-----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, EyLTC77xwky7cqdYRcz68uddFDXRsNXA+LRcp7Q5n7OaJxmfEg9wqqW8Rc+ZXB1w Q0bTi4nhpffLe9u+ELgAQA== /in/edgar/work/0000950131-00-006568/0000950131-00-006568.txt : 20001128 0000950131-00-006568.hdr.sgml : 20001128 ACCESSION NUMBER: 0000950131-00-006568 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20001127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENDOREX CORP CENTRAL INDEX KEY: 0000812796 STANDARD INDUSTRIAL CLASSIFICATION: [2834 ] IRS NUMBER: 411505029 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-16929 FILM NUMBER: 776793 BUSINESS ADDRESS: STREET 1: 28101 BALLARD DR. CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 847-573-8990 MAIL ADDRESS: STREET 1: 28101 BALLARD DR. CITY: LAKE FOREST STATE: IL ZIP: 60045 FORMER COMPANY: FORMER CONFORMED NAME: IMMUNOTHERAPEUTICS INC DATE OF NAME CHANGE: 19920703 10KSB/A 1 0001.txt FORM 10-KSB/A - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-KSB/A ---------------- (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to Commission File No. 1-14778 ---------------- ENDOREX CORPORATION (Exact name of registrant as specified in its charter) ---------------- DELAWARE 41-1505029 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 28101 BALLARD DRIVE, SUITE F, 60045 LAKE FOREST, IL (Zip Code) (Address of principal executive offices) Issuer's telephone number, including area code: (847) 573-8990 Securities registered under Section 12(b) of the Exchange Act:
Name of each Exchange Title of each class on Which registered ------------------- --------------------- None American Stock Exchange
Securities registered under Section 12(g) of the Securities Exchange Act: Common Stock, par value $.001 per share (Title of class) ---------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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- KSB or any amendment to this Form 10-KSB. [_] Revenues for its most recent fiscal year were: $-0- The aggregate market value of the voting stock held by non-affiliates computed by reference to the closing price of such stock, as of March 1, 2000, was $64,800,000. Non-affiliates have been determined on the basis of holdings set forth under Item 11 of this Annual Report on Form 10-KSB. At March 1, 2000, 10,786,337 shares of the registrant's common stock (par value, $.001 per share) were outstanding. Documents Incorporated by Reference The definitive proxy statement of Endorex Corporation in connection with the annual meeting held on May 17, 2000 is incorporated by reference into Part III of this Form 10-KSB. Transitional Small Business Issuer: Yes [_] No [X] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I Item 1. Business. The Company Endorex Corporation is a development stage drug delivery company, incorporated in Delaware. Our core drug delivery technology, the Orasome(TM) system, focuses on the oral and mucosal delivery of protein and peptide-based drugs and vaccines previously delivered only by injection. The Orasome system is licensed from the Massachusetts Institute of Technology ("MIT"). In 1998 Endorex formed two drug delivery joint ventures with Elan Corporation, plc ("Elan"), one of the world's leading drug delivery companies. The purpose of the first joint venture, InnoVaccines Corporation ("InnoVaccines"), is to research, develop and commercialize novel delivery systems for the human and veterinary vaccine markets. The second joint venture, Endorex Newco, Ltd. ("Newco"), focuses on the utilization of the MEDIPAD(R) microinfusion pump, developed by Elan, to deliver iron chelators for the treatment of a series of genetic blood disorders known as iron overload disorders. Our headquarters is located north of Chicago, close to the headquarters of several major pharmaceutical companies such as Abbott Laboratories, Baxter International, Searle (the pharmaceutical division of Monsanto), and the U.S. subsidiaries of two major Japanese pharmaceutical companies, Fujisawa and Takeda Chemicals. This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and is subject to the safe- harbors created by those sections. These forward-looking statements are subject to significant risks and uncertainties, including those identified in the "Risk Factors" section of this Form 10-KSB, which may cause actual results to differ materially from those discussed in any forward-looking statements. The forward-looking statements within this Form 10-KSB are identified by words such as "believes," "anticipates," "expects," "intends," "may," "will" and other similar expressions. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any revisions to forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this form 10-KSB with the SEC. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business. Orasome Oral and Mucosal Drug Delivery System Endorex's fundamental platform technology resides in its potential ability to convert injectable-only therapy into the patient-preferred format of oral therapy. This conversion process includes encapsulating "fragile" protein and/or peptide based drugs for oral delivery using proprietary patented technology from MIT. Many vaccines and macromolecular drugs are exceptionally fragile and thus cannot survive the digestive action of the gastrointestinal ("GI") tract. By employing the Orasome system, a specially engineered, polymerized liposome-based technology for entrapment of protein or peptide- based vaccines and drugs, many of these agents might be made orally available at therapeutic levels. Endorex is developing core technology for a new generation of vaccines that may be taken by mouth, thereby replacing painful injections, and thereby increasing patient compliance. Other applications of this technology under development at Endorex could enable preparation of oral formulations of peptide hormones, such as insulin and human growth hormone, other sensitive peptide drugs and proteins, and nucleic acids ("DNA"). Virtually all of these compounds are currently given to patients solely via injection. The Orasome system represents a series of improvements in encapsulation technology resulting in properties that we believe enable efficient uptake by crucial cells in the gastrointestinal tract. Because of the unique 1 ability of these polymerized liposomes to withstand the activity of bile salts, digestive enzymes, and gastric acids, this proprietary liposomal technology may be utilized practically and commercially for the oral delivery of many therapeutics. Orasomes encapsulate sensitive drugs and hold them within a membrane envelope that is resistant to the environmental stress of the GI tract. Orasomes can also be engineered to release contents in a controlled fashion and to contain surface ligands (or biological "magnets") capable of targeting specific receptors in the intestine and other tissues. By comparison, conventional liposomes appear to be chemically and physically unstable and tend to be unsuitable for oral delivery, because they degrade rapidly upon introduction into the GI tract. If the encapsulated drug or vaccine is released into this environment, the active material is destroyed and the therapeutic effect negated. In vitro studies with orasomes have demonstrated high stability under harsh conditions similar to conditions found in the human intestinal tract, such as exposure to acidic pH, simulated bile salts, and detergents. Liposomal formulations have been scaled up and manufactured commercially. Examples of such formulations include the cancer drugs liposomal doxorubicin and liposomal daunorubicin as well as the anti-fungal agent liposomal amphotericin B, which have been approved by the Food and Drug Administration ("FDA") and are currently being marketed. Endorex is currently scaling up its Orasome system for human clinical trials through its joint venture partner, Elan. Endorex believes that the Orasome system as a platform technology satisfies a number of criteria necessary for a successful drug delivery system, including: --Flexibility for incorporation of numerous types of drugs and vaccines; --Stability of the drug or vaccine through the GI tract; --Enhanced mucosal uptake of the drug or vaccine; --Compatibility of the delivery system with current manufacturing methodology; and --No apparent toxicity of the orasomes in animal studies to-date. Drug Delivery Development Status Endorex has demonstrated the bioavailability and bioactivity of using orasomes for oral delivery of selected drugs in animal models as well as the immunogenicity of oral vaccines in similar models. Orasomes have been used successfully in animal models for oral delivery of human growth hormone ("hGH"). Endorex believes an oral version of hGH should provide product differentiation along with the convenience and improved compliance that accompanies oral delivery. Daily oral delivery should offer an attractive alternative to daily injections or slow release formulations, particularly for chronic therapies. Animal studies have shown that delivery of unencapsulated hGH, or hGH in non-polymerized liposomes, does not result in a rise in serum hGH, while hGH is detected in serum after oral delivery in orasomes. Endorex recently signed a research and option agreement with Novo Nordisk A/S (a major European pharmaceutical company with a significant share of the estimated $1.7 billion global market for hGH), to evaluate the commercial attractiveness of Novo's brand of hGH delivered orally, Norditropin(R). They plan to evaluate the Orasome system in several animal models. Novo Nordisk has taken an exclusive option to license the Orasome technology for Norditropin(R). During 2000, Endorex will also evaluate the Orasome system for oral delivery of a DNA based product (vaccine). Oral Delivery of Human and Veterinary Vaccines According to a Frost & Sullivan market research report on human vaccines, the worldwide vaccine market is projected to reach $6 billion in 2000. There is also a large and growing veterinary vaccine market. 2 In order to participate in this attractive and large market with a new delivery alternative, Endorex partnered with Elan in 1998 and established a joint venture, InnoVaccines, for the research, development and commercialization of oral and mucosal vaccines. In forming this joint venture, Elan purchased equity securities of Endorex (common and preferred stock, as well as warrants) for aggregate investments of $10 million. InnoVaccines combines novel existing and future delivery systems from both companies for the development of human vaccines. The joint venture has evaluated the Orasome system in animal models for its potential to deliver a variety of vaccines, including tetanus, orally and by nasal administration. Additionally, the company has demonstrated successful encapsulation of a vaccine adjuvant in combination with the vaccine antigen. No toxicological side effects have been seen in animal studies with orasomes. During 2000, InnoVaccines plans to scale up the Orasome technology in preparation for a clinical trial of its lead clinical candidate, an oral tetanus vaccine. Additionally, the joint venture plans to evaluate the feasibility and efficacy of an oral hepatitis B vaccine and an oral flu vaccine in animal models. The Orasome technology for delivery of drugs and vaccines is the subject of two MIT U.S. patents which have issued and four pending patents: one from MIT and three filed by Endorex. In addition, the joint venture further extended its fundamental oral vaccine intellectual property by acquiring an exclusive worldwide license to the Southern Research Institute and University of Alabama-Birmingham's portfolio of patents on oral microsphere delivery for vaccines in 1999. This patent portfolio consists of six issued U.S. patents and more than 40 related issued patents in Europe and in many countries throughout the world. Endorex/Elan MEDIPAD Drug Delivery System Joint Venture for Iron Chelators In October 1998, Endorex announced that it had established a second joint venture with Elan whose purpose was the exclusive research, development and commercialization of the MEDIPAD drug delivery system to deliver iron chelators for the treatment of iron overload disorders. The most common cause of this health problem is a type of genetic blood disorder. These diseases include Cooley's anemia (beta-thalassemia) and sickle cell anemia. MEDIPAD is Elan's unique microinfusion pump designed for the subcutaneous delivery of selected drugs that require continuous infusion via pump. Each MEDIPAD is a low cost, disposable drug delivery device with an adhesive backing. Its light weight enables it to be worn in a manner similar to a transdermal patch. MEDIPAD is expected to replace conventional infusion pumps that are expensive and cumbersome for the patient. Conventional pumps appear to impede patient compliance. We believe MEDIPAD will improve patient compliance. In February 2000, Endorex announced that the MEDIPAD iron chelator joint venture has entered into an exclusive worldwide license, development, and supply agreement with Schein Pharmaceutical, Inc. to develop and commercialize iron chelating products using the MEDIPAD drug delivery system. Schein Pharmaceutical will market this product in the United States. The Schein Pharmaceutical Agreement Effective February 2nd 2000, Endorex Newco, Ltd., a joint venture between Endorex and Elan Corporation, plc, entered into a license, co-development and supply agreement with Schein Pharmaceutical (Bermuda) Ltd, an affiliate of Schein Pharmaceutical, Inc. Under the terms of this agreement, Endorex Newco granted to Schein exclusive worldwide license to utilize and commercialize MEDIPAD(R) in combination with a Schein iron chelator. Subsequent to the date of the agreement, Watson Pharmaceuticals, Inc. acquired 100% ownership of Schein Pharmaceutical, Inc. Under the license, co-development and supply agreement, Endorex Newco is responsible for development of the MEDIPAD(R) delivery system, for use with Schein's iron chelator product, in accordance with product 3 specifications as defined jointly by Endorex Newco and Schein. Schein is responsible for the development, sourcing and supply of the iron chelator compound. Schein will also be responsible for the packaging, selling and distribution of the MEDIPAD(R)/iron chelator product in the U.S. Subject to approval of Endorex Newco, Schein may sublicense commercialization of the MEDIPAD(R)/iron chelator product in countries outside of the U.S. Costs and royalties associated with the license, co-development and supply agreement are as follows: . Endorex Newco will supply MEDIPAD(R) product to Schein at manufacturing cost. . Development costs are shared between Endorex Newco and Schein, with Endorex Newco bearing substantially all of the costs of developing the MEDIPAD(R) system and Schein bearing substantially all of the costs of developing the iron chelator. . Costs of any clinical trials on the MEDIPAD(R) or the MEDIPAD(R)/iron chelator product will generally be shared. . Schein is responsible for the costs of regulatory filings for the MEDIPAD(R)/iron chelator product. . Schein will remit to Endorex Newco a license royalty fee based on the operating profit from MEDIPAD(R)/iron chelator product sales. . Endorex Newco is entitled to share in any fees received by Schein for sub-licenses granted. Endorex Newco's development costs throughout the remainder of the year 2000 are not expected to exceed $500,000. Endorex will recognize approximately 80% of these costs, due to its 80% interest in Endorex Newco. The license, co-development and supply agreement has an initial term of 10 years from the date of MEDIPAD(R)/iron chelator product launch (on a country by country basis) subject to automatic, 2-year renewal periods. After the expiration of the initial 10-year period, either party may terminate the license, co-development and supply agreement by providing two years' notice. Either party may terminate the license, co-development and supply agreement if the other party goes into liquidation or bankruptcy or breaches the agreement, without curing. In addition, Newco may terminate the agreement. . If Schein fails in its performance obligations regarding supply of the iron chelator, . If Schein fails to file for U.S. regulatory approval of the MEDIPAD(R)/iron chelator product within 6 months of the completion of its development, . If Schein fails to effect a timely commercial launch of the product in the U.S., . If Schein notifies Endorex Newco that it does not wish to commercialize the MEDIPAD/iron chelator product, or . If a technological competitor of Endorex Newco acquires 25% or more of Schein or, alternatively, if Schein acquires 25% or more of a technological competitor. Oncology Program On March 1, 2000, we announced that in spite of several active phase I and II trials with our two oncology drugs, POH and ImmTher(R), Endorex has decided to divest the oncology business in favor of focusing on the rapid expansion and promise of our drug delivery business. Further development of the oncology business would require a substantial step-up in investment in product development and human resources at a time when we are facing a similar requirement in our drug delivery business that has already attracted initial partners. Oncology has been our focus for many years. However, to be a serious participant in this highly competitive arena would require a significant restructuring of our business and significantly higher financial resources. We have already begun to pursue several alternatives for terminating our role in this business early in 2000. Endorex's oncology program consists of two areas of cancer therapy: immunotherapy and natural chemotherapy. 4 Immunotherapy Program Endorex's immunomodulator, ImmTher(R), works by activating macrophages, cells that specifically recognize and destroy cancer cells. ImmTher(R) is currently being evaluated in a randomized phase II (efficacy) trial as an adjunct therapy, following surgery and chemotherapy, for the treatment of bone cancer in children and young adults. The initial therapy for this type of cancer is often surgery (including limb amputation). However, residual cancer cells remaining after surgery metastasize to the liver or lungs and patients rarely survive more than a few years. ImmTher(R) is being tested for its usefulness in treating micrometastases with a goal of increasing the life of these children and young adults. The trial is being conducted at the two leading cancer centers in the U.S., Memorial Sloan Kettering in New York and M.D. Anderson Cancer Center in Houston. Endorex has received Orphan Drug designation for ImmTher(R) by the FDA for two types of bone cancer, Ewings sarcoma and osteogenic sarcoma. Natural Chemotherapy POH is a synthetic compound that is a member of a new class of anti-cancer agents, monoterpenes, which have shown anti-tumor and preventative activity against a wide range of tumor types in preclinical studies at non-toxic dose levels. POH was developed by Dr. Michael Gould and his collaborators at the University of Wisconsin-Madison, with the support of the National Cancer Institute. Monoterpenes are natural compounds produced by plants and are found in commonly consumed fruits and vegetables, and have multiple cellular effects including the modulation of the cellular levels of growth factors and their receptors. Monoterpenes selectively inhibit cell growth in a wide variety of rodent tumors and human cancer cell lines and also act to induce programmed cell death (apoptosis). Wisconsin Genetics, Inc. ("WGI"), a majority-owned Endorex subsidiary, was founded to develop new therapies for the prevention and treatment of cancer. Patents covering the use of POH in the treatment of cancer have been licensed for development by WGI from Wisconsin Alumni Research Foundation ("WARF"). WARF, a non-profit organization, is the office designated to receive and license new discoveries made by the University of Wisconsin-Madison researchers. In June 1999, WGI completed development of a new oral formulation of POH and filed an Investigational New Drug ("IND") application. The new formulation significantly reduces the number of pills a patient needs to take daily and should enhance overall patient compliance during the treatment. In September 1999, we commenced the first Endorex-sponsored POH trial of the new formulation, a phase I (safety) human clinical trial commenced at the University of Wisconsin-Madison Comprehensive Cancer Center. The National Cancer Institute ("NCI") continues to sponsor phase II clinical trials in breast, prostate and pancreatic cancer. During 1999, two phase II NCI- sponsored trials for ovarian and colorectal cancer were closed due to lack of objective response. All of the NCI-sponsored phase II trials use the initial formulation of POH developed by the NCI. Additional phase II clinical trials with POH in other types of cancer, such as brain cancer and different types of leukemia, are being considered. Government Regulation Prior to marketing, each of our products must undergo an extensive regulatory approval process conducted by the FDA and applicable agencies in other countries. Testing, manufacturing, commercialization, advertising, promotion, export and marketing, among other things, of our proposed products are subject to extensive regulation by government authorities in the United States and other countries. All products must go through a series of tests, including advanced human clinical trials, which the FDA is allowed to suspend as it deems necessary. Patents and Other Proprietary Rights We rely on patent rights, trade secrets and nondisclosure agreements to establish and protect our proprietary rights to our technologies. Despite these precautions, it may be possible for unauthorized third parties to utilize 5 our technology or to obtain and use information that we regard as proprietary. The laws of some foreign countries do not protect our proprietary rights in processes and products to the same extent as the laws of the United States. Endorex currently has the following patent portfolio in the United States: (1) Endorex has three issued patents, (2) Orasomal has two patents issued, (3) InnoVaccines has licensed a series of patents from Southern Research Institute, 6 of which have issued in the U.S., and (4) WGI has licensed the rights to three patents issued to WARF. In addition, we have more than 50 foreign issued patents, as well as several foreign patent applications pending. Research and Development Expense Research and development expenditures were approximately $2.0 million for the year ended December 31, 1999 and the year ended December 31, 1998. Employees As of March 1, 2000 we had fifteen full-time employees, including 5 Ph.D.s, and 4 masters-level employees. Endorex has recruited seasoned managers with considerable experience in the pharmaceutical industry and utilizes a Scientific Advisory Board, certain members of which are prominent researchers and academics in their fields. Michael Rosen, the company's President/CEO, joined Endorex in 1996. Prior to joining Endorex, Mr. Rosen held senior executive positions at Monsanto, Pfizer and Bristol-Myers Squibb. Robert Brey, Ph.D., Vice President of Research and Development, has prior experience with American Home Products' vaccine division. David Franckowiak, Chief Financial Officer, spent eleven years with PricewaterhouseCoopers LLP prior to joining Endorex in 1997. Frank C. Reid joined Endorex in February 2000 as Vice President of Finance and Corporate Development. He has extensive experience in banking and management consulting, including nineteen years with Bank of America/Continental Bank in senior executive positions. Endorex's board of directors includes CEO's and senior management of other publicly traded biotechnology companies with extensive pharmaceutical company expertise, and a member of Elan's senior management team. Endorex has assembled an expert Scientific Advisory Board for its Orasome technology. Drug Delivery Advisory Board Co-Chairman, Dr. Robert Langer, recognized as a leading expert on drug delivery technology, is a member of three National Academies (Sciences, Medicine and Engineering), holds 265 patents and has authored over 500 articles. Dr. Langer is a Professor of Biomedical and Chemical Engineering and is co-inventor of the Orasome technology. Advisory Board Co-Chairman, Dr. Henry Brem, is a Professor of Neurology, Ophthalmology and Oncology at Johns Hopkins University. Drs. Langer and Brem have significant continued involvement with Endorex as advisors, consultants and shareholders. 6 RISK FACTORS If we cannot obtain additional funding, our product development and commercialization efforts may be reduced or discontinued. We will require additional funding to sustain our research and development efforts, provide for future clinical trials, and continue our operations until we are able to generate sufficient revenue from the sale and/or licensing of our products. We cannot be certain whether we will be able to obtain required additional funding on terms satisfactory to us, if at all. In addition, we have expended, and will continue to expend, substantial funds on the development of our product candidates and for clinical trials. We currently have commitments to expend additional funds for the development of the Orasome oral delivery system, the MEDIPAD infusion pump, license contracts, severance arrangements, employment agreements, and consulting agreements. If we are unable to raise additional funds when necessary, we may have to reduce or discontinue development, commercialization or clinical testing of some or all of our product candidates or enter into financing arrangements on terms that we would not otherwise accept. We have had significant losses and anticipate future losses. We are a development stage company, have experienced significant losses since inception and have a significant accumulated deficit. We expect to incur significant additional operating losses in the future and expect cumulative losses to substantially increase due to expanded research and development efforts, preclinical studies and clinical trials. All of our products are currently in development, preclinical studies or clinical trials, and we have not generated significant revenues from product sales. We do not expect to generate significant product revenues in the next year. There can be no guarantee that we will ever generate product revenues sufficient to become profitable or to sustain profitability. We are dependent on our joint ventures with Elan Corporation and any future joint ventures. Our strategy for research, development and commercialization of certain of our products is to rely on arrangements with corporate partners. As a result, our products are dependent upon the success of third parties in performing preclinical studies and clinical trials, obtaining regulatory approvals, manufacturing and marketing. In connection with our two joint ventures with Elan, we are obligated to fund research and development activities in proportion to our ownership interest in each joint venture, currently 80.1% of each joint venture, based on the research and development plan and budget that we mutually agree upon with Elan. If we do not have sufficient resources to meet our funding obligations under the two Elan joint ventures, we may have to terminate the venture prior to commercialization or renegotiate the terms of the joint venture with Elan, or our interest in the venture may be diluted. We intend to pursue additional collaborations in the future, however, the terms available may not be acceptable to us and the collaborations may not be successful. In addition, the amount and timing of resources that our collaborators devote to these activities are not within our control. Problems in product development may cause our cash depletion rate to increase. We have limited experience with clinical trials and if we encounter unexpected difficulties with our operations or clinical trials, we may have to expend additional funds, which would increase our cash depletion rate. Our ability to manage expenses and our cash depletion rate are keys to the continued development of product candidates and the completion of ongoing clinical trials. Our cash depletion rate will vary substantially from quarter to quarter as we fund non-recurring items associated with clinical trials, product development, patent legal fees and consulting fees. Our product development and commercialization efforts may not be successful. Our product candidates, which have not received regulatory approval, are generally in the early stages of development. If the initial results from any of the clinical trials are poor, those results will adversely effect our 7 ability to raise additional capital, which will affect our ability to continue full-scale research and development for our oral delivery technology. In addition, product candidates resulting from our research and development efforts, if any, are not expected to be available commercially for several years, if at all. Our products, if approved, may not be immediately used by doctors unfamiliar with our product's application in the treatment of cancer. As with any new drug, doctors may be inclined to continue to treat patients with conventional therapies, in most cases chemotherapy, rather than new alternative therapies. We or our marketing partner may be required to implement an aggressive education and promotion plan with doctors in order to gain market recognition, understanding and acceptance of our products. Any such effort may be time consuming and might not be successful. Accordingly, we cannot guarantee that our product development efforts, including clinical trials, or commercialization efforts will be successful or that any of our products, if approved, can be successfully marketed. Our technology and products may prove ineffective or harmful, or be too expensive to market successfully. Our future success is significantly dependent on our ability to develop and test workable products for which we will seek approval from the FDA to market to certain defined patient groups. The products we are currently developing will require significant additional laboratory and clinical testing and investment for the foreseeable future. Although we are optimistic that we will be able to complete development of one or more products, our proposed products may not prove to be effective in clinical trials or they may cause harmful side effects during clinical trials. In addition, our product candidates, if approved, may prove impracticable to manufacture in commercial quantities at a reasonable cost and/or with acceptable quality. Any of these factors could negatively affect our financial position and results of operations. Our dependence on a limited number of suppliers may negatively impact our ability to complete clinical trials and market our products. Prior to commercial distribution of any of our products, if approved, we will be required to identify and contract with a commercial supplier. We cannot guarantee that these suppliers will be able to qualify their facilities under regulations imposed by the FDA or that they will be able to label and supply us with drugs in a timely manner, if at all. Accordingly, any change in our existing or future contractual relationships with, or an interruption in supply from, any third-party service provider or supplier could negatively impact our ability to complete clinical trials and to market our products, if approved. We do not have a sales force to market our products. If and when we receive approval from the FDA for our initial product candidates, the marketing of these products will be contingent upon our ability to either license these products or enter into marketing agreements with partner companies or our ability to recruit, develop, train and deploy our own sales force. We currently intend to sell our products in the United States and internationally in collaboration with one or more marketing partners. However, we presently have no agreements for the licensing or marketing of our product candidates, and we cannot assure you that we will be able to enter into any such agreements in a timely manner or on commercially favorable terms, if at all. Additionally, we do not presently have a sales force, or possess the resources or experience necessary to market any of our product candidates, if and when they are approved. Development of an effective sales force requires significant financial resources, time and expertise. We cannot assure you that we will be able to obtain the financing necessary to establish such a sales force in a timely or cost effective manner, if at all, or that such a sales force will be capable of generating demand for our product candidates, if and when they are approved. We maintain only limited product liability insurance and may be exposed to claims if our insurance coverage is insufficient. The manufacture and sale of our products involves an inherent risk of product liability claims. We currently have product liability insurance with limits of liability of $10 million. Because product liability insurance is 8 expensive and difficult to obtain, we cannot assure you that we will be able to maintain existing insurance or obtain additional product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Our inability to obtain sufficient insurance coverage on acceptable terms or to otherwise protect against potential product liability claims in excess of our insurance coverage, if any, could negatively impact our financial position and results of operations. We may not be able to compete with our competitors in the biotechnology industry. The biotechnology industry is intensely competitive, subject to rapid change and sensitive to new product introductions or enhancements. Virtually all of our existing competitors have greater financial resources, larger technical staffs, and larger research budgets than we have, as well as greater experience in developing products and conducting clinical trials. Our competitors in the vaccine delivery field include Aviron, which is developing a nasal flu vaccine that is in phase III, BioVector, which is in phase II trials with an intranasal flu vaccine and another major vaccine, specialized biotechnology firms, universities, and governmental agencies. Our competitors in the liposomal formulation field include The Liposome Company, NexStar and Sequus. Our competitors in the field of the oral delivery of drugs include Emisphere, which has recently started Phase III trials for oral heparin and phase I trials with oral calcitonin, and is in preclinical development with oral hormones; Unigene, which has an oral calcitonin product in phase I; and Protein Delivery which has an oral insulin in early clinical trials in Europe and the U.S. In addition, there may be other companies which are currently developing competitive technologies and products or which may in the future develop technologies and products which are comparable or superior to our technologies and products. Accordingly, we cannot assure you that we will be able to compete successfully with our existing and future competitors or that competition will not negatively affect our financial position or results of operations in the future. We may not be successful if we are unable to obtain and maintain patents and licenses to patents. Our success depends, in large part, on our ability to obtain and maintain a proprietary position in our products through patents, trade secrets and orphan drug designations. We have been granted several United States patents and have submitted several United States patent applications and numerous corresponding foreign patent applications, and have also obtained licenses to patents or patent applications owned by other entities. However, we cannot assure you that any of these patent applications will be granted or that our patent licensors will not terminate any of our patent licenses. We also cannot guarantee that any issued patents will provide competitive advantages for our products or that any issued patents will not be successfully challenged or circumvented by our competitors. Further, the laws of certain countries may not protect our proprietary rights to the same extent as U.S. law. We are dependent upon our license of oral delivery technology from MIT, and licenses from Elan in connection with our two joint ventures with Elan. We cannot assure you that the technology underlying such licenses will be profitable, or that we will be able to retain licenses for such technologies or that we will obtain patent protection outside the United States. To the extent that we rely on trade secret protection and confidentiality agreements to protect our technology, others may develop similar technology, or otherwise obtain access to our findings or research materials embodying those findings. The application of patent law to the field of biotechnology is relatively new and has resulted in considerable litigation. There is a substantial risk in the rapidly developing biotechnology industry that patents and other intellectual property rights held by us could be infringed by others or that products developed by us or their method of manufacture could be covered by patents owned by other companies. Although we believe that our patents and our licensors' patents do not infringe on any third party's patents, we cannot be certain that we can avoid litigation involving such patents or other proprietary rights. Patent and proprietary rights litigation entails substantial legal and other costs, and we may not have the necessary financial resources to defend or prosecute our rights in connection with any litigation. Responding to, defending or bringing claims related to patents and other intellectual property rights may require our management to redirect our human and monetary resources to address these claims and may take years to resolve. 