering, the Company shall not be required under Section 7.3(b) to include Registrable Securities in such underwritten offering unless the Holder of such Registrable Securities accepts the terms of the underwriting of such offering that have been reasonably agreed upon between the Company and the underwriters selected by the Company in accordance with the terms of this Agreement. 7.4 Indemnification. For the purpose of this Section 7.4: (a) the term "Selling Stockholder" shall include Holders and any "affiliate" (as such term is defined in Rule 144) of any such Holder, and their respective permitted transferees and assigns; (b) the term "untrue statement" shall, with respect to any Registration Statement, include any untrue statement or alleged untrue statement of a material fact contained in the related Registration Statement, or any omission or alleged omission to state in the related Registration Statement a material fact required to be stated therein or necessary to make the statements therein, not misleading, and, with respect to any Prospectus, include any untrue statement or alleged untrue statement of a material fact contained in the related Prospectus, or any omission or alleged omission to state in the related Prospectus a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (i) The Company agrees to indemnify and hold harmless the Selling Stockholder (and each person, if any, who controls the Selling Stockholder within the meaning of Section 15 of the Securities Act, each officer of the Selling Stockholder and each director of the Selling Stockholder) from and against any losses, claims, damages or liabilities to which the Selling Stockholder (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon (i) any untrue statement or (ii) any failure by the Company to fulfill any undertaking included in the related Registration Statement, and the Company will reimburse the Selling Stockholder promptly as incurred for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim, provided, however, that the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability (A) arises out of, or is based upon, an untrue statement made in conformity with written information furnished to the Company by the Selling Stockholder specifically for use in preparation of the Registration Statement or Prospectus (which has not been subsequently corrected or supplemented), (B) results directly from the failure of the Selling Stockholder to comply in all material respects with its covenants and agreements contained in Section 7 hereof respecting sale of the Shares, or (C) arises out of any statement or omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Selling Stockholder prior to the pertinent sale or sales by the Selling Stockholder. 21 CONFIDENTIAL TREATMENT REQUEST (ii) The Selling Stockholder agrees to indemnify and hold harmless the Company (and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each officer of the Company and each director of the Company) from and against any losses, claims, damages or liabilities to which the Company (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise), insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any untrue statement if such untrue statement was made in conformity with written information furnished by the Selling Stockholder specifically for use in preparation of the Registration Statement or Prospectus, and the Selling Stockholder will reimburse the Company promptly as incurred for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim, provided, however, that the Selling Stockholder need not indemnify any of the aforementioned indemnitees for such losses, claims, damages or liabilities arising from any statement or omission in any Prospectus that is corrected in any subsequent Prospectus if the subsequent Prospectus was furnished to the person or entity asserting the loss, claim, damage or liability prior to the pertinent transaction or transactions. The Selling Stockholder will reimburse the Company (or such officer, director or controlling person), as the case may be, for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such indemnifiable action, proceeding or claim; provided that the Selling Stockholder's obligation to indemnify the Company shall be limited to the net amount received by the Selling Stockholder from the sale of the Shares to which the loss related. (iii) Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 7.4, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party under this Section 7.4 (except to the extent that such omission materially and adversely affects the indemnifying party's ability to defend such action) or from any liability otherwise than under this Section 7.4. Subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. After notice from the indemnifying person to such indemnified person of its election to assume the defense thereof, such indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof, provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate, in the opinion of counsel to the indemnified person, for the same counsel to represent both the indemnified person and such indemnifying person or any "affiliate" or "associate" (as those terms are defined in Rule 405 promulgated under the Securities Act) thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person; provided, however, that no indemnifying person shall be responsible for the fees and expenses of more than one separate counsel (together with appropriate local counsel) for all indemnified parties. In no event shall any indemnifying person be liable in respect of any amounts paid in settlement of any action unless the indemnifying person shall have approved the terms of such settlement; provided that 22 CONFIDENTIAL TREATMENT REQUEST such consent shall not be unreasonably withheld. No indemnifying person shall, without the prior written consent of the indemnified person, effect any settlement of any pending or threatened proceeding in respect of which any indemnified person is or could have been a party and indemnification could have been sought hereunder by such indemnified person, unless such settlement includes an unconditional release of such indemnified person from all liability on claims that are the subject matter of such proceeding. (iv) If the indemnification provided for in this Section 7.4 is unavailable to or insufficient to hold harmless an indemnified party under subsection (i) or (ii) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Selling Stockholder on the other in connection with the statements or omissions or other matters which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, in the case of an untrue statement, whether the untrue statement relates to information supplied by the Company on the one hand or the Selling Stockholder on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement. The Company and the Selling Stockholder agree that it would not be just and equitable if contribution pursuant to this subsection (iv) were determined by pro rata allocation (even if Selling Stockholder were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (iv). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (iv) shall be deemed to include any reasonable legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (iv), Selling Stockholder shall not be required to contribute any amount in excess of the amount by which the net amount received by Selling Stockholder from the sale of the Shares to which such loss relates exceeds the amount of any damages which Selling Stockholder has otherwise been required to pay by reason of such untrue statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Selling Stockholder's obligations in this subsection to contribute are several in proportion to their sales of Shares to which such loss relates and not joint. (v) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 7.4, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7.4 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement as required by the Securities Act and the Exchange Act. The parties are advised that federal or state public policy as interpreted by the courts in certain jurisdictions may be contrary to certain of the provisions of this Section 7.4, and the parties hereto hereby expressly waive and 23 CONFIDENTIAL TREATMENT REQUEST relinquish any right or ability to assert such public policy as a defense to a claim under this Section 7.4 and further agree not to attempt to assert any such defense. 7.5 Termination of Conditions and Obligations. The conditions precedent imposed by this Section 7 upon the transferability of the Shares shall cease and terminate as to any particular number of the Shares (i) when such Shares shall have been effectively registered under the Securities Act and sold or otherwise disposed of in accordance with the intended method of disposition set forth in the Registration Statement covering such Shares, (ii) when such Shares are sold pursuant to Rule 144 or (iii) at such time as an opinion of counsel reasonably satisfactory to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act. 7.6 Information Available. So long as a Registration Statement is effective covering the resale of Shares owned by Purchaser, the Company will furnish to Purchaser: (a) as soon as practicable after it is available, one copy of (i) its Annual Report to Stockholders (which Annual Report shall contain financial statements audited in accordance with generally accepted accounting principles by a national firm of certified public accountants), (ii) its Annual Report on Form 10-K and amendments, if any, and (iii) its Quarterly Reports on Form 10-Q and amendments, if any (the foregoing, in each case, excluding exhibits); (b) upon the request of Purchaser, all exhibits excluded by the parenthetical to subparagraph (a) of this Section 7.6 as filed with the SEC and publicly available and all other information that is made available to shareholders; and (c) promptly upon the request of Purchaser, an adequate number of copies of the Prospectuses to supply to any other party requiring such Prospectuses; and the Company, upon the request of Purchaser, will meet with Purchaser or a representative thereof at the Company's headquarters, or such other mutually agreed upon location, to discuss all information relevant for disclosure in a Registration Statement covering the Shares and will otherwise cooperate with any Purchaser conducting an investigation for the purpose of reducing or eliminating such Purchaser's exposure to liability under the Securities Act, including the reasonable production of information at the Company's headquarters. 24 CONFIDENTIAL TREATMENT REQUEST 8. COMPANY REPORTS FILED UNDER THE EXCHANGE ACT. With a view to making available to Purchaser the benefits of Rule 144 and other rules or regulations of the SEC that may permit the Purchaser to sell the Shares without registration, for the first two years in which Purchaser owns Shares issued in each Closing, the Company covenants and agrees to (a) comply with all of the reporting requirements of the Exchange Act applicable to it and shall comply with all other public information reporting requirements of the SEC that are conditions to the availability of Rule 144 for the sale of the Shares and (b) furnish to Purchaser, upon request, a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, and such other information as may be reasonably requested in order to avail the Purchaser of any rule or regulation of the SEC that permits the selling of any such Shares without registration. 9. MISCELLANEOUS. 9.1 Waivers and Amendments. The terms of this Agreement may be waived or amended only with the written consent of the Company and Purchaser. 9.2 Governing Law; Jurisdiction. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware without regard to conflict of laws. The Company and Purchaser each hereby irrevocably submit to the nonexclusive jurisdiction of any court of the State of Delaware, both state and federal, for the purpose of any suit, action or other proceeding arising out of this Agreement. 9.3 Survival. The covenants and agreements made under Section 7 of this Agreement shall survive any Closing or any termination of the Collaboration Agreement. 9.4 Successors and Assigns. The provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. In the event of any merger, consolidation or acquisition involving the Company in which the Company is not the surviving entity, the Company's obligations hereunder, including the continued registration of the Shares pursuant to Section 7 hereof shall be expressly or by operation of law assumed by the surviving entity. 9.5 Entire Agreement. The Transaction Agreements constitute the full and entire understanding and agreement between the parties with regard to the subject hereof; provided, however, that nothing in the Transaction Agreements shall be deemed to terminate or supersede the provisions of any confidentiality and disclosure agreements executed by the parties hereto prior to the date hereof, which agreements shall continue in full force and effect until terminated in accordance with their respective terms. 25 CONFIDENTIAL TREATMENT REQUEST 9.6 Notices, etc. All notices and other communications required or permitted hereunder shall be effective upon receipt and shall be in writing and may be delivered in person, by facsimile, overnight delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, addressed: if to Purchaser, at Amgen Inc. One Amgen Center Drive Thousand Oaks, California 91320-1799 Attention: Corporate Secretary Fax: (805) 449-4531 or if to the Company, at Genome Therapeutics Corp. 100 Beaver Street Waltham, Massachusetts 02453 Attention: President Fax: ***** or in any case at such other address as Purchaser or the Company shall have furnished to the other in writing. 