9 Our product development and commercialization efforts may be reduced or discontinued due to difficulties or delays in clinical trials. We may encounter unanticipated problems, including development, manufacturing, distribution, financing and marketing difficulties, during the product development, approval and commercialization process. Our product candidates may take longer than anticipated to progress through clinical trials. In addition, patient enrollment in the clinical trials may be delayed or prolonged significantly, thus delaying the clinical trials and causing increased costs. If we experience any such difficulties or delays, we may have to reduce or discontinue development, commercialization or clinical testing of some or all of our product candidates. Our product development and commercialization efforts may be reduced or discontinued due to delays or failure in obtaining regulatory approvals. We will need to do substantial additional development and clinical testing prior to seeking any regulatory approval for commercialization of our product candidates. Testing, manufacturing, commercialization, advertising, promotion, export and marketing, among other things, of our proposed products are subject to extensive regulation by governmental authorities in the United States and other countries. The testing and approval process requires substantial time, effort and financial resources and we cannot guarantee that any approval will be granted on a timely basis, if at all. At least initially, we intend, to the extent possible, to rely on licensees to obtain regulatory approval for marketing our products. The failure by us or our licensees to adequately demonstrate the safety and efficacy of any of our product candidates under development could delay, limit or prevent regulatory approval of the product, which may require us to reduce or discontinue development, commercialization or clinical testing of some or all of our product candidates. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in conducting advanced human clinical trials, even after obtaining promising results in earlier trials. Furthermore, the United States Food & Drug Administration may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Also, even if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Accordingly, we may experience difficulties and delays in obtaining necessary governmental clearances and approvals to market our products, and we may not be able to obtain all necessary governmental clearances and approvals to market our products. Our products, if approved, may not be commercially viable due to health care changes and third-party reimbursement limitations. Recent initiatives to reduce the federal deficit and to change health care delivery are increasing cost-containment efforts. We anticipate that Congress, state legislatures and the private sector will continue to review and assess alternative benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, price controls on pharmaceuticals, and other fundamental changes to the health care delivery system. Any such changes could negatively impact the commercial viability of our products, if approved. Our ability to successfully commercialize our product candidates, if and when they are approved, will depend in part on the extent to which appropriate reimbursement codes and authorized cost reimbursement levels of such products and related treatment are obtained from governmental authorities, private health insurers and other organizations, such as health maintenance organizations. In the absence of national Medicare coverage determination, local contractors that administer the Medicare program, within certain guidelines, can make their own coverage decisions. Accordingly, there can be no assurance that any of our product candidates, if approved and when commercially available, will be included within the then current Medicare coverage determination or the coverage determination of state Medicaid programs, private insurance companies and other health care providers. In addition, third-party payers are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care and the growth of health maintenance organizations in the United States may all result in lower prices for our products, if approved and when commercially available, than we currently expect. The cost containment measures that health care payers and providers are instituting and the effect of any health care changes could 10 negatively affect our financial performance, if and when one or more of our products are approved and available for commercial use. Our operations and financial performance could be negatively affected if we cannot attract and retain key personnel. Our success is dependent, in part, upon a limited number of key executive officers and technical personnel, including Michael S. Rosen, our President and Chief Executive Officer, David G. Franckowiak, our Chief Financial Officer, Dr. Robert N. Brey, our Vice President of Research and Development, and Frank C. Reid, our Vice President of Finance and Corporate Development. We also believe that our future success will depend largely upon our ability to attract and retain highly skilled research and development and technical personnel. We face intense competition in our recruiting activities, including competition from larger companies with greater resources. We cannot assure you that we will be successful in attracting or retaining skilled personnel. The loss of certain key employees or our inability to attract and retain other qualified employees could negatively affect our operations and financial performance. Our stock price is highly volatile and our common stock is thinly traded. The market price of our common stock, like that of many other development- stage public pharmaceutical and biotechnology companies, has been highly volatile and may continue to be so in the future. Factors such as disclosure of results of preclinical and clinical testing, adverse reactions to products, governmental regulation and approvals, and general market conditions may have a significant effect on the market price of the common stock and our other equity securities. Since it commenced trading on the American Stock Exchange on August 6, 1998, our common stock has been thinly traded. We cannot guarantee that a more active trading market will develop in the future. Investors may suffer substantial dilution. Endorex has a number of agreements or obligations that may result in dilution to investors. These include: . warrants to purchase 2,162,162 shares of common stock at $2.54375 per share, subject to adjustment, issued in connection with the October 1997 Private Placement; . warrants for the purchase of 230,770 shares of common stock at $10.00 per share held by Elan; . warrants to purchase 66,668 shares of common stock at $2.54375 per share, subject to adjustment, held by the Aries Master Fund and the Aries Domestic Fund, L.P.; . conversion rights and dividend rights of preferred stock held by Elan, consisting of 92,973 shares of Series B Convertible Preferred Stock ($8.0 million original liquidation value) bearing an 8% cumulative payment-in-kind dividend and convertible at liquidation value into common stock at $7.50 per share, subject to adjustment, and 91,218 shares of Series C Exchangeable Convertible Preferred Stock ($8.4 million original liquidation value) bearing a 7% cumulative payment-in- kind dividend and which is exchangeable for part of Endorex's interest in the second joint venture or convertible at liquidation value into common stock at $9.00 per share; . options to purchase approximately 1.6 million shares of common stock outstanding to participants in our stock option plan with a weighted average exercise price of approximately $3.00; . anti-dilution rights under the above warrants and preferred, which can permit purchase of additional shares and/or at lower prices under certain circumstances. To the extent that anti-dilution rights are triggered, or warrants or conversion rights are exercised, our stockholders will experience substantial dilution and the Company's stock price may decrease. 11 Future sales of common stock by our existing stockholders could adversely affect our stock price. The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. We have not paid cash dividends. We have never paid cash dividends on our common stock and we do not anticipate paying any dividends in the foreseeable future. We currently intend to retain earnings, if any, for the development of our business. We have certain interlocking relationships that may present potential conflicts of interest. Lindsay A. Rosenwald, M.D., is the Chairman and sole stockholder of Paramount Capital Asset Management, Inc. ("PCAM"), Paramount Capital, Inc. ("Paramount"), and Paramount Capital Investment LLC ("PCI"), a merchant banking and venture capital firm specializing in biotechnology companies. PCAM is the investment manager of The Aries Master Fund, a Cayman Island exempted company, and the general partner of each of the Aries Domestic Fund, L.P. and the Aries Domestic Fund II, L.P., each of which is a significant stockholder of Endorex. In addition, certain officers, employees and/or associates of Paramount and/or its affiliates own securities in subsidiaries of Endorex. In the regular course of its business, PCI identifies, evaluates and pursues investment opportunities in biomedical and pharmaceutical products, technologies and companies. Generally, Delaware corporate law requires that any transactions between Endorex and any of its affiliates be on terms that, when taken as a whole, are substantially as favorable to us as those then reasonably obtainable from a person who is not an affiliate in an arms-length transaction. Nevertheless, neither such affiliates nor PCI is obligated pursuant to any agreement or understanding with us to make any additional products or technologies available to us. We do not expect and you should not expect, that any biomedical or pharmaceutical product or technology identified by such affiliates or PCI in the future will be made available to us. In addition, certain of the current officers and directors of Endorex or any officers or directors of the company hereafter appointed may from time to time serve as officers, directors or consultants of other biopharmaceutical or biotechnology companies. There can be no assurance that such other companies will not have interests in conflict with us. Certain directors and stockholders have significant influence. Our directors, executive officers and principal stockholders and certain of their affiliates have the ability to influence the election of directors and most other stockholder actions. In particular, pursuant to a placement agency agreement, so long as 50% of the shares sold in our October 1997 private placement remain outstanding and subject to contractual rights described in the subscription agreement, we may not do any of the following without the placement agent's prior approval: . issue or increase the authorized amount or alter the terms of any securities of the Company senior to, or on parity with, the private placement shares with respect to voting, liquidation or dividends, . alter the Company's charter documents in any manner that would adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the private placement shares or of certain contractual rights described in the subscription agreements, . incur indebtedness in excess of $1.0 million, . incorporate or acquire any subsidiaries, and . enter any transactions with affiliates of the Company. In addition, our Board of Directors cannot exceed seven persons without the prior written consent of the placement agent. These arrangements may discourage or prevent any proposed takeover of Endorex, including 12 transactions in which stockholders might otherwise receive a premium for their shares over the then current market prices. Such stockholders may influence corporate actions, including influencing elections of directors and significant corporate events. Item 2. Facilities. Endorex's executive offices and research and development center are located in a leased facility of approximately 7,500 square feet in Lake Forest, Illinois, near Chicago. The lease expires on December 31, 2003. We believe that our current leased facilities are sufficient to meet our needs for the foreseeable future and that suitable additional space will be available if and as needed. Item 3. Legal Proceedings. The Company is not a party to any legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of security holders in the fourth quarter of 1999. PART II Item 5. Market for Common Equity and Related Stockholder Matters. As of August 6, 1998, our common stock started trading on the American Stock Exchange under the symbol "DOR." Prior to that, quotations for Endorex's common stock appeared on the "pink sheets" published by the National Quotations Bureau, Inc. and on the "Bulletin Board" of the National Association of Securities Dealers, Inc. The following table sets forth the high and low bid quotations, as provided by the National Quotation Bureau, Inc., for our common stock during the period January 1, 1998 through August 5, 1998. The table sets forth the high and low closing prices, as provided by the American Stock Exchange, for the period from August 6, 1998 through March 1, 2000. The amounts represent inter-dealer quotations without adjustment for retail markups, markdowns or commissions and do not represent the prices of actual transactions.
High Low ----- ----- 1998 1st Quarter................................................. $9.00 $5.38 2nd Quarter................................................. $6.25 $2.88 3rd Quarter................................................. $4.88 $2.13 4th Quarter................................................. $2.63 $1.88 1999 1st Quarter................................................. $2.69 $1.50 2nd Quarter................................................. $2.23 $1.50 3rd Quarter................................................. $2.25 $1.50 4th Quarter................................................. $2.94 $1.38 2000 1st Quarter................................................. $9.00 $2.69
As of December 31, 1999, we had approximately 1,100 stockholders of record. We currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future. In connection with a senior line of credit agreement entered into by Endorex with two of our major stockholders, Aries Domestic Fund, L.P. and The Aries Fund, on May 19, 1997, we granted warrants to purchase an aggregate of 66,668 shares of common stock at an initial exercise price equal to the offering price of Endorex's Private Placement (as defined below), subject to adjustment under certain circumstances. The warrants are exercisable until May 19, 2002. 13 Pursuant to a private placement (the "Private Placement") of common stock, we issued and sold an aggregate of 8,648,718 shares of common stock to accredited investors on July 16, October 10 and October 16, 1997, in consideration of an aggregate amount of $20,000,000. Our net proceeds, after deducting commissions and expenses of Paramount Capital, Inc., which acted as the placement agent for the Private Placement (the "Placement Agent"), were $17,400,000. In connection with the Private Placement, we issued and sold to the Placement Agent and/or its designees, warrants (the "Placement Warrants") to purchase up to an aggregate of 864,865 shares of common stock. In connection with the execution of a financial advisory agreement, dated October 16, 1997, between Endorex and the Placement Agent, we issued and sold to the Placement Agent warrants (the "Advisory Warrants") to purchase up to an aggregate of 1,297,297 shares of common stock. The Placement Warrants and the Advisory Warrants are exercisable until April 16, 2003, at an exercise price of $2.54375 per share, subject to adjustment under certain circumstances. On January 21, 1998, Endorex formed a joint venture, InnoVaccines Corporation, with Elan. In connection with the agreement, we issued and sold to Elan International Services, Ltd. ("EIS"), 307,692 shares of Endorex common stock and warrants to purchase an aggregate of 230,770 shares of common stock in consideration of an aggregate amount of $2.0 million. The warrants are exercisable until January 20, 2007, at an exercise price of $10.00 per share. In addition, we issued and sold to EIS 80,100 shares of Endorex Series B Convertible Preferred Stock at a price of $100 per share. The Series B Preferred Stock is voting and pays an 8% annual cumulative in-kind dividend. The shares can be converted to common stock based upon their liquidation value, currently at $7.50 per share, subject to adjustment. On October 21, 1998, we formed a second joint venture with Elan, Endorex Newco, Ltd. In connection with the new agreement, Endorex issued and sold to EIS 84,105 shares of Series C Exchangeable Convertible Preferred Stock ("Series C Preferred"), at a price of $100 per share. The Series C Preferred Stock is non-voting and pays a 7% annual cumulative in-kind dividend. The shares can be exchanged for common stock in the joint venture or converted to Endorex common stock at $9.00 per common share. Item 6. Management's Discussion and Analysis or Plan of Operations. The following "Discussion and Analysis" provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and notes thereto. This report contains statements of a forward-looking nature relating to future events or our future financial performance. These statements are only predictions and actual events or results may differ materially. In evaluating such statements, you should carefully consider the various factors identified in this report, which could cause actual results to differ materially from those indicated from any forward-looking statements, including those set forth in "Risk Factors" on this Annual Report Form 10-KSB. Material Changes in Results of Operations Net loss for the twelve months ended December 31, 1999 of $7.5 million decreased approximately $14.3 million as compared to the $21.8 million loss recorded for the twelve months ended December 30, 1998. Reduction in equity losses from Endorex's two joint ventures with Elan accounted for substantially all of the reduction in consolidated net loss from 1998 to 1999. For 1999, equity losses from joint ventures were $2.9 million as compared with $17.1 million for 1998. The 1998 equity losses include our 80.1% share of the aggregate $20.0 million license fees paid by the joint ventures to Elan to acquire two technologies: 1) an oral delivery technology for vaccines, and 2) a medical device called MEDIPAD for delivery of certain drugs for treatment of life-threatening diseases. Research and development expenditures for the year ended December 31, 1999 were $2.0 million, approximately the same as compared to the year ended December 31, 1998. The increased effort devoted to the InnoVaccines joint venture versus other Endorex activities offset the reduction related to expenses we incurred in 1998 to transfer the laboratory facilities and scientific personnel to Lake Forest, IL from Fargo, ND. 14 Excluding the impact of the license fees paid to Elan in 1998, equity in losses from joint ventures increased $1.8 million or 166% from 1998 to 1999. Elan and Endorex each funded research and development related to InnoVaccines equally from the inception of the joint venture through March 31, 1999, in accordance with the agreement between Elan and Endorex. As of April 1, 1999, Endorex and Elan fund future joint venture expenditures in proportion to our respective ownership levels, therefore Endorex includes 80.1% of the joint ventures results. The current year equity loss also includes $0.4 million for Endorex's portion of InnoVaccines' acquisition of an exclusive worldwide license and intellectual property for proprietary oral microsphere delivery technology for human and veterinary vaccines. The license encompasses a portfolio of over 50 patents acquired from Vaxcel, Inc., which was the previous exclusive licensee for this technology from the Southern Research Institute and the University of Alabama-Birmingham Research Foundation. The current year equity loss includes $400,500 reflecting Endorex's 80.1% share of losses relating to the second joint venture. General and administrative expenses for the year ended December 31, 1999 decreased $0.5 million, or 13%, to $3.0 million as compared to $3.5 million for the year ended December 31, 1998. The decrease was mainly due to a $0.3 million reduction in amortization of fair value of warrants issued in connection with the financial advisory agreement with Paramount Capital, Inc. The warrants, which were amortized over a two-year period, were fully amortized by the end of the third quarter of 1999. Excluding this amortization, legal expenses decreased approximately $160,000 as compared to 1998. During 1998, we had additional legal expenses related to the initiation of Endorex's listing on the American Stock Exchange, effective August 6, 1998 under our new symbol DOR, joint venture activity, and private placement activities. Interest income for the year ended December 31, 1999 decreased approximately $0.3 million as compared to the year ended December 31, 1998 due to a depletion of cash and marketable securities utilized in research and development activities. Endorex is a development stage enterprise and expects no significant revenue from the sale of products in the near future. Plan of Operation and Financial Condition Endorex continues to progress preclinical development of the Orasome delivery system for the oral delivery of vaccines and drugs. Development includes ongoing work with Elan and several major medical and academic institutions for vaccines and key hormones such as insulin and human growth hormone. A new patent for this technology was issued in February 2000. During 2000, we anticipate that InnoVaccines will begin to scale up an oral tetanus vaccine to take into human clinical trials. Additionally the joint venture will develop prototype oral hepatitis B and flu vaccines and evaluate them in animal models during 2000. Such new vaccines have been made possible by InnoVaccines's advances in delivery technology that include safe and effective adjuvants and site specific targeting. "Targeting" vaccines to the correct sites in the gastrointestinal tract or the nasal passage gets the antigen to the right place; otherwise, antigens are lost and are ineffective. Adjuvants boost the overall immune response to the antigen, creating a higher level of immunization. This element is critical in persons with diminished immune systems, such as the elderly, where many vaccines are much less effective. InnoVaccines combines novel existing and future delivery systems of the two companies for the development of human vaccines, a $6 billion market that is projected to increase to $10 billion by 2003, as well as for the growing veterinary vaccine market. During 1999 collaborative development efforts began for our second joint venture with Elan, Endorex Newco, Ltd., established for the commercialization, research and development of two iron chelator drugs using the MEDIPAD technology. The MEDIPAD system is a small, disposable drug delivery system, which combines a microinfusion pump with the convenience of patch technology. We expect to initiate clinical trials during 2000 with MEDIPAD in one iron chelator drug through the joint venture, and our recently announced agreement with Schein Pharmaceutical, Inc. Endorex recently signed a research and option agreement with Novo Nordisk A/S (a major pharmaceutical company with a significant share of the estimated $1.7 billion global market for hGH), to evaluate the commercial attractiveness of Novo's brand of hGH delivered orally, Norditropin(R). They plan to evaluate the Orasome system in several animal models. Novo Nordisk has taken an exclusive option to license the Orasome technology for Norditropin(R). 15 During 2000, Endorex will also evaluate the Orasome system for oral delivery of a DNA vaccine. On March 1, 2000, we announced that in spite of several active phase I and II trials with our two oncology drugs, POH and ImmTher(R), Endorex has decided to divest the oncology business in favor of focusing on the rapid expansion and promise of our drug delivery business. Further development of the oncology business would require a substantial step-up in investment in product development and human resources at a time when we are facing a similar requirement in our drug delivery business that has already attracted initial partners. Oncology has been our focus for many years. However, to be a serious participant in this highly competitive arena would require a significant restructuring of our business and significantly higher financial resources. We have already begun to pursue several alternatives for terminating our role in this business early in 2000. On December 31, 1999 and December 31, 1998, we had cash, cash equivalents, and marketable securities of $8.5 million and $13.2 million, respectively, and working capital of $6.9 million and $12.6 million, respectively, exclusive of deferred costs. Our current level of activities requires the expenditure of approximately $400,000 per month, including costs associated with the joint ventures. We believe that our current cash resources will be sufficient to support currently planned operations for the next two years. However, we intend, from time to time in the future, to seek to expand our research and development activities into other technologies and/or products that we either may license from other persons or develop. Any such activities may require the expenditure of funds not presently available. We also may seek to obtain funds from possible future public or private sales of our securities or other sources. See "Risk Factors--If we cannot obtain additional funding, our product development and commercialization efforts may be reduced or discontinued." Item 7. Financial Statements. Pursuant to Exchange Act Rule 12b-23, the financial statements set forth on pages F-1, et seq. attached hereto are incorporated herein by reference. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 9. Directors, Executive Officers, Promoters, and Control Persons; Compliance with Section 16(A) of the Exchange Act. The information required by this Item is incorporated by reference from our definitive proxy statement to be filed with the Commission prior to 120 days after December 31, 1999. Item 10. Executive Compensation. The information required by this Item is incorporated by reference from our definitive proxy statement to be filed with the Commission prior to 120 days after December 31, 1999. Item 11. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated by reference from our definitive proxy statement to be filed with the Commission prior to 120 days after December 31, 1999. Item 12. Certain Relationships and Related Transactions. The information required by this Item is incorporated by reference from our definitive proxy statement to be filed with the Commission prior to 120 days after December 31, 1999. 16 Item 13. Exhibits and Reports on Form 8-K. (a) The following financial statements are filed as part of this report: Financial Statements. (1) Balance Sheet as of December 31, 1999. (2) Statements of Operations for the periods ended December 31, 1999 and 1998 and cumulative from February 15, 1985 (date of inception) to December 31, 1999. (3) Statements of Cash Flows for the periods ended December 31, 1999 and 1998 and cumulative from February 15, 1985 (date of inception) to December 31, 1999. (4) Statements of Stockholders' Equity for the period from February 15, 1985 (date of inception) to December 31, 1999. (5) Notes to Financial Statements. (6) Independent Accountants' Report. (b) Reports on Form 8-K During the fiscal quarter ended December 31, 1999 we did not file any Current Reports on Form 8-K. (c) Exhibits: 3.1 Certificate of Incorporation of Endorex. (1) 3.2 Certificate of Ownership and Merger filed March 30, 1987. (1) 3.3 Certificate of Amendment to Certificate of Incorporation filed September 7, 1989. (2) 3.4 Certificate of Amendment to Certificate of Incorporation filed November 13, 1990. (3) 3.5 Certificate of Amendment to Certificate of Incorporation filed May 29, 1991. (3) 3.6 Certificate of Amendment to Certificate of Incorporation filed February 27, 1992. (3) 3.7 Certificate of Amendment to Certificate of Incorporation filed February 27, 1992. (3) 3.8 Certificate of Amendment to Certificate of Incorporation filed June 29, 1993. (4) 3.9 Certificate of Amendment to Certificate of Incorporation filed April 15, 1996. (5) 3.10 Certificate of Amendment to Certificate of Incorporation filed June 10, 1997. (8) 3.11 Certificate of Amendment to Certificate of Incorporation filed December 9, 1998. (11) 3.12 Series B Preferred Certificate of Designations, Preferences and Rights filed January 21, 1998. (10) 3.13 Series C Preferred Certificate of Designations, Preferences and Rights filed October 21, 1998. (10) 3.14 By-laws of the Company. (1) 4.1 Specimen Common Stock Certificate. (1) 4.2 Warrant for the Purchase of 864,865 Shares of Common Stock. (7) 4.3 Warrant for the Purchase of 1,297,297 Shares of Common Stock. (7) 4.4 Warrant for the Purchase of 230,770 Shares of Common Stock. (8) 10.1 Patent License Agreement dated December 16, 1996 between Endorex and Massachusetts Institute of Technology. (6) 10.2 Employment Agreement dated July 25, 1996 between Endorex and Michael S. Rosen. (4) 10.3 Employment Agreement dated December 1, 1996 between Endorex and Robert N. Brey. (6)
17 10.4 Purchase Agreement dated as of June 26, 1996 between Endorex, The Aries Fund and The Aries Domestic Fund, L.P. (6) 10.5 Amended and Restated 1995 Omnibus Incentive Plan. (9) 10.6 Placement Agency Agreement between Endorex and Paramount Capital, Inc., dated July 1, 1997. (7) 10.7 Side Letter #1 to Placement Agency Agreement. (7) 10.8 Form of Subscription Agreement for the purchase of Common Stock. (7) 10.9 Lease dated December 19, 1997 between Endorex and Howard M. Ruskin. (8) 10.12+ Joint Development and Operating Agreement, dated as of January 21, 1998, between Endorex, Elan Corporation, plc, Orasomal Technologies, Inc. and Endorex Vaccine Delivery Technologies, Inc. (8) 10.13 Securities Purchase Agreement, dated as of January 21, 1998, between Endorex and Elan International Services, Ltd. (8) 10.14 Registration Rights Agreement, dated as of January 21, 1998, between the Company and Elan International Services, Ltd. (8) 10.15+ License Agreement, dated as of January 21, 1998, between Elan Pharmaceuticals, plc. and Endorex Vaccine Delivery Technologies, Inc. (8) 10.16+ License Agreement, dated as of January 22, 1998, between Orasomal Technologies, Inc., Endorex Vaccine Delivery Technologies, Inc. and the Company. (8) 10.17 Securities Purchase Agreement, dated as of October 21, 1998, between Endorex and Elan International Services, Ltd. (10) 10.18 Registration Rights Agreement, dated as of October 21, 1998, between Endorex and Elan International Services, Ltd. (10) 10.19+ License Agreement, dated as of October 21, 1998, between Endorex, Elan Corporation, plc, Endorex Newco. Ltd., and Elan Medical Technologies Ltd. (10) 10.20+ Joint Development and Operating Agreement, dated as of October 21, 1998, between Endorex, Elan Corporation, plc, Elan International Services, Ltd. and Endorex Newco, Ltd. (10) 10.21* Development License and Supply Agreement, dated February 2, 2000, between Endorex Newco, Ltd. and Schein Pharmaceutical (Bermuda), Ltd. 10.22 Employment Agreement, dated February 8, 2000, between Endorex Corporation and Frank C. Reid. (12) 10.23 Letter Agreement, dated March 13, 2000, between Endorex Corporation and David Franckowiak. (12) 21 Subsidiaries of Endorex. (12) 23.1 Consent of PricewaterhouseCoopers LLP, independent certified public accountants. 27 Financial Data Schedule.