9.7 Severability of this Agreement. If any provision of this Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 9.8 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to Company or to the Purchaser, upon any breach or default of any party hereto under this Agreement, shall impair any such right, power or remedy of Company or the Purchaser nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of any similar breach of default thereafter occurring; nor shall any waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of Company or the Purchaser of any breach of default under this Agreement or any waiver on the part of Company or the Purchaser of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to Company or the Purchaser shall be cumulative and not alternative. 9.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference and shall not, by themselves, determine the construction of this Agreement. 26 CONFIDENTIAL TREATMENT REQUEST 9.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 9.11 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchaser and the Company will be entitled to specific performance under this Agreement. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. 9.12 Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. [signature page follows] 27 IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized representatives to execute this Agreement as of the date and year first above written. GENOME THERAPEUTICS CORP. By: ------------------------------------- Steven M. Rauscher President and Chief Executive Officer AMGEN INC. By: ------------------------------------- Kevin W. Sharer Chairman of the Board, Chief Executive Officer and President S-1 EX-10.64 5 dex1064.txt LETTER TO CLAUDIO QUARTA FROM CEO October 22, 2002 Exhibit 10.64 Claudio Quarta Chief Executive Officer and CEO BioSearch Italia, S.p.A. via R. Lepetit, 34 21040 Gerenzano, Italy Re: License and Supply Agreement dated October 8 , 2001 Dear Claudio: As we have discussed, Genome Therapeutics believes that it is uncertain as to whether the clinical development program for ramoplanin can be completed and a new drug application ("NDA") filed by *****. This uncertainty is due to a number of factors, which we both acknowledge to be beyond our control, including patient compliance with the current sachet dosage form and slow enrollment in the RAVE trial due to restrictive inclusion criteria and competition from other experimental clinical trials for the same patient population. Genome Therapeutics has been in contact with the U.S. Food and Drug Administration to discuss changes to the ramoplanin development program, which we believe can expedite its completion. We shall endeavor to identify with the FDA in the reasonably shortest time frame the program changes that will result in the most expeditious development path for Ramoplanin. You and we agree to devise a reasonable timetable based on that development path, and if it should appear that the filing of a NDA is, for reasons beyond our control, not possible by *****, you and we will determine an outside date for the filing of the NDA for Ramoplanin based on the new timetable. The target date so determined will replace the date currently reflected in Section 11.3(b) of the License and Supply Agreement. We both agree that the right granted to Biosearch under Section 11.3(b) will not be exercised pending determination and insertion of the new date. - ---------- *Confidential Treatment has been requested for the marked portions. BioSearch Italia, S.p.A. October 22, 2002 Page 2 I appreciate your working with us on this issue and doing, as we have in the past, what is best for the clinical development of Ramoplanin. I look forward to continuing our collaboration in the future. Except as set forth in this letter, the License and Supply Agreement remains unchanged. Please acknowledge your agreement with provisions of this letter by signing in the space provided and returning a copy to me. Genome Therapeutics, Corp. By: ---------------------------- Steven M. Rauscher Chief Executive Officer Agreed and Accepted: BioSearch Italia, S.p.A. By: ------------------------------- Claudio Quarta, Ph.D. Chief Executive Officer EX-23.1 6 dex231.txt CONSENT OF ERNST & YOUNG INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS As independent auditors, we hereby consent to the incorporation of our report dated February 18, 2003 except with respect to the matter discussed in Note 13, as to which the date is March 14, 2003, included in this Form 10-K into the Company's previously filed Registration Statement File No. 2-77846, No. 2-81123, No. 2-95446, No. 33-12633, No. 33-27885, No. 0-10824, No. 33-45432, No. 33-75136, No. 333-15935, No. 333-49069, No. 333-30920, No. 333-39390, No. 333-92951, No. 333-32614 and No. 333-58274. /s/ ERNST & YOUNG LLP Boston, Massachusetts March 28, 2003 EX-99.1 7 dex991.txt RISK FACTORS EXHIBIT 99.1 RISK FACTORS We have a history of significant operating losses and expect these losses to continue in the future. We have experienced significant operating losses each year since our inception and expect these losses to continue for the foreseeable future. We had a net loss of approximately $34,017,000 for the fiscal year ended December 31, 2002, and, as of December 31, 2002, we had an accumulated net loss of approximately $125,775,000. The losses have resulted primarily from costs incurred in research and development, including our clinical trials, and from general and administrative costs associated with our operations. These costs have exceeded our revenues which to date have been generated principally from collaborations, government grants and sequencing services. We anticipate incurring additional losses this year and in future years and cannot predict when, if ever, we will achieve profitability. These losses may increase in the near future as we expand our research and development and clinical trial activities. In addition, our partners' product development efforts which utilize our genomic discoveries are at an early stage and, accordingly, we do not expect our losses to be substantially mitigated by revenues from milestone payments or royalties under those agreements for a number of years, if ever. Clinical trials are costly, time consuming and unpredictable, and we have limited experience conducting and managing necessary pre-clinical and clinical trials for our product candidates. Our lead product candidate, Ramoplanin, is in a Phase III clinical trial for the prevention of bloodstream infections caused by vancomycin-resistant enterococci, also known as VRE, and a Phase II clinical trial to assess the safety and efficacy of Ramoplanin to treat Clostridium difficile-associated diarrhea (CDAD). Prior clinical and pre-clinical trials for Ramoplanin were conducted by Biosearch Italia S.p.A. and its licensees, from whom we acquired our license to develop Ramoplanin. We may not be able to demonstrate the safety and efficacy of Ramoplanin or our other products to the satisfaction of the U.S. Food and Drug Administration, commonly referred to as the FDA, or other regulatory authorities. We may also be required to demonstrate that our proposed product represents an improved form of treatment over existing therapies and we may be unable to do so without conducting further clinical studies. Negative, inconclusive or inconsistent clinical trial results could prevent regulatory approval, increase the cost and timing of regulatory approval or require additional studies or a filing for a narrower indication. The speed with which we complete our clinical trials and our applications for marketing approval will depend on several factors, including the following: . the rate of patient enrollment, which is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the nature of the protocol; . fluctuations in the infection rates for patients enrolled in our trials; . compliance of patients and investigators with the protocol; . prior regulatory agency review and approval of our applications and procedures; . analysis of data obtained from pre-clinical and clinical activities which are susceptible to varying interpretations, which interpretations could delay, limit or prevent regulatory approval; . changes in the policies of regulatory authorities for drug approval during the period of product development; and . the availability of skilled and experienced staff to conduct and monitor clinical studies, to accurately collect data and to prepare the appropriate regulatory applications. In addition, the cost of human clinical trials varies dramatically based on a number of factors, including the order and timing of clinical indications pursued, the extent of development and financial support from alliance partners, the number of patients required for enrollment, the difficulty of obtaining clinical supplies of the product candidate, and the difficulty in obtaining sufficient patient populations and clinicians. We have limited experience in conducting and managing the pre-clinical and clinical trials necessary to obtain regulatory marketing approvals. We may not be able to obtain the approvals necessary to conduct clinical studies. Also, the results of our clinical trials may not be consistent with the results obtained in pre-clinical studies or the results obtained in later phases of clinical trials may not be consistent with those obtained in earlier phases. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after experiencing promising results in early animal and human testing. If regulatory approval of a drug is granted, such approval is likely to limit the indicated uses for which it may be marketed. Furthermore, even if a product of ours gains regulatory approval, the product and the manufacturer of the product will be subject to continuing regulatory review. We may be restricted or prohibited from marketing or manufacturing a product, even after obtaining product approval, if previously unknown problems with the product or its manufacture are subsequently discovered. Use of genomic information to develop or commercialize products is unproven. The development of new drugs and the diagnosis of disease based on genomic information is unproven. Our business strategy is based on the assumption that 2 identifying and characterizing genes and sequencing select human genes and the genomes of select pathogens may help scientists better understand complex disease processes and develop drugs to treat these diseases. There is limited understanding of the roles of genes in diseases. Few therapeutic vaccine or diagnostic products based on genomic information have been developed and commercialized. To date, no one has developed or commercialized any pharmaceutical, diagnostic or vaccine products based on our technologies. If we fail to identify genes useful for the discovery and development of such products, or if partners are unable to use the genomic information that we provide to them to develop such products, our current and potential customers may lose confidence in our products or their value for drug discovery, and our business may suffer as a result. We rely heavily upon existing and prospective alliance partners and licensees as a source of revenue for our operations and as a means of developing and commercializing our products. Our strategy for developing and commercializing therapeutic, vaccine and diagnostic products depends, in part, on strategic alliances and licensing arrangements with pharmaceutical and biotechnology partners. We currently have alliances with AstraZeneca, Amgen, bioMerieux, Schering-Plough and Wyeth-Ayerst. We have received a substantial portion of our revenue from these alliances, and we expect to continue to do so. Under these arrangements, we are entitled to receive payments and royalties based on the achievement by us and our partners of certain development milestones and the successful development of products arising from the collaborations. Although we have achieved many of the scientific milestones under our agreements, we cannot assure you that we will continue these achievements in the future or that milestones dependent on our partners' development and commercialization activities will be attained. In addition, we cannot assure that we will maintain our current collaborations or establish additional collaborations. Competition among genomics companies for collaborations with pharmaceutical companies is intense. This competition is enhanced by the trend towards consolidation among large pharmaceutical companies. Consequently, we cannot be sure that we will be able to enter into new collaborations or maintain our existing ones, and any new or renewed collaborations may be on terms less favorable to us than past collaborations. Our failure to maintain existing collaborations or to enter into additional collaborations would have a material adverse effect on our business. In particular, if funding from partners were to become unavailable or were to be reduced, we would need to devote additional internal resources to our research programs or possibly scale back or terminate some programs. If our partners develop products using our genomic information, we will rely on these partners for product development, regulatory approval, manufacturing and marketing of those products before we can receive some of the milestone payments, royalties and other payments to which we may be entitled under the terms of some of our alliance agreements. Our agreements with our partners typically allow the partners significant discretion in electing whether to pursue any of these activities. We cannot control the amount and timing of resources our partners may devote to our programs or 3 potential products. As a result, we cannot assure that our partners will perform their obligations as expected. In addition, if a partner is involved in a business