- -------- + Endorex was granted Confidential Treatment of portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. * Endorex has applied for Confidential Treatment of portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (1) Incorporated by reference to our Registration Statement on Form S-1 (File No. 33-13492). (2) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1989. (3) Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended January 31, 1992. (4) Incorporated by reference to our Annual Report on Form 10-KSB for the fiscal year ended January 31, 1996. (5) Incorporated by reference to our Quarterly Report on Form 10-QSB for the fiscal quarter ended July 31, 1996. (6) Incorporated by reference to our Annual Report on Form 10-KSB, as amended, for the transition period ended December 31, 1996. 18 (7) Incorporated by reference to our Quarterly Report on Form 10-QSB, as amended, for the fiscal quarter ended September 30, 1997. (8) Incorporated by reference to our Annual Report on Form 10-KSB, as amended, for the period ended December 31, 1997. (9) Incorporated by reference to our Registration Statement on Form S-8 dated September 23, 1998. (10) Incorporated by reference to our Quarterly Report on Form 10-QSB, for the fiscal quarter ended September 30, 1998. (11) Incorporated by reference to our Registration Statement on Form 10-KSB, for the period ended December 31, 1998. (12) Incorporated by reference to the initial filing of this Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999. 19 ENDOREX CORPORATION (A Development Stage Enterprise) CONSOLIDATED BALANCE SHEET
December 31, 1999 ------------ ASSETS Current Assets: Cash and cash equivalents...................................... $ 4,995,906 Marketable securities--available for sale...................... 3,547,847 Prepaid expenses............................................... 102,546 ------------ Total current assets....................................... 8,646,299 Leasehold improvements and equipment, net of accumulated amortization of $649,092........................................ 448,951 Patent issuance costs, net of accumulated amortization of $5,088. 176,875 ------------ Total Assets..................................................... $ 9,272,125 ============ LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable and accrued expenses.......................... $ 496,889 Accrued compensation........................................... 184,508 Due to joint ventures.......................................... 942,333 Current portion of line of credit.............................. 110,342 ------------ Total current liabilities.................................. 1,734,072 Long-term portion of line of credit.............................. 281,899 ------------ Total Liabilities................................................ 2,015,971 Series C exchangeable convertible preferred stock, $.05 par value. Authorized 200,000 shares; 91,218 issued and outstanding at liquidation value............................................ 9,027,012 Stockholders' Deficit: Preferred stock, $.05 par value. Authorized 100,000 shares; none issued and outstanding Series B convertible preferred stock, $.05 par value. Authorized 200,000 shares; 92,973 issued and outstanding at liquidation value............................................. 9,297,300 Common stock, $.001 par value. Authorized 50,000,000 shares; 10,874,295 issued and 10,755,653 outstanding.................. 10,878 Additional paid-in capital..................................... 33,659,131 Deficit accumulated during the development stage............... (44,294,417) ------------ (1,327,108) ------------ Less: treasury stock, at cost, 118,642 shares.................... (443,750) ------------ TOTAL STOCKHOLDERS' DEFICIT................................ (1,770,858) ------------ Total Liabilities, Convertible Preferred Stock, And Stockholders' Deficit......................................................... $ 9,272,125 ============
The accompanying notes are an integral part of the consolidated financial statements. F-1 ENDOREX CORPORATION (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative Period February 15, Year Ended Year ended 1985 (Inception) December December 31, to December 31, 31, 1999 1998 1999 ----------- ------------ ----------------- SBIR contract revenue............. $ -- $ -- $ 100,000 Expenses: SBIR contract research and development.................... -- -- 86,168 Proprietary research and development.................... 2,028,945 1,977,994 13,876,263 General and administrative...... 3,046,684 3,500,682 10,970,277 ----------- ------------ ------------ Total expenses.................... 5,075,629 5,478,676 24,932,708 ----------- ------------ ------------ Loss from operations.............. (5,075,629) (5,478,676) (24,832,708) Equity in losses from joint ventures......................... (2,865,908) (17,097,975) (19,963,883) Other income...................... 3,790 -- 5,302 Interest income................... 488,582 799,335 2,294,515 Interest expense.................. (51,854) (15,854) (261,421) ----------- ------------ ------------ Loss before income taxes.......... (7,501,019) (21,793,170) (42,758,195) Income taxes...................... -- -- -- ----------- ------------ ------------ Net loss.......................... (7,501,019) (21,793,170) (42,758,195) Preferred stock dividends......... (1,285,413) (713,187) (1,998,600) ----------- ------------ ------------ Net loss applicable to common stockholders..................... $(8,786,431) $(22,506,357) $(44,756,795) =========== ============ ============ Basic and diluted net loss per share applicable to common stockholders..................... $ (0.82) $ (2.09) $ (17.80) Basic and diluted weighted average common shares outstanding........ 10,755,328 10,760,988 2,513,871
The accompanying notes are an integral part of the consolidated financial statements. F-2 ENDOREX CORPORATION (A Development Stage Enterprise) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Deficit) Preferred Accumulated Treasury Total Common Stock Stock Additional During the Stock Stockholders' ---------------- ------------ Paid-In Development ------------- Deferred Note Equity Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable (Deficit) ------ --------- ------ ----- ---------- ----------- ------ ------ ------------ ---------- ------------- Common stock issued for cash in February 1985 at $1.50 per share........... 667 $ 1 -- $ -- $ 999 $ -- -- $ -- $ -- $ -- $ 1,000 Net earnings for the period from February 15, 1985 to January 31, 1996............ -- -- -- -- -- 6,512 -- -- -- -- 6,512 ----- ---- --- ----- ---------- --------- --- ------ -------- ------ ---------- Balance--January 31, 1986........ 667 1 -- -- 999 6,512 -- -- -- -- 7,512 Common stock issued for cash in October 1986 at $750.00 per share........... 666 1 -- -- 499,999 -- -- -- -- -- 500,000 Excess of fair market value over option Price of non-qualified stock option granted......... -- -- -- -- 13,230 -- -- -- -- -- 13,230 Net loss for the year............ -- -- -- -- -- (34,851) -- -- -- -- (34,851) ----- ---- --- ----- ---------- --------- --- ------ -------- ------ ---------- Balance--January 31, 1987........ 1,333 2 -- -- 514,228 (28,339) -- -- -- -- 485,891 Common stock issued in May 1987 at $750.00 per share for legal services performed for the company..... 7 -- -- -- 5,000 -- -- -- -- -- 5,000 Net proceeds from initial public stock offering in June 1987 at $6,000.00 per share, less issuance costs.. 333 -- -- -- 1,627,833 -- -- -- -- -- 1,627,833 Non-qualified stock options exercised....... 48 -- -- -- 33,808 -- -- -- (28,188) -- 5,620 Amortization of deferred compensation.... -- -- -- -- -- -- -- -- 7,425 -- 7,425 Excess of fair market value over option price of non-qualified stock options granted......... -- -- -- -- 75,063 -- -- -- -- -- 75,063 Net loss for the year............ -- -- -- (627,652) -- -- -- -- (627,652) ----- ---- --- ----- ---------- --------- --- ------ -------- ------ ---------- Balance--January 1988--forward... 1,721 $ 2 -- -- $2,255,932 $(655,991) -- $ -- $(20,763) $ -- $1,579,180
F-3 ENDOREX CORPORATION (A Development Stage Enterprise) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(Deficit) Accumulated Common Stock Preferred Stock Additional During the Treasury Stock ----------------- ----------------- Paid-In Development ----------------- Deferred Note Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable ------ --------- -------- -------- ----------- ------------ -------- -------- ------------ ---------- Balance--January 1988--forward... 1,721 $ 2 -- -- $ 2,255,932 $ (655,991) -- $ -- $ (20,763) $ -- Non-qualified stock options exercised....... 18 -- -- -- 256 -- -- -- -- -- Stock warrants exercised....... 1 -- -- -- 12,000 -- -- -- -- -- Common stock redeemed and retired......... (10) -- -- -- (150) -- -- -- -- -- Excess of fair market value over option price of non-qualified stock options granted......... -- -- -- -- 36,524 -- -- -- -- -- Amortization of deferred compensation.... -- -- -- -- -- -- -- -- 19,113 -- Net loss for the Year............ -- -- -- -- -- (1,092,266) -- -- -- -- ----- ---- ------ -------- ----------- ------------ ------ -------- --------- ----- Balance--January 31, 1989........ 1,730 2 -- -- 2,304,562 (1,748,257) -- -- (1,650) -- Non-qualified stock options exercised....... 71 -- -- -- 1,060 -- -- -- -- -- Common stock redeemed and retired......... (12) -- -- -- (175) -- -- -- -- -- Excess of fair market value over option price of non-qualified stock options granted......... -- -- -- -- 113,037 -- -- -- -- -- Net proceeds from secondary public stock offering in April 1989 at $525.00 per share, less issuance cost... 2,174 2 -- -- 980,178 -- -- -- -- -- Amortization of deferred compensation.... -- -- -- -- -- -- -- -- 1,650 -- Net loss for the year............ -- -- -- -- -- (1,129,477) -- -- -- -- ----- ---- ------ -------- ----------- ------------ ------ -------- --------- ----- Balance--January 31,1990-- forward......... 3,963 $ 4 -- $ -- $ 3,398,662 $ (2,877,734) -- $ -- $ -- $ -- Total Stockholders' Equity (Deficit) ------------- Balance--January 1988--forward... $ 1,579,180 Non-qualified stock options exercised....... 256 Stock warrants exercised....... 12,000 Common stock redeemed and retired......... (150) Excess of fair market value over option price of non-qualified stock options granted......... 36,524 Amortization of deferred compensation.... 19,113 Net loss for the Year............ (1,092,266) ------------- Balance--January 31, 1989........ 554,657 Non-qualified stock options exercised....... 1,060 Common stock redeemed and retired......... (175) Excess of fair market value over option price of non-qualified stock options granted......... 113,037 Net proceeds from secondary public stock offering in April 1989 at $525.00 per share, less issuance cost... 980,180 Amortization of deferred compensation.... 1,650 Net loss for the year............ (1,129,477) ------------- Balance--January 31,1990-- forward......... $ 520,932
F-4 ENDOREX CORPORATION (A Development Stage Enterprise) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(Deficit) Accumulated Common Stock Preferred Stock Additional During the Treasury Stock ----------------- ----------------- Paid-In Development ----------------- Deferred Note Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable ------- --------- -------- -------- ---------- ------------ -------- -------- ------------ ---------- Balance--January 31, 1990-- forward......... 3,963 $ 4 -- $ -- $3,398,662 $ (2,877,734) -- $ -- $ -- $ -- Common stock issued for cash in October 1990 through January 1991 at $9.00 per share....... 5,694 6 -- -- 51,244 -- -- -- -- -- Excess of fair market value over option price of non- qualified stock options granted. -- -- -- -- 30,635 -- -- -- -- -- Net loss for the year............ -- -- -- -- -- (854,202) -- -- -- -- ------- ---- ------ -------- ---------- ------------ ------ -------- ----- -------- Balance--January 31, 1991........ 9,657 10 -- -- 3,480,541 (3,731,936) -- -- -- -- Common stock issued for cash in February 1991 through April 1991 at $9.00 per share....... 2,772 3 -- -- 24,947 -- -- -- -- -- Common stock issued for cash and services in November 1991 at $1.50 per share. 15,333 15 -- -- 22,985 -- -- -- -- -- Common stock issued for cash and note in December 1991 at $0.75 per share. 296,949 297 -- -- 200,018 -- -- -- -- (50,315) Excess of fair market value over option price of non- qualified stock options granted. -- -- -- -- 16,570 -- -- -- -- -- Non-qualified stock options exercised....... 1 -- -- -- 1 -- -- -- -- -- Net loss for the year............ -- -- -- -- -- (410,149) -- -- -- -- ------- ---- ------ -------- ---------- ------------ ------ -------- ----- -------- Balance--January 31, 1992-- forward......... 324,712 $325 -- $ -- $3,745,062 $ (4,142,085) -- $ -- $ -- $(50,315) Total Stockholders' Equity (Deficit) ------------- Balance--January 31, 1990-- forward......... $ 520,932 Common stock issued for cash in October 1990 through January 1991 at $9.00 per share....... 51,250 Excess of fair market value over option price of non- qualified stock options granted. 30,635 Net loss for the year............ (854,202) ------------- Balance--January 31, 1991........ (251,385) Common stock issued for cash in February 1991 through April 1991 at $9.00 per share....... 24,950 Common stock issued for cash and services in November 1991 at $1.50 per share. 23,000 Common stock issued for cash and note in December 1991 at $0.75 per share. 150,000 Excess of fair market value over option price of non- qualified stock options granted. 16,570 Non-qualified stock options exercised....... 1 Net loss for the year............ (410,149) ------------- Balance--January 31, 1992-- forward......... $(447,013)
F-5 ENDOREX CORPORATION (A Development Stage Enterprise) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(Deficit) Accumulated Common Stock Preferred Stock Additional During the Treasury Stock ----------------- ----------------- Paid-In Development ---------------- Deferred Note Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable ------- --------- -------- -------- ----------- ----------- ------ --------- ------------ ---------- Balance--January 31, 1992-- forward......... 324,712 $ 325 -- $ -- $ 3,745,062 $(4,142,085) -- $ -- $ -- $(50,315) Payment on note receivable...... -- -- -- -- -- -- -- -- -- 11,300 Net proceeds from secondary public stock offering in August 1992 at $112.50 per share, less issuance costs.. 66,666 66 -- -- 6,230,985 -- -- -- -- -- Non-qualified stock options exercised....... 2,000 2 -- -- 28 -- -- -- -- -- Net loss for the year............ -- -- -- -- -- (564,173) -- -- -- -- ------- ----- ------ -------- ----------- ----------- ------ --------- --------- -------- Balance--January 31, 1993........ 393,378 393 -- -- 9,976,075 (4,706,258) -- -- -- (39,015) Excess of fair market value over option price of non- qualified stock options granted. -- -- -- -- 126,000 -- -- -- (126,000) -- Amortization of deferred compensation.... -- -- -- -- -- -- -- -- 40,750 -- Non-qualified stock options exercised....... 67 -- -- -- 57 -- -- -- -- -- Collection of note receivable. -- -- -- -- -- -- -- -- -- 39,015 Net loss for the year............ -- -- -- -- -- (1,012,882) -- -- -- -- ------- ----- ------ -------- ----------- ----------- ------ --------- --------- -------- Balance--January 31, 1994........ 393,445 393 -- -- 10,102,132 (5,719,140) -- -- (85,250) -- Acquisition of treasury stock.. -- -- -- -- -- -- 41,975 (300,000) -- -- Forfeiture of non-qualified stock options granted......... -- -- -- -- (22,402) -- -- -- 22,402 -- Amortization of deferred compensation.... -- -- -- -- -- -- -- -- 49,348 -- Net loss for the year............ -- -- -- -- -- (1,349,678) -- -- -- -- ------- ----- ------ -------- ----------- ----------- ------ --------- --------- -------- Balance--January 31, 1995-- forward......... 393,445 $ 393 -- $ -- $10,079,730 $(7,068,818) 41,975 $(300,000) $ (13,500) $ -- Total Stockholders' Equity (Deficit) ------------- Balance--January 31, 1992-- forward......... $ (447,013) Payment on note receivable...... 11,300 Net proceeds from secondary public stock offering in August 1992 at $112.50 per share, less issuance costs.. 6,231,051 Non-qualified stock options exercised....... 30 Net loss for the year............ (564,173) ------------- Balance--January 31, 1993........ 5,231,195 Excess of fair market value over option price of non- qualified stock options granted. -- Amortization of deferred compensation.... 40,750 Non-qualified stock options exercised....... 57 Collection of note receivable. 39,015 Net loss for the year............ (1,012,882) ------------- Balance--January 31, 1994........ 4,298,135 Acquisition of treasury stock.. (300,000) Forfeiture of non-qualified stock options granted......... -- Amortization of deferred compensation.... 49,348 Net loss for the year............ (1,349,678) ------------- Balance--January 31, 1995-- forward......... $ 2,697,805
F-6 ENDOREX CORPORATION (A Development Stage Enterprise) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(Deficit) Accumulated Common Stock Preferred Stock Additional During the Treasury Stock ------------------- ----------------- Paid-In Development ----------------- Deferred Note Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable --------- --------- -------- -------- ----------- ------------ ------- --------- ------------ ---------- Balance--January 31, 1995--for- ward............ 393,445 $ 393 -- $ -- $10,079,730 $ (7,068,818) 41,975 $(300,000) $(13,500) $ -- Acquisition of treasury stock.. -- -- -- -- -- -- 76,667 (143,750) -- -- Forfeiture of non-qualified stock options granted......... -- -- -- -- (1,379) -- -- -- 1,379 -- Amortization of deferred compen- sation.......... -- -- -- -- -- -- -- -- 12,121 -- Net loss for the year............ -- -- -- -- -- (1,187,985) -- -- -- -- --------- ------ ------ -------- ----------- ------------ ------- --------- -------- ----- Balance--January 31, 1996........ 393,445 $ 393 -- $ -- $10,078,351 $ (8,256,803) 118,642 $(443,750) $ -- $ -- Common stock is- sued at $0.975 per share....... 333,333 333 -- -- 324,667 -- -- -- -- -- Common stock is- sued at $3.00 per share....... 333,333 333 -- -- 999,667 -- -- -- -- -- Non-qualified stock options exercised....... 145,283 146 -- -- 379,003 -- -- -- -- -- Net loss for the period.......... -- -- -- -- -- (1,962,877) -- -- -- -- --------- ------ ------ -------- ----------- ------------ ------- --------- -------- ----- Balance--Decem- ber 31, 1996.... 1,205,394 1,205 -- -- 11,781,688 (10,219,680) 118,642 (443,750) -- -- Warrents exer- cised at $1.20 per share....... 1,173 1 -- -- 1,407 -- -- -- -- -- Proceeds on ex- ercise of stock options......... -- -- -- -- 5,000 -- -- -- -- -- Warrants Issued. -- -- -- -- 5,407,546 -- -- -- -- -- Net proceeds from private placement at $2.3125 per share, less is- suance cost..... 8,648,718 8,650 -- -- 15,122,943 -- -- -- -- -- Net loss for the year............ -- -- -- (3,244,326) -- -- -- -- --------- ------ ------ -------- ----------- ------------ ------- --------- -------- ----- Balance--Decem- ber 31, 1997-- forward......... 9,855,285 $9,856 -- $ -- $32,318,584 $(13,464,006) 118,642 $(443,750) $ -- $ -- Total Stockholders' Equity (Deficit) ------------- Balance--January 31, 1995--for- ward............ $ 2,697,805 Acquisition of treasury stock.. (143,750) Forfeiture of non-qualified stock options granted......... -- Amortization of deferred compen- sation.......... 12,121 Net loss for the year............ (1,187,985) ------------- Balance--January 31, 1996........ $ 1,378,191 Common stock is- sued at $0.975 per share....... 325,000 Common stock is- sued at $3.00 per share....... 1,000,000 Non-qualified stock options exercised....... 379,149 Net loss for the period.......... (1,962,877) ------------- Balance--Decem- ber 31, 1996.... 1,119,463 Warrents exer- cised at $1.20 per share....... 1,408 Proceeds on ex- ercise of stock options......... 5,000 Warrants Issued. 5,407,546 Net proceeds from private placement at $2.3125 per share, less is- suance cost..... 15,131,593 Net loss for the year............ (3,244,326) ------------- Balance--Decem- ber 31, 1997-- forward......... $18,420,684
F-7 ENDOREX CORPORATION (A Development Stage Enterprise) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(Deficit) Accumulated Common Stock Preferred Stock Additional During the Treasury Stock --------------------- ------------------ Paid-In Development ------------------ Deferred Shares Par Value Shares Value Capital Stage Shares Cost Compensation ---------- --------- ------- ---------- ------------ ------------- ------- ---------- ------------ Balance-- December 31, 1997--forward... 9,855,285 $ 9,856 -- $ -- $ 32,318,584 $ (13,464,006) 118,642 $ (443,750) $ -- Net proceeds from issuance of common stock and warrants........ 307,692 308 -- -- 1,871,537 -- -- -- -- Proceeds from exercise of stock options... 25,000 25 -- -- 61,725 -- -- -- -- Purchase and retirement of common stock.... (133,335) (134) -- -- (129,866) -- -- -- -- Net proceeds from issuance of Series B Preferred Stock at $100 per share........... -- -- 80,100 8,010,000 -- -- -- -- -- Accrued preferred stock dividends....... -- -- 5,986 598,666 (713,187) -- -- -- -- Net loss for the year............ -- -- -- -- -- (21,793,170) -- -- -- ---------- ------- ------- ---------- ------------ ------------- ------- ---------- ----- Balance-- December 31, 1998............ 10,054,642 $10,055 86,086 $8,608,666 $ 33,408,793 $ (35,257,176) 118,642 $ (443,750) $ -- Proceeds from exercise of stock options... 334 4 -- -- 347 -- -- -- -- Common stock dividends issued.......... 819,319 819 1,535,404 (1,536,223) -- -- -- Accrued preferred stock dividends....... 68,867 688,634 (1,285,413) Net loss for the year............ -- -- -- -- -- (7,501,019) -- -- -- ---------- ------- ------- ---------- ------------ ------------- ------- ---------- ----- Balance-- December 31, 1999............ 10,874,295 $10,878 154,953 $9,297,300 $ 33,659,131 $ (44,294,417) 118,642 $ (443,750) $ -- ========== ======= ======= ========== ============ ============= ======= ========== ===== Total Stockholders' Note Equity Receivable (Deficit) ---------- -------------- Balance-- December 31, 1997--forward... $ -- $ 18,420,684 Net proceeds from issuance of common stock and warrants........ -- 1,871,845 Proceeds from exercise of stock options... -- 61,750 Purchase and retirement of common stock.... -- (130,000) Net proceeds from issuance of Series B Preferred Stock at $100 per share........... -- 8,010,000 Accrued preferred stock dividends....... -- (114,521) Net loss for the year............ -- (21,793,170) ---------- -------------- Balance-- December 31, 1998............ $ -- $ 6,326,588 Proceeds from exercise of stock options... -- 351 Common stock dividends issued.......... -- -- Accrued preferred stock dividends....... (596,778) Net loss for the year............ -- (7,501,019) ---------- -------------- Balance-- December 31, 1999............ $ -- $ (1,770,858) ========== ==============
The accompanying notes are an integral part of the consolidated financial statements. F-8 ENDOREX CORPORATION (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF CASH FLOW
Cumulative Period Year Ended Year Ended February 15, 1985 December 31, December 31, (Inception) to 1999 1998 December 31, 1999 ------------ ------------ ----------------- Operating Activities: Net Loss......................... $(7,501,019) $(21,793,170) $(42,758,195) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization.. 153,894 93,722 1,217,724 Gain on sale of marketable securities--available for sale.......................... (110,244) -- (110,244) Amortization of deferred compensation.................. 131,786 Equity in losses from joint ventures...................... 2,865,908 17,097,975 19,963,883 Excess of fair market value over option prices on non- qualified stock options....... -- -- 528,680 Amortization of fair value of warrants...................... 1,253,856 1,577,644 3,307,546 Gain on sale of assets......... (3,790) -- (4,530) Write off patent issuance cost. 327,078 -- 439,725 Changes in assets and liabilities: Restricted cash................ 500,000 (500,000) -- Prepaid expenses............... (36,785) 70,027 (102,546) Accounts payable and accrued expenses...................... 188,503 (177,734) 586,859 Accrued compensation........... (56,509) 97,655 184,508 Due to joint ventures.......... 442,333 500,000 942,333 ----------- ------------ ------------ Total adjustments............ 5,524,244 18,759,289 27,085,724 ----------- ------------ ------------ Net Cash Used In Operating Activities....................... (1,976,775) (3,033,881) (15,672,471) Investing Activities: Patent issuance cost............. (152,530) (96,933) (676,513) Investment in joint ventures..... (2,465,408) (17,498,475) (19,963,883) Organizational costs incurred.... -- -- (135) Purchases of leasehold improvements.................... (20,054) (255,888) (695,613) Purchases of office and lab equipment....................... (107,873) (190,738) (911,276) Proceeds from assets sold........ 3,790 -- 4,790 Purchases of marketable securities--available for sale.. (4,663,099) (950,000) (5,613,099) Proceeds from sale of marketable securities--available for sale.. 2,175,496 -- 2,175,496 ----------- ------------ ------------ Net Cash Used In Investing Activities....................... (5,229,678) (18,992,034) (25,680,233) Financing Activities: Net proceeds from issuance of common stock.................... -- 1,871,845 30,024,722 Net proceeds from issuance of preferred stock................. -- 16,325,712 16,325,712 Proceeds from exercise of options......................... 351 61,750 201,338 Proceeds from borrowings from President....................... -- -- 41,433 Repayment of borrowings from President....................... -- -- (41,433) Proceeds from borrowings under line of credit.................. 95,774 392,649 1,150,913 Repayment of borrowings under line of credit.................. (96,181) -- (758,672) Proceeds from note payable to bank............................ -- -- 150,000 Payments on note payable to bank............................ -- -- (150,000) Proceeds from borrowings from stockholders.................... -- -- 15,867 Repayment of borrowings from stockholders.................... -- -- (15,867) Advances from parent company..... -- -- 135,000 Payments to parent company....... -- -- (135,000) Repayment of long-term note receivable...................... -- -- 50,315 Repayment of note payable issued in exchange for legal service... -- (71,968) Purchase and retirement of common stock.................... -- (130,000) (130,000) Purchase of treasury stock....... -- -- (443,750) ----------- ------------ ------------ Net Cash Provided By (Used In) Financing Activities............. (56) 18,521,956 46,348,610 ----------- ------------ ------------ Net Increase (decrease) In Cash And Cash Equivalents............. (7,206,509) (3,503,959) 4,995,906 Cash And Cash Equivalents- Beginning Of Period.............. 12,202,415 15,706,374 -- ----------- ------------ ------------ Cash And Cash Equivalents-End Of Period........................... $ 4,995,906 $ 12,202,415 $ 4,995,906 =========== ============ ============ Supplemental Disclosure Of Cash Flow: Cash paid for interest........... $ 51,950 $ 15,854 $ 108,452 Non-cash Transactions Issuance of common stock dividends in kind............... $ 1,536,223 $ -- $ 1,536,223 Issuance of preferred stock dividends in kind............... 1,285,413 713,187 1,998,600