combination, such as a merger or acquisition, or changes its business focus, its performance under our agreement may suffer and, as a result, we may not generate any revenues from the royalty, milestone and similar payment provisions of our collaboration agreement with that partner. Development of therapeutic, diagnostic and vaccine products based on our discoveries will be subject to the high risks of failure inherent in the development or commercialization of health care products. These risks include the possibility that any such products will be found to be toxic, be found to be ineffective, fail to receive necessary regulatory approvals, be difficult or impossible to manufacture on a large scale, be uneconomical to market, fail to be developed prior to the successful marketing of similar products by competitors or infringe on proprietary rights of third parties. Our strategy includes entering into multiple, concurrent alliances. We cannot assure that we will be able to manage multiple alliances successfully. The risks we face in managing multiple alliances include maintaining confidentiality among partners, avoiding conflicts between partners and avoiding conflicts between us and our partners. If we fail to manage our alliances effectively, or if any of the problems described above arise, one or more of the following could occur which could have a material adverse effect on our business: . use of significant resources to resolve conflicts, . delay in research effects, . legal claims involving significant time, . expense, . loss of reputation, . termination of one or more alliances, or loss of capital and loss of revenues. We expect to raise additional funds in the future. We believe that our existing cash and marketable securities together with borrowings under equipment financing arrangements and anticipated cash flow from operations will be sufficient to support our current plans for approximately eighteen months. However, we expect to raise additional capital, subject to market conditions and strategic considerations over the course of the next 12 months. In particular, we will need additional funds to increase our research and development activities and fund our clinical trials. We may seek funding through additional public or private equity offerings, debt financings or agreements with customers. If we raise additional capital by issuing equity or convertible debt securities, the issuances may dilute share ownership of existing investors and future investors may be granted rights superior to those of current shareholders. Additional financing may not be available when needed, or, if available, 4 may not be available on favorable terms. If we cannot obtain adequate financing on acceptable terms when such financing is required, our business will be adversely affected. We have issued $15 million of convertible notes due December 31, 2004, which contain restrictive covenants, including covenants that can cause early repayment of the Notes. On March 5, 2002, we issued convertible notes, bearing interest at 6% per annum, to two institutional investors in the aggregate principal amount of $15 million. The notes are due on December 31, 2004, but if at any time on or after December 31, 2003, we maintain a net cash balance (i.e., cash and cash equivalents less obligations for borrowed money bearing interest) of less than $35 million, then the holders of the notes can require that all or any part of the outstanding principal balance of the notes plus all accrued but unpaid interest be repaid. If we have to repay the notes early, our cash position and ability to execute our business plan could be adversely affected. The notes also contain provisions limiting our ability to incur debt that is senior to the notes, with an exception for certain equipment financing, and provisions that can cause the payment of a premium to the holders of the notes on a change of control transaction. The notes are convertible into our common stock at a price of $8 per share (subject to anti-dilution and other adjustments). As part of the transaction, the purchasers also received warrants to purchase up to 487,500 shares of our common stock at an exercise price of $8.00 per share (subject to anti-dilution and other adjustments), which become exercisable to the extent the notes are converted or if certain other redemptions or repayments of the notes occur. The shares underlying the notes and the warrants will be registered for re-sale and if the notes are converted and the warrants exercised, these shares could be sold into the market creating dilution of the ownership of our shareholders at that time. We will need to develop marketing and sales capabilities to successfully commercialize our product candidates. Because we have only recently acquired a license to develop our first product candidate, we currently have no marketing or sales experience. We will need to develop a marketing and sales staff to successfully commercialize our product candidates, including Ramoplanin. The development of marketing and sales capabilities will require significant expenditures, management resources and time. We may be unable to build such a sales force, the cost of establishing such a sales force may exceed any product revenues, or our marketing and sales efforts may be unsuccessful. Failure to successfully establish sales and marketing capabilities in a timely manner or find suitable sales and marketing partners may materially adversely affect our business and results of operation. Even if we are able to develop a sales force or find a suitable marketing partner, our products may not be accepted by health care providers or consumers. Health care insurers and other payers may not pay for our products or may impose limits on reimbursement. 5 Our ability to commercialize Ramoplanin and our future products will depend, in part, on the extent to which reimbursement for such products will be available from third-party payers, such as Medicare, Medicaid, health maintenance organizations, health insurers and other public and private payers. If we succeed in bringing Ramoplanin or other products in the future to market, we cannot assure you that third-party payers will pay for Ramoplanin or other products or will establish and maintain price levels sufficient for realization of an appropriate return on our investment in product development. If adequate coverage and reimbursement levels are not provided by government and private payers for use of our products, our products may fail to achieve market acceptance and our results of operations may be materially adversely affected. Many health maintenance organizations and other third-party payers use formularies, or lists of drugs for which coverage is provided under a health care benefit plan, to control the costs of prescription drugs. Each payer that maintains a drug formulary makes its own determination as to whether a new drug will be added to the formulary and whether particular drugs in a therapeutic class will have preferred status over other drugs in the same class. This determination often involves an assessment of the clinical appropriateness of the drug and sometimes the cost of the drug in comparison to alternative products. We cannot assure you that Ramoplanin or any of our future products will be added to payer's formularies, whether our products will have preferred status to alternative therapies, nor whether the formulary decisions will be conducted in a timely manner. We may also decide to enter into discount or formulary fee arrangements with payers, which could result in us receiving lower or discounted prices for Ramoplanin or future products. We currently depend and will in the future depend on third parties to manufacture our product candidates, including Ramoplanin. We do not have the internal capability to manufacture commercial quantities of pharmaceutical products under the FDA's current Good Manufacturing Practices. We have entered into an agreement with Biosearch (which merged with Versicor Inc. in March 2003 and subsequently changed its name to Vicuron Pharmaceuticals Inc.) for the manufacture of Ramoplanin and expect to enter into similar agreements with third parties for the manufacture of future product candidates. We cannot be certain that Vicuron or future manufacturers will be able to deliver commercial quantities of product candidates to us or that such deliveries will be made on a timely basis. If we are required to find additional or alternative sources of supply for Ramoplanin or other future product candidates, we may face additional cost and delay in product development and commercialization. We may not be able to enter into alternative supply arrangements at commercially acceptable rates, if at all. Also, if we change the source or location of supply or modify the manufacturing process, regulatory authorities will require us to demonstrate that the product produced by the new source or from the modified process is equivalent to the product used in any clinical trials that we had conducted. In addition, any contract manufacturers that we may use must adhere to the FDA's regulations on current Good Manufacturing Practices, which are enforced by the FDA through its facilities inspection program. These facilities are subject to periodic 6 inspection by the FDA. The manufacture of products at these facilities will be subject to strict quality control testing and recordkeeping requirements. Moreover, while we may choose to manufacture products in the future, we have no experience in the manufacture of pharmaceutical products for clinical trials or commercial purposes. If we decide to manufacture products, we would be subject to the regulatory requirements described above. In addition, we would require substantial additional capital and would be subject to delays or difficulties encountered in manufacturing pharmaceutical products. No matter who manufactures the products, we will be subject to continuing obligations regarding the submission of safety reports and other post-market information. Future acquisitions may absorb significant resources and may be unsuccessful. As part of our strategy, we may pursue acquisitions of businesses or assets, investments and other relationships and alliances. Acquisitions may involve significant cash expenditures, debt incurrence, additional operating losses, dilutive issuances of equity securities, and expenses that could have a material adverse effect on our financial condition and results of operations. For example, to the extent that we elect to pay the purchase price for such acquisitions in shares of our stock, the issuance of additional shares of our stock will be dilutive to our stockholders. Acquisitions involve numerous other risks, including: . difficulties integrating acquired technologies and personnel into our business; . diversion of management from daily operations; . inability to obtain required financing on favorable terms; . entering new markets in which we have little or no previous experience; . potential loss of key employees or customers of acquired companies; . assumption of the liabilities and exposure to unforeseen liabilities of acquired companies; and . amortization of the intangible assets of acquired companies. It may be difficult for us to complete these types of transactions quickly and to integrate the businesses efficiently into our current business. Any acquisitions or investments by us may ultimately have a negative impact on our business and financial condition. The biopharmaceutical industry is intensely competitive and rapidly evolving. There is intense competition among entities in the biopharmaceutical field to develop and commercialize pharmaceutical and diagnostic products and services. We face competition in these areas from pharmaceutical, biotechnology, diagnostic and 7 genomics companies. Many of our competitors have substantially greater capital resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than us. Furthermore, many of our competitors are more experienced than we are in drug discovery, development and commercialization, and obtaining regulatory approvals. As a result, our competitors may discover, develop and commercialize pharmaceutical products or services before us. In addition, our competitors may discover, develop and commercialize products or services that are more effective than, or otherwise render non-competitive or obsolete, the products or services that we or our collaborators are seeking to develop and commercialize. Moreover, these competitors may obtain patent protection or other intellectual property rights that would limit our rights or the ability of our collaborators to develop or commercialize pharmaceutical products or services. Our intellectual property protection may be inadequate to protect our proprietary rights. Our success will depend, in part, on our ability to obtain commercially valuable patent claims and protect our intellectual property. Our patent position involves complex legal and factual questions, and legal standards relating to the validity and scope of claims in our technology field are still evolving. Therefore, the degree of future protection for our proprietary rights is uncertain. The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following: . the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents; . the claims of any patents which are issued may be limited from those in our patent applications and . may not provide meaningful protection; . we may not be able to develop additional proprietary technologies that are patentable; . the patents licensed or issued to us or our customers may not provide a competitive advantage; . other companies may challenge patents licensed or issued to us or our customers; . patents issued to other companies may harm our ability to do business; . other