The accompanying notes are an integral part of the consolidated financial statements. F-9 ENDOREX CORPORATION (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. Operations Basis of Presentation--Endorex Corporation and Subsidiaries was incorporated in January 1987 as ImmunoTherapeutics, Inc, a wholly owned subsidiary of BiologicalTherapeutics, Inc. ("BTI"). BTI was incorporated on December 19, 1984 and commenced operations on February 15, 1985 [inception date]. On March 30, 1987 BTI was merged into Endorex. Our financial statements include the accounts of our predecessor, BTI, for all periods presented. In October 1996 Endorex formed its first subsidiary, Orasomal Technologies, Inc. ("Orasomal"), and in July 1997, we formed a second subsidiary, Wisconsin Genetics, Inc. ("WGI"). Nature of Business--Endorex Corporation is a development-stage drug delivery company. Our core drug delivery technology focuses on oral/mucosal delivery of drugs and vaccines previously delivered only by injection. The Company's Orasome system utilizes technology licensed from MIT to develop the oral/mucosal delivery of vaccines, proteins and peptides. In 1998 Endorex formed two joint ventures with Elan Corporation, plc, one of the world's leading drug delivery companies. The purpose of the first joint venture, InnoVaccines, is to research, develop, and commercialize novel delivery systems for the human and veterinary vaccine markets. The second joint venture, Newco, focuses on the utilization of the MEDIPAD microinfusion pump, developed by Elan, to deliver iron chelators for the treatment of a series of genetic blood disorders known as iron overload disorders. 2. Summary of Significant Accounting Policies Principles of Consolidation--The consolidated financial statements include Endorex and its subsidiaries, Orasomal and WGI. Intercompany accounts and transactions have been eliminated. We account for the joint ventures by recognizing Endorex's portion of the joint venture losses as Equity in losses from joint ventures. Segment and Geographic Information -- Endorex operates exclusively in the biotechnology drug delivery industry. We are currently in the development stage and do not have any revenues, or any segregation of assets relating to products or business entities. All development work is performed in the United States. During 1999, we made operating decisions based upon product and market potential and collaborative agreements and did not utilize specific operating results to manage the business. Therefore, we do not have reportable operating segments as defined by Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." Cash and Cash Equivalents--Cash equivalents are comprised of certain highly liquid investments with maturity of three months or less when purchased. Marketable Securities--Marketable securities are comprised of high-grade commercial paper and short-term government agency notes that have maturities ranging from six to twelve months from the purchase date. The fair value of marketable securities classified as available for sale approximates the carrying value of these assets due to the short maturity of the instruments. Office and Lab Equipment and Leasehold Improvements--Office and lab equipment is stated at cost. Depreciation is computed on a straight-line basis over five years. Leasehold improvements are amortized utilizing the straight- line method over the term of the lease. Depreciation expense was $138,582 and $75,934 for the periods ended December 31, 1999 and 1998, respectively. Research and Development Costs--Expenditures for research and development activities are charged to operations as incurred. Previously reported research and development expenses related to our first year funding F-10 ENDOREX CORPORATION (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) of InnoVaccines have been reclassified in the accompanying 1998 consolidated statement of operations to Equity in losses from joint ventures to conform to our 1999 presentation of expenditures. The reclassification did not impact previously reported net loss or deficit accumulated during the development stage. Patent Issuance Costs--The cost of patents is accumulated during the approval process. Patents granted are amortized on a straight-line basis over the remaining legal life of the patent or the estimated remaining economic life. When a patent is not granted, or the process is terminated, the accumulated cost is charged to operations. Common Stock Dividend--Common stock dividends are reflected as a charge to accumulated deficit, using the fair market value method computed with the closing price as of the day before the declaration date. Investment in Joint Ventures--We own 80.1% of each of the joint ventures with Elan as of December 31, 1999. Each joint venture is governed by a joint development and operating agreement which provides that both Elan and Endorex must approve all major transactions, research and development plans, and budgets. Therefore, Endorex records its share of the joint ventures' expenditures as Equity in losses from joint ventures. Impairment of Long-Lived Assets--In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Concentrations of Credit Risk--Financial instruments that potentially subject us to concentrations of credit risk primarily are limited to cash, cash equivalents, and marketable securities. Cash is primarily invested in money market mutual funds managed by investment banks approved by the Board of Directors. Our marketable securities investments consist of high-grade commercial paper and short-term government agency notes. Use of Estimates--While preparing financial statements in conformity with generally accepted accounting principles, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Risk and Uncertainties--We are subject to risks common to companies in the biotechnology industry, including, but not limited to, litigation, product liability, development by ourselves or our competitors of new technological innovations, dependence on key personnel, protections of proprietary technology, and compliance with FDA regulations. 3. Joint Ventures In 1998 Endorex formed the two joint ventures with Elan as follows: InnoVaccines Corporation InnoVaccines was established in January 1998 pursuant to agreements between Endorex and Elan. At the time of closing, we issued to Elan International Services, Ltd. ("EIS") 307,692 shares of Endorex common stock and a six-year warrant to purchase an additional 230,777 shares of Endorex common stock at an exercise price of $10.00 per share for an aggregate purchase price of $2.0 million. In addition, EIS purchased $8.0 million of Endorex Series B convertible preferred stock, which is convertible into Endorex common stock at a price of $7.50 per share, subject to adjustment. The Series B convertible preferred stock pays an 8% annual in-kind dividend. F-11 ENDOREX CORPORATION (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) InnoVaccines is initially owned 80.1% by Endorex and 19.9% by Elan. It licensed certain technology from Elan and certain other technology from Orasomal. Endorex and Elan invested $8.0 and $2.0 million in the joint venture, respectively. At the time of closing, InnoVaccines paid Elan an initial $10.0 million license payment. Elan may receive future milestones and royalties based on the joint venture's performance. Since the technology did not yet represent a commercial product, the joint venture recorded an expense in the first quarter of 1998 for the initial license fee. We recorded our $8.0 million share of that expense and simultaneously recorded Elan's purchase of $8.0 million of Endorex Series B convertible preferred stock. Orasomal sub-licensed to InnoVaccines oral vaccine rights to its proprietary Orasome polymerized liposome technology exclusively licensed from MIT. In consideration of the license, Orasomal may receive milestone payments and royalties. Elan and Endorex each funded research and development related to InnoVaccines equally from the inception of the joint venture through March 31, 1999, in accordance with the agreement between Elan and Endorex. Those expenditures by Endorex aggregated $1.1 million and $0.4 million for the year ended December 31, 1998 and 1999, respectively, and are included in Equity in losses from joint ventures. As of April 1, 1999, Endorex and Elan fund future joint venture expenditures in proportion to our respective ownership levels. Accordingly, Endorex and Elan each invoice InnoVaccines for activities performed on behalf of the venture. During the period April 1, 1999 through December 31, 1999, Endorex incurred research and development expenditures aggregating $1.1 million related to the joint venture. Endorex billed the joint venture $1.6 million during that period related to this research and development activity. Endorex has a net due to joint venture of $0.6 million as of December 31, 1999 relating to InnoVaccines, which represents the difference between Endorex's funding obligations to the venture and receivable from the venture for activities performed. In addition, Elan has agreed to lend Endorex up to $2.5 million, restricted to Endorex's funding obligations for the joint venture. During 1999, the joint venture acquired certain rights to licenses, aggregating $870,000, which were immediately recorded as expense of the joint venture, as such technology did not yet represent a commercial product. Elan and Endorex agreed to fund these licensing expenditures equally. Endorex Newco, Ltd. Newco was established in October 1998 pursuant to agreements between Endorex and Elan. At the time of closing, Endorex and EIS purchased $8.4 million and $2.1 million of Newco's common stock, respectively. In addition, Elan purchased $8,410,500 of Endorex Series C exchangeable convertible preferred stock ("Series C Preferred"). The Series C Preferred is exchangeable at Elan's option for an additional 30.1% ownership interest of Newco's common stock, or it may be converted into Endorex's common stock at a price of $9.00 per share. The Series C Preferred pays a 7% annual in-kind dividend. Newco is initially owned 80.1% by Endorex and 19.9% by EIS. At the time of closing, Newco paid Elan an initial $10.0 million license payment. Elan may receive future milestones and royalties based on Newco's performance. Since the technology did not yet represent a commercial product, Newco recorded an expense in the fourth quarter of 1998 for the initial license fee. We also recorded our $8.0 million share of that expense and simultaneously recorded EIS's $8.4 million purchase of Series C Preferred. In consideration of the license fee, Newco has obtained an exclusive worldwide license to the MEDIPAD drug delivery system developed by Elan with two drugs. Newco is now focusing on development of the first of those drugs, iron chelators, for the treatment of a series of genetic blood disorders known as iron overload F-12 ENDOREX CORPORATION (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) disorders. MEDIPAD is a lightweight, microinfusion pump, which combines the simplicity of a patch with the extensive delivery capabilities of an infusion pump. During 1999, Newco's research and development activities were funded from working capital. As of December 31 1999, Elan and Endorex invoiced activities totaling approximately $500,000. Endorex has a net due to joint venture of $350,000 as of December 31, 1999 relating to Newco, which represents the difference between Endorex's funding obligations to the venture and receivable from the venture for activities performed. During 2000 and 2001, Elan and Endorex are required to fund Newco expenditures according to their respective ownership interests. However, Endorex may require Elan to lend up to $4.8 million, pursuant to a convertible note, to fund our portion of the joint venture's research and development expenses. Unaudited Condensed Financial Statements for Unconsolidated Joint Ventures Condensed, unaudited financial statement information of the joint ventures is stated below. The joint ventures had no revenues. Net expenses equaled the net loss for all periods.
1999 1998 ------------ ------------- InnoVaccines, net of Endorex mark-up on billings to InnoVaccines.................. $ (3,731,588) $ (12,577,975) Newco...................................... (500,000) (10,000,000) ------------ ------------- Total net loss............................. $ (4,231,588) $ (22,577,975) ============ ============= Reconciliation to Equity in losses from joint ventures: Total joint venture net losses............. $ (4,231,588) $ (22,577,975) Less: Elan Minority Interest............... 1,365,680 5,480,000 ------------ ------------- Equity in losses from joint ventures....... $ (2,865,908) $ (17,097,975) ============ =============
4. Development Stage Activities and Operations For the period from our incorporation to date, we have been a "development stage enterprise" and our operations have consisted primarily of financial planning, raising capital, and research and development activities. We have not produced any revenues from product sales since our inception. 5. Leasehold Improvements and Equipment As of December 31, 1999, leasehold improvements and equipment consisted of the following: Leasehold improvements...................................... $ 255,888 Laboratory equipment........................................ 730,803 Office equipment............................................ 111,302 ---------- 1,097,993 Accumulated depreciation.................................... (649,042) ---------- $ 448,951 ==========
F-13 ENDOREX CORPORATION (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Lines of Credit On December 31, 1998, Endorex obtained a $750,000 equipment financing line with Finova Technology Financing, Inc. ("Finova"). As of December 31, 1999, we had used approximately $456,000 to finance equipment and leasehold improvements related to the Lake Forest Research and Development Center. Interest rates for each draw are based upon a base interest rate of 7.4%, plus an index rate equivalent to the highest yield as published in The Wall Street Journal of three-year United States Treasury Notes two days prior to the loan draw. The index rates for the first and second draws were 4.75% and 5.83%, respectively, resulting in an aggregate interest rate of 12.15% and 13.23%, respectively. Draws are payable in monthly installments over a period of 48 months, which currently amounts to approximately $11,000 per month. Finova filed security interest in the assets. In addition, the agreement is subject to certain terms and covenants, including the right of Finova to call the loan in the event of materially adverse financial conditions. We estimate the fair value of the line of credit to be approximately the carrying value based upon borrowing rates currently available to us for borrowings with similar terms. On May 19, 1997, Endorex entered into a senior line of credit agreement with The Aries Funds, two of our major stockholders, pursuant to which we could borrow up to $500,000 (the "Bridge Loan"). During 1997, we paid the outstanding principal and interest on the Bridge Loan. In partial consideration of the Bridge Loan, Endorex granted warrants to purchase an aggregate of 66,668 shares of common stock at an initial exercise price equal to $2.54 per share. The warrant exercise price and the number of shares of common stock that the warrants can be used to purchase are subject to adjustment in certain circumstances. The warrants are exercisable until May 19, 2002. 7. Stockholders' Equity Private Placement--Pursuant to a Private Placement, Endorex issued and sold an aggregate of 8,648,718 shares of common stock on July 16, October 10 and October 16, 1997 to certain accredited investors. The aggregate proceeds of these issuances were $20 million and the net proceeds to Endorex, after deducting commissions and expenses, were $17.2 million. In connection with the Private Placement, we issued warrants to purchase 864,865 shares of Endorex common stock at an exercise price of $2.54375 per share to Paramount Capital, Inc., the Placement Agent ("Paramount") and certain of its affiliates and employees. The estimated fair value at the warrants' grant date was $2.1 million, which we recorded as a reclassification of additional paid-in capital. We also executed a financial advisory agreement with Paramount. In connection with the financial advisory agreement, we issued warrants to purchase 1,297,297 shares of Endorex common stock at an exercise price of $2.54375 per share to certain employees of Paramount. The estimated fair value at the warrants' grant date was $3.16 million, which was recorded as a deferred cost and amortized to expense over two years, the term of the agreement. The warrants currently are exercisable and expire on April 16, 2003. Common Stock Dividend--The terms of the Private Placement also included 5%, semi-annual dividends payable in additional shares of common stock based on the number of shares held as of the record date, including previous dividend distributions. The first and second semi-annual common stock dividends were payable to holders of stock with dividend rights as of the record date of April 16, 1999 and October 16, 1999, respectively. We distributed the first and second dividends on June 1, 1999 and November 16, 1999, respectively. Semi-annual common stock dividends continue to be payable through October 16, 2002. F-14 ENDOREX CORPORATION (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The stock dividends were reflected as a charge to accumulated deficit, using the fair market value method computed with the closing price as of the day before the declaration date. Net Loss Per Share--Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," we presented earnings per share on the Consolidated Statement of Operations in accordance with SFAS No. 128 for the current and prior periods. As operations resulted in a net loss for all periods presented, diluted earnings per share are the same as basic earnings per share due to the anti-dilutive effect of potential dilutive common shares, including warrants discussed above and stock options discussed in Note 8. 8. Stock Based Compensation The Amended and Restated 1995 Omnibus Plan ("the Plan") is intended to promote Endorex's interests by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company as an incentive for them to remain in the service of the Company. The Plan is divided into three separate equity programs: 1) the Discretionary Option Grant Program, under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of common stock, 2) the Salary Investment Option Grant Program, under which eligible employees may elect to have a portion of their base salary invested each year in options to purchase shares of common stock, 3) the Automatic Option Grant Program, under which eligible non-employee Board members will automatically receive options at periodic intervals to purchase shares of common stock, and 4) the Director Fee Option Grant Program, under which non- employee Board members may elect to have all, or any portion, of their annual retainer fee otherwise payable in cash applied to a special option grant. The terms of the options, including vesting periods, are determined by the Compensation Committee of the Board of Directors in accordance with the Plan. Options generally vest over four years. No one person participating in the Plan may receive options and separately exercisable stock appreciation rights for more than 750,000 shares of Common Stock per calendar year. We elected the disclosure-only option under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and accordingly account for stock options per the terms of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." If instead, compensation expense for stock options had been determined based upon the fair value at the grant date, according to the terms of SFAS No. 123, our net loss would have increased by approximately $0.4 million, or $.03 per share, and $1.3 million, or $0.12 per share, for 1999 and 1998, respectively. Net loss and net loss per share would have increased as follows:
1999 1998 ------------ ------------- Net loss applicable to common stockholders: As reported.............................. $ (8,786,431) $ (22,506,357) Pro forma................................ (9,118,581) (23,814,669) Basic and diluted net loss per share applicable to common stockholders As reported.............................. $ (0.82) $ (2.09) Pro forma................................ (0.85) (2.21)
F-15 ENDOREX CORPORATION (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The weighted average fair value of options granted with an exercise price equal to the fair market value of the stock was $1.45 and $5.46 for 1999 and 1998, respectively. For purposes of estimating the fair value of options according to SFAS 123, we estimated the fair value of each option grant as of the date of the grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used: dividend yield 0%, volatility of 139% and 149-226%, expected life of four (4) years, and risk-free interest rates as of the date of grant ranging from 5.05%-6.2% and 5.36-6.06% for 1999 and 1998, respectively. Option activity for the periods ended December 31, 1999 and 1998 was as follows:
Weighted Average Exercise Price Shares ---------------- --------- Ending Balance at December 31, 1997........... $2.66 1,300,114 Granted....................................... $6.24 209,500 Expired/Cancelled............................. $2.70 (23,838) Exercised..................................... $2.47 (25,000) --------- Ending Balance at December 31, 1998........... $3.18 1,460,776 ========= Granted....................................... $1.93 229,000 Expired/Cancelled............................. $5.11 (117,940) Exercised..................................... $1.05 (334) --------- Ending Balance at December 31, 1999........... $2.82 1,571,502 =========
The range of exercise prices and weighted average contractual lives are as follows:
Options Outstanding Options Exercisable ------------------------------- ------------------------ Weighted Average Weighted Average Exercise Price Shares Term Exercise Price Shares Exercise Price -------------- --------- ---- ---------------- ------- ---------------- $1.05 1,002 0.02 $1.05 1,002 $1.05 $2.47 1,155,000 7.81 $2.47 812,935 $2.47 $4.75 35,000 7.97 $4.75 19,687 $4.75 $5.50 20,000 7.97 $5.50 20,000 $5.50 $5.63 35,000 7.92 $5.63 35,000 $5.63 $6.50 18,000 0.06 $6.50 18,000 $6.50 $6.75 80,000 8.12 $6.75 27,500 $6.75 $6.63 12,500 8.16 $6.63 3,125 $6.63 $2.00 86,000 9.16 $2.00 -- $2.00 $1.75 3,000 9.21 $1.75 -- $1.75 $1.88 20,000 9.37 $1.88 -- $1.88 $2.54 36,000 9.82 $2.54 9,000 $2.54 $2.54 10,000 0.82 $2.54 10,000 $2.54 $1.38 60,000 9.81 $1.38 7,500 $1.38 --------- ------- 1,571,502 7.92 $2.82 963,749 $2.90 ========= =======
F-16 ENDOREX CORPORATION (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Income Taxes At December 31, 1999, we had a usable net operating loss carryforward of approximately $15.9 million after limitations based on ownership. If not utilized to offset future taxable income, this carryforward will expire in years 2007 to 2019. Pursuant to SFAS No. 109, we have deferred taxes as of December 31, 1999 consisting of the following: Net operating loss carryforward............................. $ 5,414,203 Research & development credit carryforward.................. 618,058 Licensing fees--amortization................................ 5,045,090 Depreciation................................................ 108,008 ------------ Gross deferred tax assets................................... 11,185,359 Valuation allowance......................................... (11,185,359) ------------ Net deferred tax assets..................................... $ -- ============
Due to the uncertainty that we will generate income in the future sufficient to fully or partially utilize these carryovers, a valuation allowance of $11,185,359 has been established to offset the deferred tax asset. This represents an increase of $1.9 million over the valuation allowance at December 31, 1998. Under the Internal Revenue Code certain stock transactions including sales of stock and the granting of options to purchase stock, could limit the amount of net operating loss carry forwards that may be utilized on an annual basis to offset taxable income in future periods. If utilization is limited by such transactions the net operating loss carry forwards may expire before they are utilized. 10. Leases Endorex leases its executive offices and research facilities under operating leases, which provide for annual minimum rent and additional rent based on increases in operating costs and real estate taxes. Rental expense was $83,153 during 1999 and $95,522 during 1998. Future minimum lease payments for operating leases are as follows: 2000............................. $54,012 2001............................. 55,632 2002............................. 57,300 2003............................. 59,016
F-17 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Endorex Corporation (A Development Stage Enterprise): In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders' equity (deficit) and of cash flows, present fairly, in all material respects, the financial position of Endorex Corporation and its subsidiaries (a development stage enterprise) at December 31, 1999, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998, and for the period cumulative from inception (February 15, 1985) to December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Chicago, Illinois February 4, 2000 F-18 EX-10.21 2 0002.txt DEVELOPMENT LICENSE & SUPPLY AGREEMENT EXHIBIT 10.21 ------------- CONFIDENTIAL TREATMENT HAS BEEN SOUGHT FOR ------------------------------------------ PORTIONS OF THIS EXHIBIT PURSUANT TO RULE 24B-2 ----------------------------------------------- UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED ----------------------------------------------------- Dated 2/nd/ February, 2000 ENDOREX NEWCO, LTD. AND SCHEIN PHARMACEUTICAL (BERMUDA), LTD. DEVELOPMENT, LICENCE AND SUPPLY AGREEMENT - -------------------------------------------------------------------------------- Page 1 of 56 CONTENTS CLAUSE 1 PRELIMINARY CLAUSE 2 THE LICENCE CLAUSE 3 INTELLECTUAL PROPERTY CLAUSE 4 COMPETING PRODUCTS CLAUSE 6 PROJECT TEAM AND MANAGEMENT COMMITTEE CLAUSE 5 DEVELOPMENT OF THE SYSTEM, COMPOUND AND PRODUCT CLAUSE 7 REGISTRATION OF THE PRODUCT CLAUSE 8 MARKETING AND PROMOTION OF THE PRODUCT CLAUSE 9 SUPPLY OF THE PRODUCT CLAUSE 10 SUPPLY OF THE COMPOUND CLAUSE 11 FINANCIAL PROVISIONS CLAUSE 12 PAYMENTS, REPORTS AND AUDITS CLAUSE 13 DURATION AND TERMINATION CLAUSE 14 CONSEQUENCES OF TERMINATION CLAUSE 15 WARRANTY AND INDEMNITY CLAUSE 16 CUSTOMER COMPLAINTS AND PRODUCT RECALL CLAUSE 17 MISCELLANEOUS PROVISIONS SCHEDULE 1 ENDOREX JV PATENTS SCHEDULE 2 SCHEIN COMPOUND PATENTS SCHEDULE 3 THE PROJECT SCHEDULE 4 PROJECT SYSTEM SPECIFICATIONS SCHEDULE 5 PRODUCT SPECIFICATIONS - ------------------------------------------------------------------------------ Page 2 of 56 THIS AGREEMENT is made on 2/nd/ February, 2000. BETWEEN: - ------- (1) ENDOREX NEWCO, LTD., a company incorporated in Bermuda with offices at Clarendon House, 2 Church Street, Hamilton, Bermuda; and (2) SCHEIN PHARMACEUTICAL (BERMUDA), LTD., a company incorporated in Bermuda, with offices at Grosvenor Trust LTD, 33 Church Street, Hamilton, Bermuda. RECITALS: - -------- A. ENDOREX JV is a joint venture company of ELAN and ENDOREX and is beneficially entitled to the ENDOREX JV PATENTS under a licence from ELAN for use in the research, development and commercialisation of iron chelating agents. B. SCHEIN wishes ENDOREX JV to develop the SYSTEM for SCHEIN as a method of drug delivery incorporating the COMPOUND for the FIELD. C. ENDOREX JV is willing to use its technology to do so and to grant SCHEIN an exclusive sublicence of the ENDOREX JV PATENTS and ENDOREX JV KNOW-HOW to package, import, use, offer for sale, distribute and sell the PRODUCT in the TERRITORY. D. ENDOREX JV and SCHEIN are desirous of entering into an agreement to give effect to the arrangements described at Recitals B and C. NOW IT IS HEREBY AGREED AS FOLLOWS: CLAUSE 1 - PRELIMINARY 1.1 Definitions: In this Agreement unless the context otherwise requires: ----------- AFFILIATE shall mean any corporation or entity controlling or controlled or under common control with ENDOREX JV or SCHEIN, as the case may be. For the purposes of this Agreement, "control" shall mean the direct or indirect ownership of more than 50% of the issued voting shares or other voting rights of the subject entity to elect directors, or if not meeting the preceding criteria, any entity owned or controlled by or owning or controlling at the maximum control or ownership right permitted in the country where such entity exists. ANDA shall mean the new drug application, abbreviated new drug application, or any other application acceptable to an RHA for marketing approval for the COMPOUND, which SCHEIN will file with an RHA in a country of the TERRITORY, including any supplements or amendments thereto. ANDA APPROVAL shall mean the final approval of an ANDA by an RHA to market the COMPOUND in a country in the TERRITORY. - ------------------------------------------------------------------------------ Page 3 of 56 CFR shall mean the US Code of Federal Regulations 21, as amended from time to time. cGCP, cGMP, cGLP shall mean respectively current Good Clinical Practice, current Good Manufacturing Practice and current Good Laboratory Practice, respectively, as defined in the FFDCA. COMPETING PRODUCT shall have the meaning assigned to it in Clause 4.1. COMPOUND shall mean any formulations of [********] and any of its analogues, isomers or derivatives. COMPOUND SPECIFICATIONS shall have the meaning assigned to it in Clause 10.5. DEVELOPMENT COST shall mean the fully allocated cost, which is the sum total of all development and other related costs for the SYSTEM incurred after the EFFECTIVE DATE, including direct labour, direct materials and supplies, variable labour, overhead and attributable administration, quality control, quality assurance and other costs, whether incurred by ENDOREX JV, its agents or any sub-contractor of ENDOREX JV; such costs to be calculated in accordance with generally accepted accounting principles. In the case of development services which are provided by a third party, the DEVELOPMENT COST of such services shall comprise the amount actually paid, as well as any other directly attributable costs incurred by the Party. DEVICE REGULATORY APPLICATION shall mean 510(K) Kit or equivalent applications for approval to market the SYSTEM with the COMPOUND which SCHEIN will file with the RHA in any country of the TERRITORY as the parties may from time to time determine hereunder, including any supplements or amendments thereto. DEVICE REGULATORY APPROVAL shall mean the final approval by the RHA to market the SYSTEM with the COMPOUND in any country of the TERRITORY, including any governmental pricing and reimbursement approval and any other approval which is required to launch the SYSTEM with the COMPOUND in the normal course of business. MAF shall