companies may independently develop similar or alternative technologies or duplicate our technologies; and 8 . other companies may design around technologies we have licensed or developed. We may apply for patent protection for compositions and methods relating to gene expression and disease-specific patterns of gene expression that we identify and individual disease genes and targets that we discover. These patent applications may include claims relating to novel genes, gene fragments, single nucleotide polymorphisms (SNPs) or encoded protein and to novel uses for known genes, gene fragments, SNPs or proteins identified from the use of our genomic information and our databases. We may not be able to obtain meaningful patent protection for our discoveries. Even if patents are issued, their scope of coverage or protection is uncertain. For example, we or our collaborators have filed patent applications with respect to a number of full length genes and corresponding proteins and partial genes of H. pylori, of M. leprae and several other organisms. These applications seek to protect these full-length and partial gene sequences and corresponding proteins, as well as equivalent sequences and products and uses derived from these sequences and proteins. Some court decisions and US Patent and Trademark Office guidelines indicate that disclosure of a partial sequence may not be sufficient to support the patentability of a full-length sequence. In addition, we are aware that some companies have published patent applications relating to nucleic acids encoding several H. pylori proteins and, in other disease programs, relating to genes for which we have found mutations of interest. If these companies are issued patents, their patents may limit our ability and the ability of our collaborators to practice under any patents that may be issued to our collaborators or us. Because of this, we or our collaborators may not be able to obtain patents with respect to the genes of infectious agents such as H. pylori, or the value of certain other patents issued to us or our collaborators may be limited. Also, even if a patent were issued to us, the scope of coverage or protection afforded to such patent may be limited. Our proprietary position may depend on our ability to protect trade secrets. We rely on trade secret protection for our confidential and proprietary information and procedures, including procedures related to sequencing genes and to searching and identifying important regions of genetic information. We currently protect such information and procedures as trade secrets. We protect our trade secrets through recognized practices, including access control, confidentiality agreements with employees, consultants, collaborators, and customers, and other security measures. These confidentiality agreements may be breached, however, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competition. We may infringe the intellectual property rights of third parties and may become involved in expensive intellectual property litigation. The intellectual property rights of biotechnology companies, including our company, are generally uncertain and involve complex legal, scientific and factual 9 questions. Our success in the functional genomic field may depend, in part, on our ability to operate without infringing on the intellectual property rights of others and to prevent others from infringing on our intellectual property rights. There has been substantial litigation regarding patents and other intellectual property rights in the genomic industry. We may become party to patent litigation or proceedings at the U.S. Patent and Trademark Office or a foreign patent office to determine our patent rights with respect to third parties which may include subscribers to our database information services. Interference proceedings in the U.S. Patent and Trademark Office or opposition proceedings in a foreign patent office may be necessary to establish which party was the first to discover such intellectual property. We may become involved in patent litigation against third parties to enforce our patent rights, to invalidate patents held by such third parties, or to defend against such claims. The cost to us of any patent litigation or similar proceeding could be substantial, and it may absorb significant management time. If an infringement litigation against us is resolved unfavorably, we may be enjoined from manufacturing or selling certain of our products or services without a license from a third party. We may not be able to obtain such a license on commercially acceptable terms, or at all. We may not be able to obtain meaningful patent protection for discoveries under our government contracts. Under our government grants and contracts, the government has a statutory right to practice or have practiced any inventions developed under the government research contracts. In addition, under certain circumstances, such as inaction on the part of us or our licensees to achieve practical application of the invention or a need to alleviate public health or safety concerns not reasonably satisfied by us or our licensees, the government has the right to grant to other parties licenses to any inventions first reduced to practice under the government grants and contracts. If the government grants such a license to a third party, our patent position may be jeopardized. In addition, the government has ownership rights in the data, clones, genes and other material derived from the material furnished to us by the government, while we have ownership rights in other technology developed solely by us. We are also obligated under certain government grants to submit sequencing data and materials resulting from our research to public databases within 24 hours from the date such data and materials are developed. Our ability to obtain patent protection for our discoveries and inventions may be adversely affected by this publication. International patent protection is uncertain. Patent law outside the United States is uncertain and is currently undergoing review and revision in many countries. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may participate in opposition proceedings to determine the validity of our or our competitors' foreign patents, which could result in substantial costs and diversion of our efforts. Finally, some of our patent protection in the United States is not available to us in foreign countries due to the laws of those countries. 