mean a Master File for the SYSTEM, as defined in the CFR Sections 814.3(d) and 814.20(c) and/or its equivalent in the other countries of the TERRITORY. EFFECTIVE DATE shall mean 2/nd/ February, 2000. ELAN shall mean Elan Corporation, plc and any of its AFFILIATES. ____________________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 4 of 56 ENDOREX shall mean Endorex Corporation and any of its AFFILIATES (including ENDOREX JV but excluding ELAN). ENDOREX JV shall mean Endorex Newco, Ltd. ENDOREX JV BACKGROUND TECHNOLOGY shall mean ENDOREX JV PATENTS, and/or ENDOREX JV KNOW HOW. ENDOREX JV IMPROVEMENTS shall mean any and all improvements or enhancements, patentable or otherwise, that have been conceived, created or developed during the TERM which can be usefully applied to the SYSTEM and/or the PRODUCT, including the manufacture thereof, except for (i) improvements relating exclusively to the COMPOUND, or (ii) any improvements that are subject to contractual obligations of ENDOREX JV to third parties. If the inclusion of an ENDOREX JV IMPROVEMENT is restricted or limited by a third party agreement, ENDOREX JV shall use reasonable commercial efforts to exclude or where applicable minimise any such restriction or limitation. ENDOREX JV KNOW-HOW shall mean all knowledge, information, trade secrets, data and expertise which is not generally known to the public, owned by ENDOREX JV, or to which ENDOREX JV has rights under the terms of a licence or licences in force on the EFFECTIVE DATE, which permit(s) disclosure of same to SCHEIN, relating to the SYSTEM and/or the PRODUCT, whether or not covered by any patent, copyright, design patent, trademark, trade secret or other industrial or any intellectual property rights. ENDOREX JV PATENTS shall mean the patents and patent applications as set forth in Schedule 1, that are owned or licensed by or on behalf of ENDOREX JV as of the EFFECTIVE DATE. ENDOREX JV PATENTS shall also include all extensions, continuations, continuations-in-part, divisionals, patents-of- additions, re-examinations, re-issues, supplementary protection certificates and foreign counterparts of such patents and patent applications and any patents issuing thereon and extensions of any patents licensed hereunder. ENDOREX JV TRADEMARK shall mean one or more trademarks, trade names, or service marks that are owned or licensed by or on behalf of ENDOREX JV that ENDOREX JV may nominate and approve in writing from time to time for use in connection with the sale or promotion of the PRODUCT by SCHEIN. For the purposes of this Agreement, the trademark "Medipad"* which has been licensed by ENDOREX JV from ELAN shall be deemed to be an ENDOREX JV TRADEMARK hereunder. ENFORCEMENT PROCEEDINGS shall mean the proceedings referred to in Clause 3.4.2. EX WORKS shall have the meaning as such term is defined in the ICC Incoterms, 1990, International Rules for the Interpretation of Trade Terms, ICC Publication No. 460. FCA shall have the meaning as such term is defined in the ICC Incoterms, 1990, - -------------------------------------------------------------------------------- Page 5 of 56 International Rules for the Interpretation of Trade Terms, ICC Publication No. 460. FFDCA shall mean the US Federal Food, Drug and Cosmetic Act of 1934, and the regulations promulgated thereunder, as the same may be amended from time to time. FIELD shall mean the treatment of any iron overloading disorder by subcutaneously delivering the COMPOUND using the SYSTEM. IN MARKET shall mean the sale of the PRODUCT by SCHEIN or its AFFILIATES or SUBLICENSEES to an unaffiliated third party such as (i) an end-user consumer of the PRODUCT or (ii) a wholesaler, distributor, managed care organisation, hospital or pharmacy or other third party payor for final commercial sale by such party to the consumer, and shall exclude in any event the transfer pricing of the PRODUCT by SCHEIN to an AFFILIATE or a SUBLICENSEE. INITIAL PERIOD shall mean the initial period of this Agreement, as more fully described in Clause 13. LAUNCH STOCKS shall mean the quantities of stocks of the PRODUCT required by SCHEIN in relation to the launch of the PRODUCT following DEVICE REGULATORY APPROVAL in the USA, as more fully described in Clause 9.7. LICENCE FEES shall mean any monetary amounts or non cash consideration, other than NSP or ROYALTY, received by SCHEIN or its AFFILIATES from a third party in relation to the development and commercialisation of the PRODUCT outside of the USA, including but not limited to license fees, development fees or any other one-off or ongoing fees. MANAGEMENT COMMITTEE shall mean the group to be established pursuant to Clause 5. MANUFACTURING COST shall mean the fully allocated cost which is the sum total of all production related costs for the COMPOUND (subject to Clause 10.15), the SYSTEM and PRODUCT, as applicable, (direct labour, direct materials, facility overhead and expenses which can be allocated, QA/QC and analytical charges, packaging costs for the COMPOUND and/or the SYSTEM including, but not limited to, stability and RHA fees) accounted for in accordance with United States Generally Accepted Accounting Principles applied on a consistent basis. In the case of COMPOUND, SYSTEM or materials which are purchased from a third party, the MANUFACTURING COST of such COMPOUND or SYSTEM shall comprise the amount actually paid, including import duties, transport and handling costs and other directly attributable costs. MARKETING AND SELLING EXPENSES shall mean dedicated marketing and selling expenses for the PRODUCT which have been agreed in advance by the MANAGEMENT COMMITTEE in accordance with Clause 8.2. NSP shall, subject to the provisions of Clauses 11.4.5, mean in the case of PRODUCT sold by SCHEIN or an AFFILIATE or a SUBLICENSEE, that sum determined by deducting from the aggregate gross IN MARKET sales proceeds billed for the - -------------------------------------------------------------------------------- Page 6 of 56 PRODUCT by SCHEIN or, its AFFILIATE or a SUBLICENSEE, as the case may be, in accordance with generally accepted accounting principles:- (a) customs duties or other taxes (excluding income or corporation tax), directly related to the sale of the PRODUCT which are paid by SCHEIN or its AFFILIATE or SUBLICENSEES as the case may be; (b) a discount from the gross sales proceeds to cover such normal costs as are incurred by SCHEIN or its AFFILIATES or SUBLICENSEES, as the case may be, in respect of transport, shipping insurance, returns and discounts related to the sale of the PRODUCT, subject to a cap of 5% of the sum of the aggregate gross IN MARKET sales proceeds less the deductible items at (a) above. Party shall mean ENDOREX JV or SCHEIN as the case may be. Parties shall mean ENDOREX JV and SCHEIN. PRODUCT shall mean the SYSTEM containing, or packaged with, the COMPOUND. PRODUCT SPECIFICATIONS shall mean the specifications for the PRODUCT set by the Parties for the DEVICE REGULATORY APPLICATIONS and which shall be attached as Schedule 5, as well as such other specifications such as interim specifications which may be required during the PROJECT and such additional specifications for the PRODUCT as may be agreed by the parties in writing. PROFIT shall mean NSP less (i) MANUFACTURING COST of the PRODUCT, (ii) MANUFACTURING COST of the COMPOUND, and (iii) MARKETING AND SELLING EXPENSES; and plus, where applicable, any ROYALTY. PROJECT shall mean all activity in order to develop the SYSTEM and the PRODUCT for commercialisation in the USA in accordance with the plan shown in Schedule 3, as may be amended from time to time as agreed by the parties in writing. PROJECT SYSTEM SPECIFICATIONS shall mean the specifications for the SYSTEM which shall be set by the parties for the DEVICE REGULATORY APPLICATIONS and which shall be attached as Schedule 4, as well as such other specifications such as interim specifications which may be required during the PROJECT and such additional specifications for the SYSTEM as may be agreed by the parties in writing. PROJECT TEAM shall mean the group to be established pursuant to Clause 6. RHA shall mean any relevant government health authority (or successor agency thereof) in any country of the TERRITORY whose approval is necessary to market the SYSTEM, COMPOUND and/or PRODUCT, as applicable, in the relevant country of the TERRITORY, including, without limitation, the United States Food and Drug Administration. ROYALTY shall mean any amount received by SCHEIN, its AFFILIATES or SUBLICENSEES as a royalty on sales of the PRODUCT in the TERRITORY. - -------------------------------------------------------------------------------- Page 7 of 56 SCHEIN shall mean Schein Pharmaceutical (Bermuda) Ltd. and any of its AFFILIATES. SCHEIN COMPOUND IMPROVEMENTS shall mean any and all improvements or enhancements, patentable or otherwise, relating exclusively to the COMPOUND which are owned or licensed by SCHEIN and which can be usefully applied to the PRODUCT including the manufacture or use thereof which were first conceived, developed, invented or reduced to practice by SCHEIN or ENDOREX JV during the TERM except for any improvements that are subject to contractual obligations of SCHEIN or ENDOREX JV to third parties. If the inclusion of a SCHEIN COMPOUND IMPROVEMENT is restricted or limited by a third party agreement, SCHEIN or ENDOREX JV as the case may be shall use reasonable commercial efforts to exclude or where applicable minimise any such restriction or limitation. SCHEIN COMPOUND KNOW-HOW shall mean all knowledge, information, trade secrets, data and expertise which is not generally known to the public, owned or licensed by SCHEIN or to be developed or licensed by SCHEIN as of the EFFECTIVE DATE relating exclusively to the COMPOUND, whether or not covered by any patent, copyright, design, trademark or other industrial or intellectual property rights. SCHEIN COMPOUND PATENTS shall mean all patents and patent applications as set forth in Schedule 2, that are owned by, or licensed to SCHEIN as of the EFFECTIVE DATE relating exclusively to the COMPOUND. SCHEIN PATENTS shall also include all extensions, continuations, continuations-in-part, divisionals, patents-of-additions, re-examinations, re-issues, supplementary protection certificates and foreign counterparts of such patents and patent applications and any patents issuing thereon and extensions of any patents licensed hereunder. SCHEIN COMPOUND TECHNOLOGY shall mean SCHEIN COMPOUND PATENTS and SCHEIN COMPOUND KNOW HOW. SUBLICENSEE shall mean any independent third party appointed by SCHEIN, with the unanimous approval of the MANAGEMENT COMMITTEE, pursuant to Clause 2.2, to market, distribute and sell the PRODUCT in any country of the TERRITORY outside of the USA. SYSTEM shall mean the ambulatory subcutaneous infusion drug delivery system for direct attachment to the body of a patient having a flexible diaphragm drug reservoir, which is capable of delivering factory pre-programmed continuous amounts of drug upon activation as disclosed and described in the ENDOREX JV PATENTS set forth in Schedule 1 attached hereto. TECHNOLOGICAL COMPETITOR shall mean a company or corporation having a substantial part of its business in the transdermal or device drug delivery, research, development and manufacturing areas of the pharmaceutical industry, with a market capitalization of at least $100 million, in the case of a publicly-held company, or at least $75 million of annual revenues, in the case of a privately-held company. For the - -------------------------------------------------------------------------------- Page 8 of 56 avoidance of doubt, Bayer AG shall not be deemed a TECHNOLOGICAL COMPETITOR of ENDOREX JV. TERM shall mean the term of this Agreement, as set out in Clause 14. TERRITORY shall mean all of the countries of the world. $ shall mean United States Dollars. "US" or "USA" shall mean the United States of America, its territories and possessions 1.2 Interpretation: In this Agreement: -------------- 1.2.1 the singular includes the plural and vice versa, the masculine includes the feminine and vice versa and references to natural persons include corporate bodies, partnerships and vice versa. 1.2.2 any reference to a Clause or Schedule, unless otherwise specifically provided, shall be respectively to a Clause or Schedule of this Agreement. 1.2.3 the headings of this Agreement are for ease of reference only and shall not affect its construction or interpretation. CLAUSE 2 - THE LICENCE 2.1 Licence to SCHEIN: ----------------- 2.1.1 Subject to the terms of this Agreement, ENDOREX JV hereby grants to SCHEIN, and SCHEIN hereby accepts for the TERM, an exclusive licence to the ENDOREX JV BACKGROUND TECHNOLOGY and ENDOREX JV IMPROVEMENTS to package, import, use, offer for sale and sell and otherwise distribute the PRODUCT for the FIELD in the TERRITORY. 2.2 Sub-licensing by SCHEIN: ----------------------- 2.2.1 Any appointment of a SUBLICENSEE for the PRODUCT in any country of the TERRITORY outside of [********] shall be determined by the MANAGEMENT COMMITTEE and shall require the prior unanimous consent of the MANAGEMENT COMMITTEE. In the event that such unanimous decision is made by the MANAGEMENT COMMITTEE, SCHEIN shall grant such SUBLICENSEE a sub-license to package, import, use, offer for sale and sell the PRODUCT for the FIELD in such country of the ________________________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 9 of 56 TERRITORY. [********]only shall be appointed per country and no sub- licence shall be granted to a TECHNOLOGICAL COMPETITOR of ENDOREX JV. 2.2.2 The MANAGEMENT COMMITTEE shall be responsible for deciding by unanimous vote upon the commercial terms of any sub-licence granted hereunder. Any such sub-licence shall be on terms mutatis mutandis as the terms of this Agreement insofar as they are applicable, but excluding the right to grant a sub-licence or a production licence. 2.2.3 For the avoidance of doubt, ENDOREX JV shall have the same rights of audit and inspection vis-a-vis a SUBLICENSEE, as ENDOREX JV has pursuant to this Agreement concerning SCHEIN. SCHEIN shall also provide copies of all sublicense agreements to ENDOREX JV. 2.2.4 SCHEIN shall be liable to ENDOREX JV for all acts and omissions of any SUBLICENSEE as though such acts and omissions were by SCHEIN and SCHEIN shall provide the indemnity to ENDOREX JV outlined in Clause 15.9. 2.2.5 Where a sub-licence has been granted under Clause 2.2.1, such sub- licence shall automatically terminate if this Agreement terminates for the country or countries covered by the sub-licence. 2.2.6 SCHEIN shall undertake to protect the confidentiality of ENDOREX JV's engineering and manufacturing processes for the SYSTEM and/or PRODUCT in its dealings with SUBLICENSEES. 2.2.7 For the avoidance of doubt:- (1) the parties agree that any sub-licence granted pursuant to this Clause 2.2 shall not be capable of surviving the termination of this Agreement; and (2) IN MARKET sales of the PRODUCT by SUBLICENSEES or other agreed upon arrangements shall be included in calculating NSP for the purposes of this Agreement. CLAUSE 3 - INTELLECTUAL PROPERTY 3.1 Ownership of ENDOREX JV PATENT RIGHTS/KNOW-HOW: ---------------------------------------------- 3.1.1 ENDOREX JV shall be and remain the sole beneficial owner or licensee of the ENDOREX JV BACKGROUND TECHNOLOGY and ENDOREX JV IMPROVEMENTS. ____________________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 10 of 56 3.1.2 ENDOREX JV shall be entitled to use the ENDOREX JV BACKGROUND TECHNOLOGY and ENDOREX JV IMPROVEMENTS, and all technical and clinical data, generated by ENDOREX JV, SCHEIN, its AFFILIATES or any SUBLICENSEE pursuant to this Agreement in connection with ENDOREX JV's commercial arrangements otherwise than in relation to the PRODUCT for the FIELD, and in connection with the PRODUCT for the FIELD in any countries which cease to be part of the TERRITORY; and in the TERRITORY following termination of this Agreement. SCHEIN hereby makes any assignment or license to the extent necessary to achieve the foregoing and shall execute such further documents to confirm the same as ENDOREX JV may reasonably request from time to time. In addition, SCHEIN agrees to promptly disclose to ENDOREX JV any ENDOREX JV IMPROVEMENTS and all related technical and clinical data that are generated by SCHEIN, its AFFILIATES or SUBLICENSEES. 3.2 Ownership of SCHEIN PATENT RIGHTS/KNOW-HOW: ------------------------------------------ 3.2.1 SCHEIN shall be and remain the sole owner of the SCHEIN COMPOUND TECHNOLOGY and SCHEIN COMPOUND IMPROVEMENTS. 3.3 Filing and maintenance of patents: --------------------------------- 3.3.1 Subject to licensing agreements pre-existing as of the EFFECTIVE DATE, by and between ENDOREX JV and any third party having ownership or controlling interest in ENDOREX JV PATENTS and ENDOREX JV IMPROVEMENTS, ENDOREX JV will be entitled, at its own expense, to file or have filed and prosecute or have prosecuted ENDOREX JV PATENTS and patentable ENDOREX JV IMPROVEMENTS; to determine or have determined the patent filing strategy in relation to same at its sole discretion; to assert or have asserted and defend or have defended the foregoing patent applications against third party oppositions; and upon grant of any letters patent, to maintain or have maintained such letters patent in force. 3.3.2 SCHEIN will be entitled, at its own expense, to file and prosecute any SCHEIN COMPOUND PATENTS and patentable SCHEIN COMPOUND IMPROVEMENTS; to determine the patent filing strategy in relation to same at its sole discretion; to assert and defend the foregoing patent applications against third party oppositions; and upon grant of any letters patent, to maintain such letters patent in force subject to the following conditions:- (1) SCHEIN shall promptly notify ENDOREX JV in writing in relation to the existence of SCHEIN COMPOUND IMPROVEMENTS and upon request by ENDOREX JV, SCHEIN shall provide ENDOREX JV with copies of any documents relating to the SCHEIN COMPOUND IMPROVEMENTS. (2) SCHEIN shall promptly notify ENDOREX JV in writing of any patent applications filed by SCHEIN under this Clause 3.3.2 and upon request - -------------------------------------------------------------------------------- Page 11 of 56 by ENDOREX JV shall provide copies to ENDOREX JV to such patent applications and any patents issuing thereon, to the extent reasonably required in order for ENDOREX JV to fulfil its obligations under this Agreement. 3.3.3 If SCHEIN does not intend to make an application for patents or continue prosecution of a pending application in respect of SCHEIN COMPOUND TECHNOLOGY or SCHEIN COMPOUND IMPROVEMENTS, or continue to maintain the SCHEIN COMPOUND PATENTS in any or some countries of the TERRITORY, ENDOREX JV, subject to the prior written consent of SCHEIN, not to be unreasonably withheld or delayed, will be entitled to file, prosecute and maintain patent applications and patents in respect thereof, at its own expense, in accordance with the following terms:- (1) ENDOREX JV shall consult with SCHEIN on a regular basis in relation to the status of its activities under this Clause 3.3.3; (2) SCHEIN shall execute all documents, forms and declarations, provide all necessary information and data, and do all such things as shall be necessary to enable ENDOREX JV to exercise the foregoing right; (3) ENDOREX JV shall promptly notify SCHEIN in writing of any patent applications filed by ENDOREX JV hereunder and shall provide all reasonable access to SCHEIN to such patent applications and any patents issuing thereon. 3.4 Enforcement: ----------- 3.4.1 SCHEIN and ENDOREX JV shall promptly inform the other in writing of any alleged infringement of which it shall become aware by a third party of any patents within the SCHEIN COMPOUND PATENTS, SCHEIN COMPOUND IMPROVEMENTS, ENDOREX JV PATENTS or ENDOREX JV IMPROVEMENTS and provide such other with any available evidence of infringement. 3.4.2 ENDOREX JV, at its option and subject to its preexisting licensing agreements by and between ENDOREX JV and any third party having ownership or controlling interest in ENDOREX JV PATENTS and ENDOREX JV IMPROVEMENTS, shall be entitled to institute or have instituted any administrative, judicial or other proceeding to prevent or stop any infringement or unauthorised use ("ENFORCEMENT PROCEEDINGS") of the ENDOREX JV PATENTS or ENDOREX JV IMPROVEMENTS. 3.4.3 SCHEIN agrees to provide all reasonable co-operation and assistance in relation to any such ENFORCEMENT PROCEEDINGS and agrees to be named as a party in any ENFORCEMENT PROCEEDINGS, as necessary, that may be instituted hereunder. ENDOREX JV shall reimburse SCHEIN, its reasonable costs and expense for such cooperation. - -------------------------------------------------------------------------------- Page 12 of 56 3.4.4 SCHEIN, at its option, shall be entitled to institute ENFORCEMENT PROCEEDINGS in respect of any infringement or unauthorised use of the SCHEIN COMPOUND TECHNOLOGY or SCHEIN COMPOUND IMPROVEMENTS at its own expense and for its own benefit. ENDOREX JV agrees to provide all reasonable co-operation and assistance to SCHEIN in relation to any such ENFORCEMENT PROCEEDINGS and agrees to be named as a party in any ENFORCEMENT PROCEEDINGS, as necessary, instituted by SCHEIN hereunder. SCHEIN shall reimburse ENDOREX JV its reasonable costs and expense for such cooperation. 3.4.5 In the event that ENDOREX JV does not want to institute ENFORCEMENT PROCEEDINGS relating to ENDOREX JV BACKGROUND TECHNOLOGY or ENDOREX JV IMPROVEMENTS, then SCHEIN may enforce such rights at its own expense. ENDOREX JV shall cooperate with SCHEIN and provide all reasonable assistance in relation to any such ENFORCEMENT PROCEEDINGS. SCHEIN must seek written approval from ENDOREX JV, which may not be unreasonably withheld or delayed, prior to taking action and must keep ENDOREX JV informed of the action and may not enter into any settlement agreement without ENDOREX JV's consent, which may not be unreasonably withheld or delayed. Any reasonable fees and costs borne by ENDOREX JV shall be reimbursed by SCHEIN. In the event that SCHEIN decides to enforce the ENDOREX JV BACKGROUND TECHNOLOGY or ENDOREX JV IMPROVEMENTS in accordance with this paragraph, any recovery remaining after the deduction of reasonable expenses (including attorney's fees and expenses) incurred in relation to such ENFORCEMENT PROCEEDINGS shall constitute NSP for the purpose of this Agreement. 3.4.6 In the event that SCHEIN does not want to institute ENFORCEMENT PROCEEDINGS relating to SCHEIN COMPOUND TECHNOLOGY or SCHEIN COMPOUND IMPROVEMENTS, then ENDOREX JV may enforce such rights at its own expense. SCHEIN shall cooperate with ENDOREX JV and provide all reasonable assistance in relation to any such ENFORCEMENT PROCEEDINGS. ENDOREX JV must seek written approval from SCHEIN, which may not be unreasonably withheld or delayed, prior to taking action and must keep SCHEIN informed of the action and may not enter into any settlement agreement without SCHEIN's consent, which may not be unreasonably withheld or delayed. Any reasonable fees and costs borne by SCHEIN shall be reimbursed by ENDOREX JV. In the event that ENDOREX JV decides to enforce the SCHEIN COMPOUND TECHNOLOGY or SCHEIN COMPOUND IMPROVEMENTS in accordance with this paragraph, any recovery remaining after the deduction of reasonable expenses (including attorney's fees and expenses) incurred in relation to such ENFORCEMENT PROCEEDINGS shall constitute NSP for the purpose of this Agreement. - -------------------------------------------------------------------------------- Page 13 of 56 3.5 Defence: ------- 3.5.1 In the event that a claim or proceeding is brought against SCHEIN by a third party alleging that the manufacture, sale, use or offer for sale of the SYSTEM and/or the PRODUCT as claimed exclusively in the ENDOREX JV PATENTS or a patented ENDOREX JV IMPROVEMENT, infringes the patent rights of such a third party in the TERRITORY, SCHEIN shall promptly advise ENDOREX JV of such threat or suit. 3.5.2 Solely to the extent set out in Clause 3.5.4, ENDOREX JV shall indemnify SCHEIN against a claim referred to in Clause 3.5.1, provided that ENDOREX JV should have reasonably been aware of such third party patent rights as a result of ENDOREX JV's efforts in the preparation and prosecution of ENDOREX JV PATENTS as of the EFFECTIVE DATE. SCHEIN shall not acknowledge to the third party or to any other person the validity of any claims of such a third party, and shall not compromise or settle any claim or proceedings relating thereto without the prior written consent of ENDOREX JV, not to be unreasonably withheld or delayed. At its option, ENDOREX JV may elect to take over the conduct of such proceedings from SCHEIN with counsel of ENDOREX JV's choice. In such event ENDOREX JV shall keep SCHEIN advised of all material developments in the said proceedings and shall not settle or compromise such proceedings without the prior written consent of SCHEIN which shall not be unreasonably withheld or delayed. Should ENDOREX JV not reasonably have had knowledge of such third party patent rights as a result of ENDOREX JV's efforts in the preparation and prosecution of ENDOREX JV PATENTS as of the EFFECTIVE DATE, ENDOREX JV shall not indemnify SCHEIN against any such claim. 3.5.3 In the event that a claim or proceeding is brought against SCHEIN by a third party alleging that the manufacture, sale, offer for sale or use of the SYSTEM and/or the PRODUCT as claimed exclusively in the ENDOREX JV PATENTS or in a patented ENDOREX JV IMPROVEMENT infringes the patent rights of such a third party and such claim falls outside of the scope of the indemnity granted by ENDOREX JV to SCHEIN pursuant to Clause 3.5.2, SCHEIN and ENDOREX JV shall meet to discuss in what manner the said proceedings should be defended. In accordance with their obligations pursuant to Clause 15.9.5, the Parties shall take such action as is reasonable, such as to cease selling the PRODUCT, or to re-engineer or modify the PRODUCT so as to avoid infringing the patent rights of a third party, or entering into a license agreement with such third party after due consideration of each of the party's interest in the matter. 3.5.4 ENDOREX JV's maximum liability pursuant to Clause 3.5.2 for damages and costs in relation to all third party claims shall be a reduction in full of the royalty payable by SCHEIN to ENDOREX JV pursuant to Clause 11.4 for such period until such reduction in royalty amounts to $5 million (five million United States Dollars) plus interest accruing at 8% per annum; provided however in the event that such royalty on the PRODUCT is not available or sufficient to pay such obligations, ENDOREX JV shall, at its sole discretion, - -------------------------------------------------------------------------------- Page 14 of 56 have the option, to either (i) pay such obligations over such 5 year period in equal quarterly installments of principal and interest, or (ii) pay the sum of $5 million (five million United States Dollars) in one installment. ENDOREX JV shall be entitled to apply the reasonable costs and expenses incurred by it in defending such claims against the said sum of US$5 million (five million United States Dollars. Any reduction in royalty shall apply for so long as is necessary to discharge ENDOREX JV's patent liability of $5 million (five million United States Dollars) pursuant to this Clause 3.5. ENDOREX JV shall be entitled to apply the reasonable costs and expenses incurred by it in defending such claims against the said reduction in royalty. In accordance with its obligations pursuant to Clause 15.9.5, SCHEIN shall favourably consider taking such action as is reasonable, such as to cease selling the PRODUCT so as to avoid infringing the patent rights of a third party, or entering into a license agreement with such third party after due consultation with ENDOREX JV. 3.5.5 Neither party shall have any liability to the other party whatsoever or howsoever arising for any losses incurred as a result of SCHEIN having to cease selling the PRODUCT or having to defer the launch of selling the PRODUCT as a result of an infringement claim. Neither ENDOREX JV nor SCHEIN shall have any liability to the other for any enhanced or punitive damages awarded as a result of any willful patent infringement 3.5.6 In the event that a claim or proceeding is brought against ENDOREX JV by a third party alleging that the manufacture, offer for sale, sale, distribution or use of the COMPOUND, including but not limited to the delivery of such COMPOUND through continuous subcutaneous administration, regardless of the device in which it is being subcutaneously administered, infringes any adversely held patent or involves the unauthorised use of any other intellectual property in the TERRITORY, ENDOREX JV shall promptly advise SCHEIN of such threat or suit. Subject to ENDOREX JV's obligations pursuant to the provisions of Clause 3.5.2, Clause 3.5.3, and Clause 3.5.4., SCHEIN shall indemnify ENDOREX JV against such a claim; provided that ENDOREX JV shall not acknowledge to the third party or to any other person the validity of the claims of such a third party and shall not compromise or settle any claim or proceedings relating thereto without the written consent of SCHEIN, which shall not be unreasonably withheld or delayed. At its option, SCHEIN may elect to take over the conduct of such proceedings from ENDOREX JV with counsel of SCHEIN's choice. In such event SCHEIN shall keep ENDOREX JV advised of all material developments in the said proceedings and shall not settle or compromise such proceedings without the consent of ENDOREX JV which shall not be unreasonably withheld or delayed. 3.6 Trademarks: ---------- 3.6.1 SCHEIN shall market the PRODUCT in the TERRITORY under the ENDOREX JV TRADEMARK and such other trademarks as may be authorized under Clause 3.6.5 below. - -------------------------------------------------------------------------------- Page 15 of 56 3.6.2 ENDOREX JV hereby grants to SCHEIN a non-exclusive royalty free licence in the TERRITORY for the TERM to use the ENDOREX JV TRADEMARK solely for the purposes of exercising its rights and performing its obligations under this Agreement and the following provisions shall apply as regards the use of the ENDOREX JV TRADEMARK by SCHEIN: (1) SCHEIN shall ensure that each reference to and use of the ENDOREX JV TRADEMARK by SCHEIN is in a manner from time to time approved by ENDOREX JV and accompanied by an acknowledgement, in a form approved by ENDOREX JV, that the same is a trademark licensed from ENDOREX JV, such approvals not to be unreasonably withheld or delayed. (2) SCHEIN undertakes that all related advertising, promotional and other related uses of the ENDOREX JV TRADEMARK by SCHEIN, shall conform to standards set by, ENDOREX JV. Such standards shall be agreed between the parties in advance of SCHEIN's first use of the ENDOREX JV TRADEMARK, negotiating in good faith. (3) SCHEIN shall use the ENDOREX JV TRADEMARK for the benefit of ENDOREX JV and any third parties having an ownership interest in the same and upon termination of the Agreement, all of the goodwill associated with the ENDOREX JV TRADEMARK shall transfer without charge to ENDOREX JV and any such third parties. (4) Subject to any obligations from any third party licenses entered into between ENDOREX JV and any third party having an ownership interest in ENDOREX JV TRADEMARK, ENDOREX JV shall file or have filed, prosecute or have prosecuted, maintain or have maintained the registrations for the ENDOREX JV TRADEMARK in the MAJOR MARKETS. SCHEIN shall provide upon request all reasonable assistance to ENDOREX JV in performing such activities. (5) SCHEIN shall not use the ENDOREX JV TRADEMARK in any way which might prejudice its distinctiveness or validity or the goodwill associated therewith. (6) SCHEIN shall not use in relation to the PRODUCT any trademarks other than the ENDOREX JV TRADEMARK without obtaining the prior consent in writing of ENDOREX JV. (7) SCHEIN shall not use in the TERRITORY any trademarks or trade names so resembling the ENDOREX JV TRADEMARK as to be likely to cause confusion, deception or dissolution. (8) SCHEIN shall promptly notify ENDOREX JV in writing of any alleged infringement of which it becomes aware by a third party of the ENDOREX JV TRADEMARK and provide ENDOREX JV with any applicable evidence of infringement. - -------------------------------------------------------------------------------- Page 16 of 56 3.6.3 Subject to any obligations from any third party licenses entered into between ENDOREX JV and any third party having an ownership interest in ENDOREX JV TRADEMARK, ENDOREX JV will be entitled to conduct or have conducted all proceedings relating to the ENDOREX JV TRADEMARK and shall at its sole discretion decide what action, if any, to take in respect of any infringement or alleged infringement of the ENDOREX JV TRADEMARK or passing-off or any other claim or counter-claim brought or threatened in respect of the use or registration of the ENDOREX JV TRADEMARK. Any such proceedings shall be conducted at ENDOREX JV's expense and for its own benefit. In the event that ENDOREX JV fails to take action in respect of any infringement or alleged infringement of the ENDOREX JV TRADEMARK or passing-off or any other claim or counter-claim brought or threatened in respect of the use or registration of the ENDOREX JV TRADEMARK, SCHEIN may request ENDOREX JV to take such action at the expense of SCHEIN. 3.6.4 Except as provided in this Clause 3.6, SCHEIN will have no rights in respect of the ENDOREX JV TRADEMARK or any trade names or trademarks used by ENDOREX JV in relation to the PRODUCT or of the goodwill associated therewith, and SCHEIN hereby acknowledges that, except as expressly provided in this Agreement, it shall not acquire any rights in respect thereof. SCHEIN shall not, at any time during or after the TERM, challenge or assist others to challenge the ENDOREX JV TRADEMARK, or the registration thereof or attempt to register any trademarks, marks, or trade names confusingly similar to the ENDOREX JV TRADEMARK. 3.6.5 In conjunction with the ENDOREX JV TRADEMARK, SCHEIN shall be also entitled to market the PRODUCT in the TERRITORY under such trademarks as are designated by SCHEIN provided that such trademarks have been agreed in advance with ENDOREX JV. CLAUSE 4 - COMPETING PRODUCTS 4.1 Subject to the provisions of Clause 4.2, ENDOREX JV and SCHEIN shall not promote, license, manufacture, market, or sell any external subcutaneous infusion device for the continuous delivery of the COMPOUND other than the PRODUCT ("COMPETING PRODUCT") in the TERRITORY during the INITIAL PERIOD. 4.2 Notwithstanding the provisions of Clause 4.1, SCHEIN will be permitted to market and sell the COMPOUND in any country in the TERRITORY up until receipt of the DEVICE REGULATORY APPROVAL for the SYSTEM in such country and for a period of six months after such approval, subject to any governmental obligation to continue to make available the COMPOUND. During the six months after receipt of the DEVICE REGULATORY APPROVAL in each country of the TERRITORY, SCHEIN shall take reasonable steps to reduce and eventually phase out its marketing and sale of the COMPOUND in such country. After the expiration of the six month - -------------------------------------------------------------------------------- Page 17 of 56 period, subject only to any governmental obligation to continue to make available the COMPOUND, SCHEIN shall no longer market or sell the COMPOUND, other than the PRODUCT or as otherwise permitted pursuant to this Agreement, for the remaining term of this Agreement. 4.3. In addition and subject to Clauses 4.1 and 4.2 and to its obligations under Clause 8, (i), SCHEIN agrees that, prior to receipt of the DEVICE REGULATORY APPROVAL of the PRODUCT, SCHEIN shall not take any actions to fundamentally damage the market for the PRODUCT in the TERRITORY and (ii) prior to and after the launch of the PRODUCT in each country of the TERRITORY, SCHEIN shall not take any actions that would be detrimental to the market for the PRODUCT in such country of the TERRITORY. 4.4. In the event that SCHEIN wishes to manufacture or sell any pharmaceutical product containing any compound other than the COMPOUND ("Alternative Compound") for the treatment of iron overloading disorder by subcutaneous delivery and the SYSTEM is a suitable, competitive delivery system for such Alternative Compound, SCHEIN shall notify ENDOREX JV and ENDOREX JV shall have the right of first negotiation to develop the SYSTEM to deliver such Alternative Compound on terms to be negotiated by the parties in good faith. 4.5. In the event that the Alternative Compound will be administered by a route other than subcutaneous delivery, or the SYSTEM is not a suitable, competitive delivery system for such Alternative Compound, then in consideration of the expenditure incurred by ENDOREX JV in developing the SYSTEM for the COMPOUND, SCHEIN will compensate ENDOREX JV for any lost PROFIT sustained in any country in the TERRITORY during the six (6) year period commencing upon the execution of this AGREEMENT as follows: SCHEIN will pay to ENDOREX JV a quarterly payment equal to (i) the [********] during the two calendar quarters immediately preceding the calendar quarter in which SCHEIN launches the product containing the Alternative Compound less (ii) [********] for each such calendar quarter; provided, however, that in the event during such period a third party launches a product which is competitive with the PRODUCT and [********], the Parties shall negotiate in good faith a revised compensation formula to take into account the effect of such third party's product on the sales of the PRODUCT. CLAUSE 5 - PROJECT TEAM AND MANAGEMENT COMMITTEE 5.1 It is recognised by the parties that a significant resource shall be required from each party to accomplish successful DEVICE REGULATORY APPROVAL in the TERRITORY and launch of the PRODUCT, particularly in the co-ordination of logistics, finalisation of various specifications, preparation and agreement of clinical _______________________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 18 of 56 study designs and protocols, methodologies transfer, supply and packaging configurations, shipping and handling procedures and for this purpose, the parties will establish a PROJECT TEAM. 5.2 The PROJECT TEAM shall consist of a chief representative from each party together with such additional business and development personnel from each party who are appropriately skilled and knowledgeable in relation to the PROJECT and who are deemed necessary to accomplish the work of the PROJECT. 5.3 Unless otherwise agreed by the parties, the PROJECT TEAM shall meet as needed, such meetings to continue until the time of launch or such later time as may be agreed. The PROJECT TEAM may meet in person or by means of such telephone, video or other communication facilities as permit all members of the PROJECT TEAM to communicate with each other simultaneously and instantaneously. If the PROJECT TEAM decides to meet in person, such meetings shall be held alternatively at the offices of ENDOREX JV and SCHEIN or as otherwise agreed by the parties. Meetings shall be co-chaired by the chief representatives of the parties. At and between meetings of the PROJECT TEAM, each party shall keep the other fully and regularly informed as to its progress with its respective obligations. 5.4 The Parties shall also establish a MANAGEMENT COMMITTEE which shall consist of a senior executive of ENDOREX JV and a senior executive of SCHEIN along with up to two observers from each of ENDOREX JV and SCHEIN. The MANAGEMENT COMMITTEE shall have overall responsibility for the development and commercialisation of the PRODUCT in the TERRITORY including but not limited to: (i) supervising the PROJECT TEAM, (ii) approving and implementing all project plans, including the project development timetable and schedules, timing of launch of the PRODUCT, and budgets for the development of the PRODUCT, (iii) agreeing with SCHEIN that all direct marketing and selling expenses for the PRODUCT are in accordance with Clause 8.2, and (iv) deciding upon the appointment of any SUBLICENSEES for the PRODUCT in any country of the TERRITORY outside of the USA, including approving the commercial terms for any such appointment. 5.5 Unless otherwise agreed by the Parties, the MANAGEMENT COMMITTEE shall meet at least quarterly. Such meeting may be held in person or by means of such telephone, video or other communication facilities as permit all members of the MANAGEMENT COMMITTEE to communicate with each other simultaneously and instantaneously. 5.6 In the event of a dispute between the project managers of each Party on the PROJECT TEAM, the project managers shall refer the dispute to the MANAGEMENT COMMITTEE, who shall discuss the matter and attempt to reach an amicable solution. In the event that the MANAGEMENT COMMITTEE cannot resolve the - -------------------------------------------------------------------------------- Page 19 of 56 dispute amicably, the said officers shall refer the dispute to the Chairman of ENDOREX JV and the Chief Executive Officer of SCHEIN who shall discuss the matter and attempt to reach an amicable solution. The provisions of this Clause 5.6 shall be without prejudice to the Parties' other rights and remedies. 5.7 The Chairman of ENDOREX JV and the Chief Executive Officer of SCHEIN shall, if they are unable to resolve a dispute or difference when it is referred to them under Clause 5.6, refer the matter to an independent expert who is knowledgeable of the medical device/drug delivery industry (the "Expert"). The selection of the Expert shall be mutually agreed upon by the Chairman of ENDOREX JV and the Chief Executive Officer of SCHEIN. The Expert shall be selected having regard to his suitability to determine the particular dispute or difference on which he is being requested to determine. Unless otherwise agreed between the Chief Executive Officers, the following rules shall apply to the appointment of the Expert. The fees of the Expert shall be shared equally between the Parties in dispute. The Expert shall be entitled to inspect and examine all documentation and any other material which he may consider to be relevant to the dispute. He shall afford each Party a reasonable opportunity (in writing or orally) of stating reasons in support of such contentions as each Party may wish to make relative to the matters under consideration. The Expert shall give notice in writing of his determination to the Parties within such time as may be stipulated in his terms of appointment or in the absence of such stipulation as soon as practicable. The Parties shall request that the Expert in any event complete and deliver his findings within four (4) weeks from the reference of the dispute or difference to him. Any determination by the Expert of a dispute or difference shall not be final and binding on the Parties. 5.8 The PROJECT TEAM and MANAGEMENT COMMITTEE shall not have the authority to amend or vary any of the terms of this Agreement unless in accordance with the provisions of Clause 17.7. CLAUSE 6 - DEVELOPMENT OF THE SYSTEM, COMPOUND AND PRODUCT 6.1 SCHEIN wishes ENDOREX JV to develop the SYSTEM to deliver the COMPOUND, and ENDOREX JV shall diligently pursue the same in a commercially reasonable manner in accordance with the PROJECT pursuant to the terms of this Agreement. However, it is acknowledged that device development incorporates inherent risk in terms of outcomes and ENDOREX JV does not guarantee the further development of the SYSTEM, the ability of the SYSTEM to achieve the PROJECT SYSTEM SPECIFICATIONS or PRODUCT SPECIFICATIONS, and/or to obtain the MAF or DEVICE REGULATORY APPROVAL in one or more of the countries of the TERRITORY. 6.2 Within [********]of the execution of this Agreement, ENDOREX JV and SCHEIN shall agree upon the PRODUCT SPECIFICATIONS for the PRODUCT for the USA. The Parties acknowledge that their primary purpose shall be to develop the PRODUCT for commercialisation in the USA in accordance with the PROJECT. ___________________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 20 of 56 6.3 ENDOREX JV and SCHEIN shall undertake their respective obligations under the PROJECT on a collaborative basis. Accordingly, the parties shall co- operate in good faith particularly with respect to unknown problems or contingencies and shall perform their respective obligations in good faith and in a commercially reasonable, diligent and workmanlike manner. 6.4 ENDOREX JV shall be responsible for all reasonable activities and costs associated with the development of the SYSTEM for the USA in accordance with the PROJECT to meet the PROJECT SYSTEM SPECIFICATIONS up to a maximum cost of [********] as calculated in accordance with Clause 11.2.1 below. In the event that additional expenditure in excess of such [********] is required to develop the SYSTEM to meet the PROJECT SYSTEM SPECIFICATIONS, the parties shall meet to discuss the matter in good faith. 6.5 The Parties recognise that the SYSTEM may require additional development after achieving the PROJECT SYSTEM SPECIFICATIONS in order to meet the PRODUCT SPECIFICATIONS for the USA. Such additional development work may include, but is not limited to: 6.5.1 modifying or qualifying the adhesive system for use with children; and 6.5.2 modifying or qualifying the integral needle for use with children. 6.5.3 designing and manufacturing the drug vial which will contain the COMPOUND and will be made in connection with the SYSTEM (beyond the work described in Clause 6.6.2 below) in accordance with specifications to be mutually agreed within [********] of the EFFECTIVE DATE. The design and manufacture of the drug cartridge shall be performed to a development plan and budget set by the PROJECT TEAM. The PROJECT TEAM shall also decide which Party shall perform such development work. The Parties agree that the cost of any such additional development work shall [********]. In the event that additional expenditure in excess of the [********] required in the aggregate to develop the SYSTEM and to meet the PRODUCT SPECIFICATIONS by Clause 6.4 above (i.e., [********] for SYSTEM Development) and this Clause 6.5 (i.e., additional development work of up, [********] to meet the PRODUCT SPECIFICATIONS), the Parties shall meet to discuss the matter in good faith. 6.6 SCHEIN shall be responsible for all activities and costs associated with, the development of the COMPOUND for delivery with the SYSTEM in the USA, and the development of the PRODUCT in accordance with the PROJECT, pursuant to the terms of this Agreement and in particular, but not limited to sourcing, supplying and, if __________________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 21 of 56 necessary, formulating, all COMPOUND for delivery with the SYSTEM. 6.7 Subject to the maximum cost set forth in Clause 6.4 and 6.5, SCHEIN and ENDOREX JV shall be responsible for determining the scope and nature and paying in equal shares the costs associated with carrying out all clinical studies program in human patients, including for the avoidance of doubt any pharmacokinetic/ pharmacodynamic studies. Such studies shall be performed by the Parties for the USA in accordance with the following: 6.7.1 the primary objectives of the program so conducted shall be to complete the DEVICE REGULATORY APPLICATION and DEVICE REGULATORY APPROVAL in the USA and it is the Parties' expectation that the body of data so generated in the PROJECT will also support such applications for DEVICE REGULATORY APPROVAL which SCHEIN or its AFFILIATES or SUBLICENSEES shall make in the other countries of the TERRITORY in accordance with the terms of this Agreement. SCHEIN shall carry out and complete the clinical program in the USA to a standard and timeframe which it would otherwise find appropriate for one of their major branded products; 6.7.3 SCHEIN shall keep ENDOREX JV informed as to the progress and completion of the studies and, shall provide to ENDOREX JV summary study reports thereon; 6.7.4 SCHEIN undertakes that it shall carry out all such clinical studies to prevailing cGCP and cGLP and most specifically in accordance with the applicable RHA standards and guidelines; 6.7.5 SCHEIN shall be responsible at its cost for the preparation and filing of appropriate regulatory applications (to the extent deemed appropriate by the PROJECT TEAM and subject to the provisions of Clause 7.) to the extent required to allow it to undertake such clinical studies. ENDOREX JV shall co-operate with SCHEIN as reasonably necessary in the preparation and filing of such regulatory applications. The parties agree that ENDOREX JV's charges to SCHEIN for any such work shall be as set out in Clause 11.2 of the Agreement. 6.8 SCHEIN may conduct any pharmacokinetic, clinical, pharmacoeconomic, and any other market analysis, study or test on the PRODUCT which SCHEIN deems appropriate, at SCHEIN's sole cost. In the event that SCHEIN does conduct such analysis, study or test and pay all such costs, SCHEIN shall own the said data and information. SCHEIN shall provide ENDOREX JV with a summary report of any such material analysis, study or test performed by SCHEIN as soon as is reasonably possible following its completion. ENDOREX JV shall be entitled to use any such data and information in connection with ENDOREX JV's commercial arrangements for the SYSTEM otherwise than in relation to the PRODUCT for the FIELD, and in connection with the PRODUCT for the FIELD in any countries which cease to be part of the TERRITORY; and in the TERRITORY following termination of this Agreement. - -------------------------------------------------------------------------------- Page 22 of 56 6.9 The PROJECT TEAM shall be responsible for identifying any additional development work outside of the PROJECT which may be required to commercialise the PRODUCT in any country of the TERRITORY outside of [********] ("[********] Development Work"). The Parties agree that [********] shall not be performed until a commercial agreement has been concluded [********] of the TERRITORY unless otherwise agreed upon by the Parties. It is the Parties intention that [********] of the TERRITORY. The Parties agree that ENDOREX JV's charges to SCHEIN for any such work shall be as set out in Clause 11.2 of the Agreement. 6.10 In the event that SCHEIN wishes ENDOREX JV to develop any other configurations of the SYSTEM apart from the PROJECT SYSTEM SPECIFICATIONS, the Parties shall negotiate in good faith as to the costs to be paid to ENDOREX JV for such development of the SYSTEM and/or PRODUCT. The Parties agree that ENDOREX JV's charges to SCHEIN for any such work shall be as set out in Clause 11.2 of the Agreement. 6.11 SCHEIN shall supply to ENDOREX JV such quantities of COMPOUND [********]as ENDOREX JV reasonably requires for the development of the SYSTEM in accordance with the PROJECT. The quantity and delivery dates of such quantities of COMPOUND shall be agreed upon by the Parties during the PROJECT. CLAUSE 7 - REGISTRATION OF THE PRODUCT 7.1 The PROJECT TEAM shall establish the regulatory procedure to be followed by ENDOREX JV and SCHEIN in order to secure all necessary regulatory approvals to market the PRODUCT in the TERRITORY as swiftly as practicable. 7.2 If determined by the PROJECT TEAM, ENDOREX JV shall be responsible for filing and maintaining a MAF (or equivalent) for the SYSTEM with the RHA (or equivalent) in such countries in the TERRITORY as the MANAGEMENT COMMITTEE shall select from time to time. ENDOREX JV shall use reasonable endeavours in filing and maintaining each MAF with the RHA in the TERRITORY as swiftly as practicable. The cost of filing and maintaining such MAF for the SYSTEM shall be shared equally between ENDOREX JV and SCHEIN. 7.3 At its expense, SCHEIN shall be responsible for the filing and maintaining all required ANDAs and DEVICE REGULATORY APPLICATIONS in respect of the COMPOUND and PRODUCT respectively, with the RHAs in the TERRITORY. SCHEIN shall use reasonable endeavours in prosecuting each required ANDA and DEVICE REGULATORY APPLICATION to approval by the RHA as swiftly as practicable. 7.4 SCHEIN shall notify ENDOREX JV of the date of submission of any ANDA or DEVICE REGULATORY APPLICATION in any country of the TERRITORY and shall also notify ENDOREX JV of any ANDA APPROVAL or DEVICE ___________________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 23 of 56 REGULATORY APPROVAL as soon as is reasonably possible following said approval. 7.5 SCHEIN will be the holder of the ANDA APPROVAL and DEVICE REGULATORY APPROVAL for the COMPOUND and PRODUCT respectively, in the TERRITORY, provided however, that in the event that a DEVICE REGULATORY APPROVAL is granted for the SYSTEM alone, such DEVICE REGULATORY APPROVAL shall be the property of ENDOREX JV. In such event, ENDOREX JV shall provide SCHEIN with reference rights to such DEVICE REGULATORY APPROVAL mutatis mutandis with the provisions of Clause 7.6 below. 7.6 SCHEIN will permit ENDOREX JV, or ENDOREX JV's licensees, without charge, to have access to, to photocopy and to cross reference all DEVICE REGULATORY APPROVALS or DEVICE REGULATORY APPLICATIONS for the PRODUCT for the purpose of obtaining DEVICE REGULATORY APPROVALS for the SYSTEM in connection with ENDOREX JV's commercial arrangements otherwise than in relation to the PRODUCT for the FIELD, and in connection with the PRODUCT for the FIELD in any countries which cease to be part of the TERRITORY; and in the TERRITORY following termination of this Agreement. 7.7 SCHEIN shall submit to ENDOREX JV a quarterly report, for every calendar quarter prior to the marketing of the PRODUCT within [********] of the end of the relevant quarter fully outlining the regulatory status of the PRODUCT in the TERRITORY, including an overview of any material communications with the RHAs in the TERRITORY. 7.8 SCHEIN shall be responsible for obtaining and maintaining all applicable state and local regulatory approvals for the distribution of the PRODUCT in the TERRITORY. ENDOREX JV shall co-operate with SCHEIN in obtaining such approvals. 7.9 SCHEIN shall provide ENDOREX JV with access to all DEVICE REGULATORY APPROVALS to enable ENDOREX JV to exercise its rights and fulfil its obligations hereunder. 7.10 SCHEIN shall indemnify and hold harmless ENDOREX JV from and against all claims, damages, losses, liabilities and expenses to which ENDOREX JV may become liable relating to or arising out of SCHEIN's bad faith, negligence or intentional misconduct in connection with the filing or maintenance of the DEVICE REGULATORY APPLICATIONS and DEVICE REGULATORY APPROVALS in the TERRITORY. ENDOREX JV shall indemnify and hold harmless SCHEIN from and against all claims, damages, losses, liabilities and expenses to which SCHEIN may become liable relating to or arising out of ENDOREX JV's bad faith, negligence or intentional misconduct in connection with the filing or maintenance of the MAF. ____________________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 24 of 56 7.11 Subject to the express representations and warranties set out in this Agreement, it is hereby acknowledged that there are inherent uncertainties involved in the registration of pharmaceutical products and medical devices with the RHA in relation to achieving the PROJECT SYSTEM SPECIFICATIONS and/or PRODUCT SPECIFICATIONS, filing and maintaining the MAF, and obtaining the ANDA APPROVAL and/or DEVICE REGULATORY APPROVAL and such uncertainties form part of the business risk involved in undertaking the form of commercial collaboration outlined in this Agreement. Accordingly, ENDOREX JV and SCHEIN shall have no liability to the other as a result of any failure of the PRODUCT to successfully achieve the PROJECT SYSTEM SPECIFICATIONS or PRODUCT SPECIFICATIONS, or the MAF, ANDA APPROVAL or DEVICE REGULATORY APPROVAL of the RHA, unless such failure is due to a Party's gross negligence or intentional misconduct. CLAUSE 8 - MARKETING AND PROMOTION OF THE PRODUCT 8.1 SCHEIN shall be responsible for the marketing, sale and distribution of the PRODUCT in the USA. The PRODUCT may be marketed, sold and distributed in all other countries of the TERRITORY by SUBLICENSEES appointed in accordance with Clause 2.2. SCHEIN shall keep the MANAGEMENT COMMITTEE up to date on the prevailing market conditions and SCHEIN's efforts at marketing and selling the PRODUCT in the TERRITORY. 8.2 In general and consistently with the overall goals of optimizing PRODUCT sales, profits and return on investments, SCHEIN shall employ all commercially reasonable efforts to develop and maintain sales of the PRODUCT in the TERRITORY and for a period of [********] years from approval of the PRODUCT shall employ a level of advertising, sales, marketing, and promotion efforts in the TERRITORY which is: (1) commensurate with that put forth by other pharmaceutical companies of similar size to SCHEIN for prescription products of similar market potential for similar audience size/type in the TERRITORY, and (2) sufficient with respect to the potential for the TERRITORY to fully exploit the market potential for the PRODUCT with the understanding that advertising, sales, marketing and promotional expenses in the [********]after launch shall not, without the MANAGEMENT COMMITTEE's consent, exceed [********]of the forecasted NSP, as determined by the MANAGEMENT COMMITTEE. After the initial [********] year period all dedicated direct marketing and selling expenses for the PRODUCT shall be decided upon by the MANAGEMENT COMMITTEE at least 6 months in advance. At least 3 months prior to the planned launch of the PRODUCT in the USA, SCHEIN will outline to the MANAGEMENT COMMITTEE the structure of the promotional activities to be carried out by SCHEIN for the period up to the first commercial sale of the PRODUCT and for a period of [********] thereafter. SCHEIN shall both prior to and subsequent to the launch of a PRODUCT communicate with the MANAGEMENT COMMITTEE regarding its objectives for and performance of such PRODUCT in the USA and in all of the other countries of the TERRITORY. At ___________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 25 of 56 meetings of the MANAGEMENT COMMITTEE, SCHEIN shall report on the ongoing sales performance of the PRODUCT in the TERRITORY, including marketing approaches, educational campaigns, promotional and advertising materials and campaigns, sales plans, pricing and results, performance against competitors, its objectives for the PRODUCT and its plans for the next year of the Agreement. In addition the MANAGEMENT COMMITTEE shall review the quarterly PROFIT statements and in particular the calculation of PROFIT, NSP and the deductible items listed in the definition of NSP. 8.3 Subject to the trademark licensing procedures set forth in Clause 3.6 above, SCHEIN shall control and be responsible for the content and format of the promotional campaign to be submitted to the RHA, but shall inform ENDOREX JV thereof and provide to ENDOREX JV a copy of such submissions, which shall be subject to the confidentiality obligations herein. To the extent required by the laws, rules and regulations of the RHA in the applicable country of the TERRITORY, SCHEIN shall use reasonable efforts to obtain approval by the RHA of the promotional campaign for the PRODUCT. 