10 Our research and product development depends on access to tissue samples and other biological materials from individuals. To continue to build our database products, we will need access to normal and diseased human and other tissue samples, other biological materials and related clinical and other information, which may be in limited supply. We compete with many other companies for these materials and information. We may not be able to obtain or maintain access to these materials and information on acceptable terms. In addition, government regulation in the United States and foreign countries could result in restricted access to, or use of, human and other tissue samples. If we lose access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on our use of the information generated from tissue samples, our business may be harmed. Competition among genomics companies is also increasing for access to unique data from related individuals that we use to identify genes for specific human diseases. Ethical, legal and social issues related to the use of genetic information and genetic testing may cause less demand for our products. Genetic testing has raised issues regarding confidentiality and the appropriate uses of the resulting information. For example, consumers have expressed concerns towards insurance carriers and employers using such tests to discriminate on the basis of such information, resulting in barriers to the acceptance of such tests. This could lead to governmental authorities calling for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain diseases, particularly those that have no known cure. Any of these scenarios could reduce the potential markets for our products. We may not succeed in realizing any additional revenue from the PathoGenome Database. In 1997, we introduced the PathoGenome Database that consists of genetic information from more than thirty microbial organisms. In the past, our strategy for our database depended on entering into subscription agreements with pharmaceutical, biotechnology and other companies for the use of our database. Each of the agreements that we may have with our customers is for a specific term, and we anticipate that they may not be renewed upon expiration or may be renewed at a substantially lower price. If any agreements expire and are not renewed, our revenue would suffer. Our sales cycle is lengthy and we may spend considerable resources on unsuccessful negotiation efforts or may not be able to complete deals on the schedule anticipated. Our ability to obtain new customers for genomic information products depends on our customers' belief that we can help accelerate their drug discovery efforts. Our negotiation cycle is typically lengthy because we need to educate potential customers and sell the benefits of our products and services to a variety of constituencies within companies. In addition, each agreement involves the negotiation of unique terms. We may expend substantial funds and management effort with no assurance that an 11 agreement will result. Actual and proposed consolidations of pharmaceutical companies have affected and may in the future affect the timing and progress of our ability to conclude deals with collaborative partners. We depend on key personnel in a highly competitive market for skilled personnel. We are highly dependent on the principal members of our senior management and key scientific and technical personnel. The loss of any of these personnel could have a material adverse effect on our ability to achieve our goals. Our future success is also dependent upon our ability to attract and retain additional qualified scientific, technical and managerial personnel. Our plan to expand our biopharmaceutical program will require us to hire a number of new personnel with expertise in the areas of clinical trials and sales and marketing. We experience intense competition for qualified personnel and may not be able to continue to attract and retain skilled personnel necessary for the development of our business. Our activities involve hazardous materials and may subject us to environmental liability. Our research and development involve the controlled use of hazardous and radioactive materials and biological waste. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and certain waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for damages or penalized with fines, and this liability could exceed our resources. We believe that we are in compliance in all material respects with applicable environmental laws and regulations and currently do not expect to make material additional capital expenditures for environmental control facilities in the near term. However, we may have to incur significant costs to comply with current or future environmental laws and regulations. Multiple factors beyond our control may cause fluctuations in our operating results and may cause our business to suffer. Our revenues and results of operations may fluctuate significantly, depending on a variety of factors, including the following: . our success in concluding deals for, and changes in the demand for, our products; . variations in the timing of payments from partners and customers and the recognition of these payments as revenues; . the terms we are able to negotiate in our deals; . the progress of our pre-clinical and clinical trials; 12 . the timing of our new product introductions, if any; . changes in the research and development budgets of our customers and potential customers; . the introduction of new products and services by our competitors; . regulatory actions; . expenses related to, and the results of, litigation and other proceedings relating to intellectual property rights; . the cost and timing of our adoption of new technologies; . the cost, quality and availability of cell and tissue samples, reagents and related components and technologies, including those supplied to us pursuant to contractual arrangements; and . the lengthy nature of our sales cycle for concluding alliances and other deals. We will not be able to control many of these factors. In addition, if our revenues in a particular period do not meet expectations, we may not be able to adjust our expenditures in that period, which could cause our business to suffer. We believe that period-to-period comparisons of our financial results will not necessarily be meaningful. You should not rely on these comparisons as an indication of our future performance. If our operating results in any future period fall below the expectations of securities analysts and investors, our stock price may fall, possibly by a significant amount. 13 EX-99.2 8 dex992.txt LETTER FROM CEO EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Executive Officer of Genome Therapeutics Corp. (the "Company") does hereby certify that to my knowledge: 1) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Steven M.Rauscher Steven M. Rauscher Chief Executive Officer Dated: March 31, 2003 EX-99.3 9 dex993.txt LETTER FROM CFO EXHIBIT 99.3 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Executive Officer of Genome Therapeutics Corp. (the "Company") does hereby certify that to my knowledge: 1) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Stephen Cohen Stephen Cohen Chief Financial Officer Dated: March 31, 2003 -----END PRIVACY-ENHANCED MESSAGE-----