8.4 Within [********] of the EFFECTIVE DATE, the MANAGEMENT COMMITTEE shall agree in good faith upon a schedule for the commercialisation of the PRODUCT in such countries of the TERRITORY outside of the USA as the MANAGEMENT COMMITTEE shall determine. Such schedule shall include but not be limited to the target dates for appointing a SUBLICENSEE, filing the DEVICE REGULATORY APPLICATION and for securing DEVICE REGULATORY APPROVAL for the PRODUCT in such countries of the TERRITORY. 8.5 SCHEIN shall diligently pursue the commercialisation of the PRODUCT and shall use commercially reasonable efforts, including reasonable IN MARKET prices, to market and promote the PRODUCT in the USA, and in doing so, shall use the same level of effort as with other similar products of similar sales potential which it markets. SCHEIN covenants that it shall not use the PRODUCT as a "loss leader" in its marketing programs and shall at all times use its reasonable efforts in marketing the PRODUCT. 8.6 SCHEIN shall submit to ENDOREX JV for ENDOREX JV's information, copies of all trade packaging, cartons and labels and other printed materials (Materials") which SCHEIN proposes at any time to use in relation to the sale of the PRODUCT provided always that the provisions of this Clause 8.6 shall be without prejudice to the obligations and responsibilities of SCHEIN under Clauses 8.3 and 15.7 and SCHEIN shall indemnify and hold harmless ENDOREX JV from and against all claims, damages, losses, liabilities and expenses to which ENDOREX JV may become liable relating to such Materials, provided however that SCHEIN shall have no liability to the extent that such claims, damages, losses, liabilities and expenses arise from information which was provided to SCHEIN by ENDOREX JV in accordance with the terms of this Agreement. Unless ENDOREX JV reasonably objects to the use of any such ___________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 26 of 56 materials within 14 days of receipt for information purposes, SCHEIN shall be entitled to proceed to use such trade packaging, cartons and labels and other printed materials in connection with the sale of the PRODUCT provided however, that in no event shall such materials contain any statement which may have a damaging or harmful effect on the commercialisation of the PRODUCT and/or the goodwill of ENDOREX JV in the TERRITORY. 8.7 To the extent permitted by law, the materials referred to in Clause 8.6 shall include due acknowledgement that the PRODUCT is licensed from ENDOREX JV. 8.8 To the extent permitted by law, ENDOREX JV shall be entitled to mark or have marked all patent number(s) in respect of the ENDOREX JV PATENTS or patentable ENDOREX JV IMPROVEMENTS on all PRODUCT or PRODUCT packaging, or otherwise reasonably communicate to the trade the existence of any ENDOREX JV PATENTS for the countries within the TERRITORY in such a manner as to ensure compliance with, and enforceability under, applicable laws. 8.9 SCHEIN shall effect the first full scale commercial launch of the PRODUCT in the USA as soon as reasonably practicable but in any event within [********] in the USA, provided that ENDOREX JV has supplied SCHEIN with LAUNCH STOCKS ordered in accordance with the terms of this Agreement. With respect to each of the other countries of the TERRITORY, SCHEIN or its SUBLICENSEES will effect a national commercial launch of the PRODUCT as soon as reasonably practicable but in any event within [********], provided that ENDOREX JV has supplied SCHEIN with LAUNCH STOCKS ordered in accordance with the terms of this Agreement. CLAUSE 9 - SUPPLY OF THE PRODUCT 9.1 Save as otherwise provided in this Agreement, ENDOREX JV's designee shall produce and supply to SCHEIN its entire requirements of the PRODUCT. ENDOREX JV shall supply the PRODUCT solely and exclusively to SCHEIN in the TERRITORY and SCHEIN will purchase the PRODUCT exclusively from ENDOREX JV in the TERRITORY. 9.2 The PRODUCT shall be supplied to SCHEIN by ENDOREX JV in such form as may be agreed by the Parties during the PROJECT. ENDOREX JV shall deliver the PRODUCT to SCHEIN and/or any party designated by SCHEIN in proper packaging so as to permit safe storage and transport and to maintain the sterilisation of the PRODUCT. ENDOREX JV shall be responsible at its sole expense, for furnishing all operations, labour, supervision, equipment, tools, machinery, and facilities necessary to manufacture the PRODUCT in accordance with the SYSTEM SPECIFICATIONS, PRODUCT SPECIFICATIONS and DEVICE REGULATORY APPROVALS; provided however, that in all events, SCHEIN shall be responsible for the supply of the COMPOUND for the PRODUCT in accordance with Clause 10. _____________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 27 of 56 9.3 ENDOREX JV shall deliver the PRODUCT within 120 days of the receipt of a firm purchase order therefor (120 days in the case of LAUNCH STOCKS). The delivery time for the PRODUCT shall be agreed upon by the Parties. 9.4 No later than 12 months prior to the filing of the first REGULATORY APPLICATION in the TERRITORY, SCHEIN shall provide ENDOREX JV with a forecast of SCHEIN's requirements for the PRODUCT for the 18 month period following the first anticipated REGULATORY APPROVAL in the TERRITORY. The said forecast will be updated quarterly until the first REGULATORY APPROVAL in the TERRITORY. Except as otherwise provided herein, all forecasts made hereunder shall be made to assist ENDOREX JV in planning its production and SCHEIN in planning marketing and sales. Such forecasts shall not be binding purchase orders, and shall be without prejudice to SCHEIN's subsequent firm purchase orders for the PRODUCT in accordance with the terms of this Agreement. 9.5 Prior to the commencement of commercial manufacture of the PRODUCT, SCHEIN shall provide a rolling 18 months forecast for the period beginning on the first day of the relevant calendar month. The format of such 18 months forecasts shall be comprised of a 12 monthly forecast together with 2 quarterly forecasts. The first calendar quarter of such 18 months forecast shall be a binding purchase commitment of SCHEIN. In addition to the obligation of SCHEIN regarding rolling 18 month forecasts outlined herein, SCHEIN shall provide ENDOREX JV with rolling 3 years' forecasts on 1 August of each year of this Agreement. Subject to the agreement of the PROJECT TEAM, the calendar quarterly forecasts (other than for LAUNCH STOCKS) shall not increase or decrease from one quarter to the next by more than [********] in terms of volume of the PRODUCT ordered. Notwithstanding the foregoing, ENDOREX JV will use its reasonable efforts to fulfil SCHEIN's requirements in excess of forecasted amounts, but shall not be obliged to meet such requirements if it is not reasonably practicable to do so provided that ENDOREX JV shall supply the units of PRODUCT so ordered but not immediately available as soon thereafter as reasonably practicable. 9.6 The PROJECT TEAM shall agree upon a minimum batch for each form of the PRODUCT which shall be manufactured by ENDOREX JV for SCHEIN pursuant to the terms of this Agreement. ENDOREX JV shall have the right to refuse to fulfil orders which do not conform with the provisions of this Clause 9.6. Where ENDOREX JV in its absolute discretion, fulfils any order which does not conform with the provisions of this Clause 9.6, the fulfilment of such order by ENDOREX JV shall not affect ENDOREX JV's right to refuse to fulfil any subsequent order which does not conform with the provisions hereof. _____________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 28 of 56 9.7 In advance of the REGULATORY APPROVAL in the USA, the Parties shall discuss and agree upon the manufacture and purchase of specific quantities of LAUNCH STOCKS; however, for the avoidance of doubt, the parties hereby confirm that ENDOREX JV's manufacturing obligations shall only arise on receipt of firm purchase orders. For the avoidance of doubt, ENDOREX JV shall only accept orders for LAUNCH STOCKS in respect of the launch of the PRODUCT in the USA. 9.8 SCHEIN will notify ENDOREX JV within [********] of its receipt of an approval letter, or a pre-approval letter in respect of a REGULATORY APPLICATION from an RHA. SCHEIN shall within [********]of such notification place a firm purchase order with ENDOREX JV for LAUNCH STOCKS, unless such a purchase order has already been submitted to ENDOREX JV prior to that date. In addition, SCHEIN will use its reasonable efforts to provide forecasts for deliveries in addition to the LAUNCH STOCKS for the balance of the year in which the REGULATORY APPROVAL is obtained. 9.9 Save as otherwise agreed between the Parties, delivery of consignments of PRODUCT shall be effected to SCHEIN or SCHEIN's designee by ENDOREX JV's designee EX-WORKS the applicable facility. Risk of loss of or damage to any consignment of the PRODUCT shall pass to SCHEIN or it's designee when each such consignment of the PRODUCT is loaded onto the vehicle of SCHEIN or SCHEIN's designee's agent on which it is to be despatched from the applicable facility. SCHEIN or it's designee shall fully insure or procure the insurance of all consignments of the PRODUCT from the time when risk passes as aforesaid and shall produce the supporting insurance when requested by ENDOREX JV. 9.10 All claims for failure of any delivery of the PRODUCT to conform in all material respects to PRODUCT SPECIFICATIONS under Clause 9 shall be made by SCHEIN to ENDOREX JV in writing as soon as possible but in any event within 30 days following delivery except in the case of latent defects. Claims for latent defects, which could not have been reasonably discovered during the routine testing protocol (to be agreed by SCHEIN and ENDOREX JV), shall be made by SCHEIN to ENDOREX JV in writing as soon as possible but in any event within 30 days of discovery. Failure to make timely claims in the manner prescribed shall constitute acceptance of the delivery. Where possible, SCHEIN shall return the defective PRODUCT to ENDOREX JV, in such amount as is agreed by the Parties, in support of any claim pursuant to this Clause 9.10. 9.11 PRODUCT which has been delivered and which has been shown within the period designated in Clause 9.10 not to conform in all material respects to PRODUCT SPECIFICATIONS where such non-conformity is attributable to negligent acts or omissions of ENDOREX JV shall be replaced at ENDOREX JV's cost within 90 days of the receipt by ENDOREX JV of the failed SYSTEM except where such non-conformity is attributable to negligent acts or omissions of SCHEIN. ______________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 29 of 56 9.12 In the event of an unresolved dispute as to conformity of the PRODUCT with the PRODUCT SPECIFICATIONS, the Parties shall within 30 days appoint an independent first class laboratory to undertake the relevant testing and its findings shall be conclusive and binding upon the Parties. All costs relating to this process shall be borne solely by the unsuccessful Party. 9.13 The Parties shall negotiate in good faith to conclude a detailed technical agreement(s) regulating the Parties' respective obligations from a technical and quality perspective for the supply of the PRODUCT by ENDOREX JV to SCHEIN or to any SUBLICENSEES. 9.14 Subject to Clause 17.5 hereof, in the event that (i) ENDOREX JV fails to supply a shipment of the PRODUCT which has been ordered by SCHEIN for a period [********] from the receipt of a firm purchase order or (ii) there are delays in filling [********] which delays [********] when each delay is measured beginning on the [********] of the corresponding firm purchase order or (iii) there is a shortfall [********] delivered by ENDOREX JV which on [********]of the total amount of [********], then ENDOREX JV shall promptly notify SCHEIN in writing of the cause of the failure, delay or shortfall in supply of the PRODUCT. Unless such failure, delay or shortfall is caused by SCHEIN or any other supplier of the COMPOUND or other raw materials, if ENDOREX JV has not remedied the failure, delay or shortfall within a [********]of such notice, ENDOREX JV and SCHEIN shall discuss appropriate remedies which may include, subject to preexisting licensing agreements by and between ENDOREX JV and any third party, granting SCHEIN a licence to manufacture the PRODUCT itself or appoint an alternative manufacturer of the PRODUCT. In the event that SCHEIN is granted such a production licence, ENDOREX JV shall without charge: 9.14.1 provide SCHEIN (or SCHEIN's designee) with any technical data necessary for the carrying of this into effect, which information or data shall be deemed to be confidential information hereunder. To this end, ENDOREX JV shall impart to SCHEIN the documentation constituting the required material support, more particularly practical performance advice, shop practice, specifications as to materials to be used and control methods. For the avoidance of doubt, the Parties confirm that ENDOREX JV shall receive the royalty set out in Clause 11.3 from the PROFIT on sales of all PRODUCT manufactured by SCHEIN or any alternative manufacturer appointed by SCHEIN in accordance with this Clause 9.14 in consideration of the licence of the ENDOREX JV PATENTS; and 9.14.2 assist SCHEIN for the working up and use of the ENDOREX JV BACKGROUND TECHNOLOGY and ENDOREX JV IMPROVEMENTS, the machinery tools and equipment necessary to manufacture the PRODUCT as well as for the training of SCHEIN's personnel. For this purpose, ______________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 30 of 56 ENDOREX JV shall receive SCHEIN's scientific staff in its premises for periods the term of which shall be decided by common consent. When ENDOREX JV has remedied the situation that prevented ENDOREX JV from satisfying SCHEIN's requirements and is once again able to fulfil its obligations to supply the SYSTEM as provided for in this Agreement, SCHEIN shall cease manufacturing the PRODUCT or purchasing the PRODUCT from an alternative manufacturer [********] and shall resume purchasing the PRODUCT from ENDOREX JV pursuant to the terms of this Agreement. 9.15 In manufacturing the PRODUCT under Clause 9.14, SCHEIN or its AFFILIATES shall be responsible for all process and equipment validation required by the RHA and the regulations thereunder and shall take all steps reasonably necessary to pass government inspection by the RHA. CLAUSE 10 - SUPPLY OF THE COMPOUND 10.1. Subject to the terms of this Agreement, SCHEIN hereby grants to ENDOREX JV, and ENDOREX JV hereby accepts for the TERM, a royalty-free sub- licensable licence to the SCHEIN COMPOUND TECHNOLOGY and SCHEIN COMPOUND IMPROVEMENTS to develop, manufacture, use, offer for sale and sell the PRODUCT to SCHEIN in accordance with the terms of this Agreement. 10.2 SCHEIN shall be responsible at its sole expense, for furnishing all operations, labour, supervision, equipment, tools, machinery, COMPOUND and facilities necessary to ensure a reliable and continuous supply of the COMPOUND for the PRODUCT in accordance with the SYSTEM SPECIFICATIONS, PRODUCT SPECIFICATIONS and DEVICE REGULATORY APPROVALS. 10.3 SCHEIN shall be responsible for, and shall ensure that, all of the suppliers of the COMPOUND and raw materials necessary for the COMPOUND, shall hold all necessary licenses and registrations appropriate and necessary for the inclusion of such materials in the PRODUCT. All COMPOUND to be supplied by SCHEIN to ENDOREX JV shall be freeze dried, in a vial with a stopper, and in proper packaging 10.4. SCHEIN shall supply to ENDOREX JV such quantities of COMPOUND [********] as ENDOREX JV requires for the manufacture and supply of PRODUCT to SCHEIN and any SUBLICENSEES for commercial sale or promotional samples in all of the countries of the TERRITORY. COMPOUND shall be supplied by SCHEIN in accordance with orders placed by ENDOREX JV. At the placement of such orders, ENDOREX JV shall notify SCHEIN of then remaining amount of stocks of COMPOUND held by ENDOREX JV. SCHEIN shall be responsible for ensuring that ENDOREX JV receives delivery of COMPOUND in such quantities and at such times so as to ensure that ENDOREX JV has sufficient stocks of the COMPOUND to meet SCHEIN's firm purchase orders and supply the PRODUCT to SCHEIN. SCHEIN ______________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 31 of 56 shall furnish the appropriate certificate of analysis with each delivery of COMPOUND. ENDOREX JV shall be entitled to rely upon such certificates of analysis without the necessity of additional testing. As of the date of this Agreement, the Parties agree that adequate quantities of COMPOUND shall be delivered by SCHEIN to ENDOREX JV at least [********] in advance of the date on which the delivery of PRODUCT is scheduled to be made to SCHEIN or such longer period as may be agreed by the PROJECT TEAM. During the period in which ENDOREX JV is manufacturing LAUNCH STOCKS, the foregoing period of [********] shall be increased to [********]. 10.5. Prior to the launch of the PRODUCT, the Parties shall negotiate in good faith to conclude a technical agreement regulating the Parties' respective obligations from a technical and quality perspective for the supply of the COMPOUND by SCHEIN to ENDOREX JV and the supply of the PRODUCT by ENDOREX to SCHEIN. In any event all quantities of the COMPOUND delivered by SCHEIN hereunder shall conform with the specifications as approved by the RHA under SCHEIN's ANDA APPROVAL and any further specifications as may be set out or agreed to in the technical agreement referred to above (defined herein as the "COMPOUND SPECIFICATIONS"). 10.6. All quantities of the COMPOUND delivered by SCHEIN hereunder shall conform to the COMPOUND SPECIFICATIONS and all prevailing laws and regulatory requirements of the country where the COMPOUND is manufactured and intended to be sold. 10.7. Save as otherwise agreed between the Parties, delivery of consignments of COMPOUND shall be effected by SCHEIN, FCA the manufacturing facility designated by ENDOREX JV, and all risks therein shall pass to ENDOREX JV when each such consignment of the COMPOUND is delivered to ENDOREX JV's designated facility. ENDOREX JV shall fully insure or procure the insurance of all consignments of the COMPOUND when risk passes as aforesaid and shall produce such insurance documentation supporting same as and when requested by SCHEIN. ENDOREX JV shall furnish the appropriate certificate of analysis with each delivery of PRODUCT. 10.8. Title to the COMPOUND supplied to ENDOREX JV by SCHEIN shall at all times remain in SCHEIN. ENDOREX JV shall clearly mark such COMPOUND as the property of SCHEIN. At the termination of this Agreement, ENDOREX JV shall surrender to SCHEIN all useable COMPOUND in ENDOREX JV's possession. 10.9. All claims for failure of any shipment of the COMPOUND to conform to the COMPOUND SPECIFICATIONS must be made by ENDOREX JV to SCHEIN in writing within 30 days following delivery except in the case of latent defects. Claims for latent defects shall be made by ENDOREX JV to SCHEIN in writing as soon as possible but in any event within 30 days of discovery. Failure to make timely claims in ______________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 32 of 56 the manner prescribed shall constitute acceptance of the shipment. COMPOUND which has been delivered and which has been shown within the designated period not to conform to COMPOUND SPECIFICATIONS shall be replaced at SCHEIN's cost within 90 days of the receipt by SCHEIN of the failed COMPOUND. 10.10. In the event that the COMPOUND supplied by SCHEIN is not in compliance with the COMPOUND SPECIFICATIONS, or is otherwise adulterated, misbranded or defective, ENDOREX JV shall notify SCHEIN and shall follow all reasonable written instructions of SCHEIN regarding, and be responsible, at the sole cost and expense of SCHEIN, for re-analysis, sampling, processing, return, disposal or destruction, including certification of destruction, of such non-conforming bulk COMPOUND. In addition, SCHEIN shall be responsible for all costs borne by ENDOREX JV in the use of such non-conforming bulk COMPOUND, unless such non- compliance with the COMPOUND SPECIFICATIONS was solely due to a failure by ENDOREX JV to follow SCHEIN'S reasonable written instructions regarding such non-conforming bulk COMPOUND. 10.11. In the event of an unresolved dispute as to conformity of the COMPOUND with the COMPOUND SPECIFICATIONS, the Parties shall within 30 days appoint an independent first class laboratory to undertake the relevant testing and its findings shall be conclusive and binding upon the Parties. All costs relating to this process shall be borne solely by the unsuccessful Party. 10.12 SCHEIN shall indemnify ENDOREX JV against any claims, actions or losses arising from any failure, inability or delay in supplying the PRODUCT to customers arising out of any failure inability or delay by SCHEIN in supplying the COMPOUND to ENDOREX JV or ENDOREX JV's designee in accordance with the provisions of this Clause 10. 10.13 ENDOREX JV shall be responsible for, and shall ensure that, all of the suppliers of equipment, tools, machinery and materials shall hold all necessary licenses and registrations appropriate and necessary for the inclusion of such materials in the PRODUCT. 10.14 Notwithstanding the foregoing provisions of Article 10, ENDOREX JV shall be entitled, at its sole discretion, to take over some or all of the activities associated with the manufacture of the drug vial containing the COMPOUND which will be supplied by SCHEIN to ENDOREX JV; provided, however, that there may be a transition period of up to 60 days during which SCHEIN continues to perform the subject activities but only because of commitments to third party suppliers that SCHEIN had agreed to prior to the exercise of such right to take over by ENDOREX JV. Any such manufacture of the drug vial by ENDOREX JV or ENDOREX JV's designee shall be in a competitive manner. 10.15 In the event that any royalty, licence fees or other compensation obligations related to the COMPOUND and/or the bulk substance which is used to formulate the COMPOUND ("Bulk Substance") are payable to any third parties as a result of the use of the COMPOUND in the PRODUCT, SCHEIN shall be solely responsible for the payment of any such royalty, licence fee or other compensation obligations. For the - -------------------------------------------------------------------------------- Page 33 of 56 avoidance of doubt, any such royalty, licence fee or other compensation obligations relating to the COMPOUND and/or the Bulk Substance shall not be included in the calculation of the MANUFACTURING COST of the COMPOUND and shall not be deducted from the PROFIT. 10.16. SCHEIN entered into a supply agreement with Pharmacia & Upjohn Company ("PNU") on 1st July 1991 pursuant to which SCHEIN was appointed the exclusive worldwide purchaser of the Bulk Substance from PNU. This Agreement was terminated by PNU by letter dated 30th July 1999. SCHEIN and PNU are presently engaged in discussions regarding future supply of such Bulk Substance to SCHEIN. The Parties acknowledge that it is critical for the success of the PRODUCT that SCHEIN (i) secure a continuous supply of the Bulk Substance, and (ii) obtain supply rights to the Bulk Substance. SCHEIN shall use its best commercial efforts to ensure a continuous and uninterrupted supply of the Bulk Substance for the COMPOUND throughout the TERM of this Agreement. ENDOREX JV shall be entitled, at its sole discretion, to forthwith terminate this Agreement, in the event that SCHEIN: 10.16.1 at any time during the TERM of this Agreement, (i) fails to supply a shipment of the COMPOUND which has been ordered by ENDOREX JV for a period exceeding [********] from the receipt of an order from ENDOREX JV or (ii) there are delays in filling each of the [********] successive orders which delays cumulatively exceed [********] when each delay is measured beginning on the 91st day from receipt of the corresponding orders or (iii) there is a shortfall in [********] successive shipments delivered by SCHEIN which on a cumulative basis exceeds [********] of the total amount of said [********] orders; or 10.16.2 fails to, within [********] from the EFFECTIVE DATE, enter into a supply arrangement with [********], or enter into any other arrangement which secures SCHEIN e supply rights to the Bulk Substance for the TERM of this Agreement. CLAUSE 11 - FINANCIAL PROVISIONS 11.1 Licence Royalties: ----------------- 11.1.1 In consideration of the licence of the ENDOREX JV PATENTS and patentable ENDOREX JV IMPROVEMENTS granted to SCHEIN under this Agreement, SCHEIN shall pay to ENDOREX JV [********]of any LICENCE FEES which are received from SUBLICENSEES. _____________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 34 of 56 11.2 Development Royalties: --------------------- 11.2.1 All work that ENDOREX JV shall perform pursuant to the PROJECT in order to meet the PROJECT SYSTEM SPECIFICATIONS in accordance with Clause 6.4 hereof, shall be charged [********]. Except as otherwise provided in this Agreement, all development or other technical assistance which ENDOREX JV shall perform pursuant to the PROJECT or the terms of this Agreement which is outside of the scope of the PROJECT SYSTEM SPECIFICATIONS, or which is otherwise requested by SCHEIN or any SUBLICENSEES and agreed to by ENDOREX JV, shall be charged [********]. Any such work shall be mutually agreed upon by in writing in advance of the commencement of such work, which agreement shall include an agreed upon budget. 11.2.2 All development and other work agreed upon by ENDOREX JV pursuant to Clause 11.2.1. and carried out by ENDOREX JV hereunder, shall be invoiced by ENDOREX JV to SCHEIN at the end of each calendar quarter. Payment shall be effected in US Dollars within [********] of the date of receipt of the relevant invoice. 11.2.3 For the avoidance of doubt, the Parties acknowledge that in the event that a SUBLICENSEE requests that ENDOREX JV perform development work or that SCHEIN perform development, trial, regulatory applications or other work for such SUBLICENSEE: (i) SCHEIN shall have no entitlement to any profit which may be made by ENDOREX JV from any such development work performed by ENDOREX JV on the SYSTEM for any such SUBLICENSEE; and (ii) ENDOREX JV shall have no entitlement to any profit which may be made by SCHEIN from any such development, trial, regulatory applications or other work performed by SCHEIN on the COMPOUND for any such SUBLICENSEE. 11.3 Price of Product: ---------------- 11.3.1 ENDOREX JV shall supply the PRODUCT to SCHEIN [********] in accordance with the terms of this Agreement. 11.3.2 At the end of each quarter, ENDOREX JV shall retrospectively determine the exact amount of [********] for the preceding calendar quarter period and provide [********] to SCHEIN and if necessary, there shall be a payment _____________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 35 of 56 either by ENDOREX JV to SCHEIN or by SCHEIN to ENDOREX JV to adjust [********] 11.3.3 Payment for all PRODUCT delivered from ENDOREX JV designee's manufacturing facility to SCHEIN shall be effected in U.S. Dollars ($) within [********]of the date of the delivery of the PRODUCT EX WORKS the applicable facility. 11.4 Allocation: ---------- 11.4.1 In consideration of the license of the ENDOREX JV PATENTS and patentable ENDOREX JV IMPROVEMENTS to SCHEIN hereunder, SCHEIN shall pay a royalty [********]to ENDOREX JV. 11.4.2 Within four weeks of the end of each calendar quarter, SCHEIN shall notify ENDOREX JV of the NSP of PRODUCT for that previous calendar quarter. Payments shown by each calendar quarter report to have accrued but which have not yet been paid shall be included in calculating the NSP for that quarter. 11.4.3 Payment [********] shall be made once in each calendar quarter within 45 days after the expiry of the relevant calendar quarter. 11.4.4 All payments due hereunder shall be made in U.S. Dollars. 11.4.5 In the event that SCHEIN or any AFFILIATE of SCHEIN shall sell the PRODUCT together with other products of SCHEIN to third parties (by the method commonly known in the pharmaceutical industry as "bundling") and the price attributable to the PRODUCT is less than the average price of "arms length" sales to similar customers for the reporting period in which sales occur (such sales to be excluded from the calculation of the average price of "arms length" sales), NSP for any such sales shall be the [********] in the country where such bundling occurs during the reporting period in which such sales occur. 11.5 Method of calculation of royalties and other payments: ----------------------------------------------------- The parties acknowledge and agree that the methods for calculating the royalties and other payments hereunder are for the purposes of the convenience of the parties, are freely chosen and not coerced. CLAUSE 12 - PAYMENTS, REPORTS AND AUDITS 12.1 SCHEIN shall keep true and accurate records of gross sales of the PRODUCT, the number of units of PRODUCT sold, the items deducted from the gross amount _____________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 36 of 56 calculating the NSP, the NSP, the PROFIT and the royalties payable to ENDOREX JV under Clause 11. SCHEIN shall deliver to ENDOREX JV a written statement ("the STATEMENT") thereof within 30 days following the end of each calendar quarter, (or any part thereof in the first or last calendar quarter of this Agreement) for such calendar quarter. The STATEMENT shall outline on a country-by-country basis, the calculation of the NSP from gross revenues during that calendar quarter, the applicable percentage rate, and a computation of the sums due to ENDOREX JV. The parties' financial officers shall agree upon the precise format of the STATEMENT. 12.2 Unless otherwise notified in writing by ENDOREX JV, payments due on PROFIT of the PRODUCT based on sales amounts in a currency other than US Dollars shall first be calculated in the foreign currency and then converted to US Dollars on the basis of the exchange rate in effect for the purchase of US Dollars with such foreign currency quoted in the Wall Street Journal (or comparable publication if not quoted in the Wall Street Journal) with respect to the sale of currency of the country of origin of such payment for the day prior to the date on which the payment by SCHEIN is being made. 12.3 Any income or other taxes which SCHEIN is required by law to pay or withhold on behalf of ENDOREX JV with respect to royalties and any other monies payable to ENDOREX JV under this Agreement shall be deducted from the amount of such PROFIT payments, royalties and other monies due. SCHEIN shall furnish ENDOREX JV with proof of such payments. Any such tax required to be paid or withheld shall be an expense of and borne solely by ENDOREX JV. SCHEIN shall promptly provide ENDOREX JV with a certificate or other documentary evidence to enable ENDOREX JV to support a claim for a refund or a foreign tax credit with respect to any such tax so withheld or deducted by SCHEIN. The parties will reasonably cooperate in completing and filing documents required under the provisions of any applicable tax treaty or under any other applicable law, in order to enable SCHEIN to make such payments to ENDOREX JV without any deduction or withholding. 12.4 All payments due hereunder shall be made to the designated bank account of ENDOREX JV in accordance with such timely written instructions as ENDOREX JV shall from time to time provide. 12.5 SCHEIN shall pay interest to ENDOREX JV at the Prime Rate publicly announced by Morgan Guaranty Trust Company of New York at its principal office on the date (or next to occur business day, if such date is not a business day) on which payment should have been made pursuant to the applicable provisions of this Agreement plus [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.on all late payments under this Agreement applicable from the date on which payment should have been made pursuant to the applicable provisions of this Agreement until the date of payment. 12.6 For the 180 day period following the close of each calendar year of the Agreement, ENDOREX JV and SCHEIN will, in the event that the other party reasonably requests _________________ - -------------------------------------------------------------------------------- Page 37 of 56 such access, provide each other's independent certified accountants (reasonably acceptable to the other party) with access, during regular business hours and subject to the confidentiality provisions as contained in this Agreement, to such party's books and records relating to the PRODUCT, solely for the purpose of verifying the accuracy and reasonable composition of the calculations hereunder for the calendar year then ended. 12.7 In the event of a discovery of a discrepancy which exceeds [********]of the amount due or charged by a party for any period, the cost of such accountants shall be borne by the audited party; otherwise, such cost shall be borne by the auditing party. CLAUSE 13 - DURATION AND TERMINATION 13.1 This Agreement shall be deemed to have come into force on the EFFECTIVE DATE and, subject to the rights of termination outlined in this Clause 13 will expire on a country by country basis on the 10th anniversary of the date of the launch of the PRODUCT in the country concerned ("the INITIAL PERIOD"). 13.2 At the end of the INITIAL PERIOD, the Agreement shall continue automatically for rolling 2 year periods thereafter, unless the Agreement has been terminated by either of the parties by serving 2 years' written notice on the other immediately prior to the end of the INITIAL PERIOD or any additional 2 year period provided for herein. 13.3 In addition to the rights of termination provided for elsewhere in this Agreement, either party will be entitled forthwith to terminate this Agreement by written notice to the other party if: 13.3.1 that other party commits any breach of any of the provisions of this Agreement, and in the case of a breach capable of remedy, fails to remedy the same within 90 days after receipt of a written notice giving full particulars of the breach and requiring it to be remedied; 13.3.2 that other party goes into liquidation (except for the purposes of amalgamation or reconstruction and in such manner that the company resulting therefrom effectively agrees to be bound by or assume the obligations imposed on that other party under this Agreement); 13.3.3 an encumbrancer takes possession or a receiver is appointed over any of the property or assets of that other party; or 13.3.4 any proceedings are filed or commenced by that other party under bankruptcy, insolvency or debtor relief laws or anything analogous to any of the foregoing under the laws of any jurisdiction occurs in relation to that other party. ____________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 38 of 56 13.4 For the purposes of Clause 13.3.1, a breach will be considered capable of remedy if the party in breach can comply with the provision in question in all respects other than as to the time of performance (provided that time of performance is not of the essence). 13.5 In further addition to the rights and termination provided for elsewhere in this Agreement, ENDOREX JV shall be entitled to forthwith terminate the licence granted to SCHEIN under this Agreement for any country or countries of the TERRITORY, in accordance with the terms set out below, in the event that SCHEIN:- 13.5.1 fails to file a DEVICE REGULATORY APPLICATION for the PRODUCT in the USA within 6 months from the completion of the PROJECT; or 13.5.2 fails to effect the commercial launch of the PRODUCT in the USA as required by Clause 8 in accordance with the provisions thereof; or 13.5.3 notifies ENDOREX JV that it does not wish to commercialise the PRODUCT in any country of the TERRITORY; or 13.5.4 a TECHNOLOGICAL COMPETITOR of ENDOREX JV, or a company with a directly competing product (other than Bayer AG), acquires 25% or more of the SCHEIN's voting stock or where 25% or more of the voting stock of a TECHNOLOGICAL COMPETITOR of ENDOREX JV hereto is acquired by SCHEIN. CLAUSE 14 - CONSEQUENCES OF TERMINATION 14.1 Upon exercise of those rights of termination specified in Clauses 13 or elsewhere in this Agreement, this Agreement and all licenses to SCHEIN of ENDOREX JV BACKGROUND TECHNOLOGY and ENDOREX JV IMPROVEMENTS shall, subject to the provisions of the Agreement which survive the termination of the Agreement and Clause 14.2, automatically terminate forthwith and be of no further legal force or effect. 14.2 Upon termination of the Agreement by either party, or upon termination by ENDOREX JV of a licence for a particular country under Clause 14.5, the following shall be the consequences relating to the TERRITORY or the particular country, as applicable:- 14.2.1 any sums that were due from SCHEIN to ENDOREX JV under the provisions of Clause 11 or otherwise howsoever prior to the exercise of the right to terminate this Agreement as set forth herein shall be paid in full within 30 days of termination of this Agreement and receipt of the invoice in respect thereto, and ENDOREX JV shall not be liable to repay to SCHEIN any amount of money paid or payable by SCHEIN to ENDOREX JV up to the date of the termination of this Agreement; 14.2.2 all confidentiality provisions set out herein shall remain in full force and effect for a period of 7 years from the date of termination of this Agreement; - -------------------------------------------------------------------------------- Page 39 of 56 14.2.3 all representations and warranties contained herein, including, without limitation, those contained in Clause 15 hereof, shall survive termination of this Agreement and all obligations of the Parties intended to be performed after termination as provided herein shall remain in full force and effect; 14.2.4 the rights of inspection and audit shall continue in force for the period referred to in the relevant provisions of this Agreement; 14.2.5 ENDOREX JV shall be entitled to research, develop, manufacture and commercialise the SYSTEM in the FIELD for its own benefit in the relevant country or countries of the TERRITORY or in all of the TERRITORY, as appropriate, and either Party shall be entitled to manufacture, market, sell, or assist in the distribution or sale of a COMPETING PRODUCT; 14.2.6 ENDOREX JV shall be entitled to file for DEVICE REGULATORY APPROVAL for the SYSTEM with any [********] compound otherwise available to ENDOREX JV, in any country which ceases to be a part of the TERRITORY, or in any country of the TERRITORY in the event of termination of this Agreement,; 14.2.7 SCHEIN shall transfer to ENDOREX JV or ENDOREX JV's designee without charge (but at ENDOREX JV's expense, if any), and/or permit ENDOREX JV or ENDOREX JV's designee without charge to conduct sufficient cross-referencing to, and have sufficient access to any and all pending DEVICE REGULATORY APPLICATIONS or granted DEVICE REGULATORY APPROVALS for the PRODUCT for the relevant country or countries of the TERRITORY; and 14.2.8 SCHEIN shall be entitled to research, develop, manufacture and commercialise the COMPOUND in the FIELD for its own benefit in the TERRITORY or in the relevant country or countries of the TERRITORY and either party shall be entitled to manufacture, market, sell, or assist in the distribution or sale of a COMPETING PRODUCT. CLAUSE 15 - WARRANTY AND INDEMNITY 15.1 ENDOREX JV represents and warrants that 15.1.1 it has the sole, exclusive and unencumbered right to grant the licences and rights herein granted to SCHEIN, and that it has not granted any option, licence, right or interest in or to the ENDOREX JV PATENTS or ENDOREX JV KNOW-HOW to any third party which would conflict with the rights granted by this Agreement. ENDOREX JV agrees to hold SCHEIN harmless from any and all costs, expenses and damages (including reasonable attorneys' fees) incurred or sustained by SCHEIN as the result of any third party's ______________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. _______________________________________________________________________________ Page 40 of 56 challenges to ENDOREX JV's right to grant the rights and licences herein granted to SCHEIN, 15.1.2 the execution of this Agreement and the full performance of its obligations and rights under this Agreement will not breach or in any way be inconsistent with the terms and conditions of any licence, contract, understanding or agreement, whether express, implied, written or oral between ENDOREX JV and any third party. 15.2 SCHEIN represents and warrants that the execution of this Agreement and the full performance of its obligations and rights under this Agreement will not breach or in any way be inconsistent with the terms and conditions of any licence, contract, understanding or agreement, whether express, implied, written or oral between SCHEIN and any third party. 15.3 Except as expressly stated in this Clause 15 or otherwise in this Agreement, all other warranties, conditions and representations, express or implied, statutory or otherwise, including a warranty as to the quality or fitness for any particular purpose of the SYSTEM are hereby excluded and except as expressly stated in this Agreement, ENDOREX JV shall not be liable in contract, tort or otherwise for any loss, damage, expense or injury, arising out of or in connection with the PRODUCT or any defect in the SYSTEM or from any other cause. 15.4 ENDOREX JV represents and warrants that, in performing the development activities and manufacturing of the SYSTEM pursuant to this Agreement, ENDOREX JV will exercise all due skill, care and diligence in conducting such activities as are commercially reasonable and comply with all applicable laws and regulations.. 15.5.1 SCHEIN represents and warrants that the COMPOUND provided by SCHEIN under this Agreement will conform and perform in all material respects to:- 15.5.1(a) the COMPOUND SPECIFICATIONS; and 15.5.2(b)all applicable regulations and requirements of the relevant RHA including the then cGMP regulations which apply to the manufacture and supply of the COMPOUND and the PRODUCT. 15.5.2 ENDOREX JV represents and warrants that, once successfully assembled, the PRODUCT under this Agreement will conform and perform in all material respects to:- 15.5.2(a) the PRODUCT SPECIFICATIONS and DEVICE REGULATORY APPROVALS; and 15.5.2(b) all applicable regulations and requirements of the relevant RHA including the then cGMP regulations which apply to the manufacture and supply of the PRODUCT; - -------------------------------------------------------------------------------- Page 41 of 56 provided, however, that such representation and warranty shall not apply to with respect to the manufacture and supply of the COMPOUND. 15.6 SCHEIN further represents and warrants to ENDOREX JV that in transporting, storing, handling, distributing, marketing and selling the PRODUCT hereunder:- 15.6.1 it will exercise all due skill, care and diligence in conducting such activities as are commercially reasonable; and 15.6.2 it will comply with the provisions of this Agreement, all RHA and other approvals, all applicable state and local regulatory approvals and all applicable laws, ordinances and regulations. 15.7.1 ENDOREX JV shall indemnify, defend and hold SCHEIN harmless from all actions, losses, claims, demands, damages, costs and liabilities (including reasonable attorneys' fees) to which SCHEIN is or may become liable insofar as they arise out of (i) any breach by ENDOREX JV of any of its obligations, representations or warranties under this Agreement, (ii) a third party claim that the manufacture, sale, use or offer for sale of the SYSTEM as included in the PRODUCT, infringes the patent rights of such a third party, but only to the extent and subject to the limitations set forth in Clauses 3.5. hereof, (iii) ENDOREX JV's bad faith, negligence or intentional misconduct in connection with the filing or maintenance of the MAF, subject to the provisions of Clause 7.10, hereof.. 15.7.2 SCHEIN shall indemnify, defend and hold harmless ENDOREX JV from all actions, losses, claims, demands, damages, costs and liabilities (including reasonable attorneys' fees) to which ENDOREX JV is or may become liable insofar as they arise out of (i) any breach by SCHEIN of any of its obligations, representations or warranties under this Agreement, (ii) a third party alleging that the manufacture, offer for sale, sale, distribution or use of the PRODUCT with respect to the COMPOUND in the TERRITORY infringes any adversely held patent or involves the unauthorised use of any other intellectual property, but only to the extent and subject to the limitations set forth in Clauses 3.5.,.(iii) SCHEIN's bad faith, negligence or intentional misconduct in connection with the filing or maintenance of the DEVICE REGULATORY APPLICATIONS and DEVICE REGULATORY APPROVALS in the TERRITORY, subject to the provisions of Clause 7.10, hereof, (iv) labeling and other printed material supplied by SCHEIN, except to the extent that such claims, damages, losses, liabilities and expenses arise from information provided to SCHEIN by ENDOREX JV, subject to the provisions and limitations set forth in Clauses 8.6 hereof, and (v) any defective materials in the Compound or defect in the COMPOUND which may be included in the PRODUCT, as provided in Clause 10.12 herein. 15.8 With reference to Clause 2.3.4, SCHEIN shall indemnify and hold harmless ENDOREX JV to the extent that any claims, damages, liabilities, claims, costs or expenses arise out of any such acts or omissions of any SUBLICENSEE. 15.9 As a condition of obtaining an indemnity in the circumstances set out in Clauses 15.4, 15.5, 15.6, 15.7, 15.8 and 15.9, the party seeking an indemnity shall: - -------------------------------------------------------------------------------- Page 42 of 56 15.9.1 fully and promptly notify the other party of any claim or proceedings, or threatened claim or proceedings; 15.9.2 permit the indemnifying party to take full control of such claim or proceedings; 15.9.3 assist in the investigation and defence of such claim or proceedings; 15.9.4 not compromise or otherwise settle any such claim or proceedings without the prior written consent of the other party, which consent shall not be unreasonably withheld; and 15.9.5 take all reasonable steps to mitigate any loss or liability in respect of any such claim or proceedings. 15.10 Notwithstanding anything to the contrary in this Agreement, ENDOREX JV and SCHEIN shall not be liable to the other by reason of any representation or warranty, condition or other term or any duty of common law, or under the express terms of this Agreement, for any consequential or incidental or punitive loss or damage (whether for loss of profits or otherwise) and whether occasioned by the negligence of the respective parties, their employees or agents or otherwise. 15.11 ENDOREX JV and SCHEIN shall maintain comprehensive general liability insurance, including product liability insurance on the SYSTEM and PRODUCT respectively, in such prudent amount as shall be determined by the PROJECT TEAM. Each party shall provide the other party with a certificate from the insurance company verifying the above and undertakes to notify such party directly at least 30 days prior to the expiration or termination of such coverage. 15.12 The representations and warranties of the Parties, including those set forth in Clause 15, shall survive execution of the AGREEMENT. CLAUSE 16 - CUSTOMER COMPLAINTS AND PRODUCT RECALL 16.1 SCHEIN shall notify ENDOREX JV promptly:- 16.1.1 of any complaints from third parties reported to SCHEIN involving any serious and unexpected adverse reactions resulting from the use of the PRODUCT; and 16.1.2 of any potential recall of the PRODUCT by any governmental authority. 16.2 ENDOREX JV shall notify SCHEIN promptly:-. 16.2.1 of any complaints from third parties reported to ENDOREX JV involving any serious and unexpected adverse device events or incident reports resulting from the use of the SYSTEM; and 16.2.2 of any potential recall of the SYSTEM by any governmental authority. - -------------------------------------------------------------------------------- Page 43 of 56 16.3 SCHEIN and ENDOREX JV shall establish a procedure for formal adverse event handling, customer complaints and reporting. It is envisaged that SCHEIN shall be responsible for furnishing post-marketing reports to the applicable RHA's and other relevant regulatory agencies. SCHEIN and ENDOREX JV shall keep each other informed and shall copy the other party with all communications with the RHA's and other relevant regulatory agencies with respect to the PRODUCT and such events. 16.4 In the event of any recall of the PRODUCT, as suggested or requested by any governmental authority: 16.4.1 SCHEIN shall perform the recall of the PRODUCT in the TERRITORY and save as provided in Clause 16.4.2, in all events the recall costs shall be borne by SCHEIN. 16.4.2 If the recall arises from ENDOREX JV's acts or omissions in manufacturing the SYSTEM or any failure to conform to the PROJECT SYSTEM SPECIFICATIONS, the recall costs shall be borne by ENDOREX JV provided that SCHEIN should not have discovered the said act or omission prior to the sale of the PRODUCT by exercising the quality procedures to be agreed upon by the parties for the release of the PRODUCT. In the event that ENDOREX JV should bear the costs of any recall hereunder, ENDOREX JV shall be entitled but not obliged to take over and perform the recall of the PRODUCT described in Clause 16.4.1 and SCHEIN shall provide ENDOREX JV with all such reasonable assistance as may be required by ENDOREX JV, with ENDOREX JV reimbursing SCHEIN for reasonable costs incurred. 16.4.3 Neither party shall be liable to the other party or to any third party for consequential or incidental damages which may arise as a result of the recall of the PRODUCT. 16.4.4 For the avoidance of doubt, in no event shall SCHEIN be responsible under this Agreement for performing any recall of the PRODUCT in any country of the TERRITORY for which SCHEIN's license to the ENDOREX JV BACKGROUND TECHNOLOGY and ENDOREX JV IMPROVEMENTS has been terminated in accordance with the terms of this Agreement. CLAUSE 17 - MISCELLANEOUS PROVISIONS 17.1 Secrecy: ------- 17.1.1 Any information, whether written or oral (oral information shall be reduced to writing within one month by the party giving the oral information and the written form shall be furnished to the other party) pertaining to the PRODUCT that has been or will be communicated or delivered by ENDOREX JV to SCHEIN, or by SCHEIN to ENDOREX JV, including, without limitation, trade secrets, business methods, and cost, supplier, manufacturing and customer information, shall be treated by SCHEIN and ENDOREX JV, - -------------------------------------------------------------------------------- Page 44 of 56 respectively, as confidential information, and shall not be disclosed or revealed to any third party whatsoever or used in any manner except as expressly provided for herein; provided, however, that such confidential information shall not be subject to the restrictions and prohibitions set forth herein to the extent that such confidential information:- (1) is available to the public in public literature or otherwise, or after disclosure by one party to the other becomes public knowledge through no default of the party receiving such confidential information; or (2) was known to the party receiving such confidential information prior to the receipt of such confidential information by such party, whether received before or after the date of this Agreement; or (3) is obtained by the party receiving such confidential information from a third party not subject to a requirement of confidentiality with respect to such confidential information; or (4) is required to be disclosed pursuant to: (A) any order of a court having competent jurisdiction and power to order such information to be released or made public; or (B) any lawful action of a governmental or regulatory agency or stock exchange provided that each party shall notify the other in writing of any disclosure of information required hereunder prior to such disclosure. 17.1.2 Each party shall take in relation to the confidential information of the other party all such precautions as it normally takes with its own confidential information to prevent any improper disclosure of such confidential information to any third party; provided, however, that such confidential information may be disclosed within the limits required to obtain any authorisation from the applicable RHA or any governmental or regulatory agency or, with the prior written consent of the other party, which shall not be unreasonably withheld, or as may otherwise be required in connection with the purposes of this Agreement. 17.1.3 Each of the parties agrees that it will not use, directly or indirectly, any know-how of the other party (ENDOREX JV KNOW-HOW or SCHEIN KNOW-HOW, as the case may be), or other confidential information disclosed to it by the other party or obtained by it from the other party pursuant to this Agreement, other than as expressly provided herein. 17.1.4 Neither party will publicise the existence of this Agreement in any way without the prior written consent of the other party subject to the disclosure requirements of applicable laws and regulations. In the event that either party wishes to make an announcement concerning the Agreement, that party will seek the consent of the other party. The terms of any such announcement shall be agreed in good faith. ENDOREX JV and SCHEIN shall also co-operate in good faith with respect to any stock exchange filings, public announcements, or - -------------------------------------------------------------------------------- Page 46 of 56 filings with the United States Securities and Exchange Commission which may be necessary following execution of this Agreement. 17.2 Assignments/ Sub-contracting: ---------------------------- This Agreement may not be assigned by SCHEIN or ENDOREX JV without the prior written consent of the other party, save that either party may assign this Agreement in whole or in part and delegate its duties hereunder to its AFFILIATE or AFFILIATES without such consent provided that such assignment or delegation has no material adverse tax implications for the other party hereto. ENDOREX JV shall be entitled to subcontract any of its obligations under this Agreement. Each party shall be responsible for the acts and/or omissions of its respective AFFILIATES or subcontractors. 17.3 Parties bound: ------------- This Agreement shall be binding upon and enure for the benefit of parties hereto, their successors and permitted assigns. 17.4 Severability: ------------ If any provision in this Agreement is agreed by the parties to be, or is deemed to be, or becomes invalid, illegal, void or unenforceable under any law that is applicable hereto:- 17.4.1 such provision will be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it will be deleted, with effect from the date of such agreement or such earlier date as the parties may agree; and 17.4.2 the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired or affected in any way. 17.5 Force Majeure: ------------- Neither party to this Agreement shall be liable for delay in the performance of any of its obligations hereunder if such delay results from causes beyond its reasonable control, including, without limitation, acts of God, fires, earthquakes, strikes, acts of war, or intervention of a government authority, non-availability of raw materials, but any such delay or failure shall be remedied by such party as soon as practicable. 17.6 Relationship of the parties: --------------------------- Nothing contained in this Agreement is intended or is to be construed to constitute ENDOREX JV and SCHEIN as partners or members of a joint venture or either party as an employee of the other. Neither party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind the other party to any contract, agreement or undertaking with any third party. - -------------------------------------------------------------------------------- Page 46 of 56 17.7 Amendments: ---------- No amendment, modification or addition hereto shall be effective or binding on either party unless set forth in writing and executed by a duly authorised representative of both parties. 17.8 Waiver: ------ No waiver of any right under this Agreement shall be deemed effective unless contained in a written document signed by the party charged with such waiver, and no waiver of any breach or failure to perform shall be deemed to be a waiver of any future breach or failure to perform or of any other right arising under this Agreement. 17.9 No effect on other agreements: ----------------------------- No provision of this Agreement shall be construed so as to negate, modify or affect in any way the provisions of any other agreement between the parties unless specifically referred to, and solely to the extent provided, in any such other agreement. 17.10 Governing law and jurisdiction: ------------------------------ This Agreement shall be governed by the laws of the State of New York, without regard to principles of conflicts of law. Each of the Parties hereby irrevocably submits to the jurisdiction of any New York State or United States Federal court sitting in the County, City and State of New York over any action or proceeding arising out of or relating to this Agreement, and each hereby waives the defence of any inconvenient forum for the maintenance of such action. 17.11 Notice: ------ 17.11.1 Any notice to be given under this Agreement shall be sent in writing in English by registered airmail or telecopied to: ENDOREX JV at: Clarendon House 2 Church Street Hamilton, Bermuda Attention: Chairman Telefax 1 441 292 4720 With a copy to: Elan Corporation, plc Lincoln House Lincoln Place Dublin 2 Ireland - -------------------------------------------------------------------------------- Page 47 of 56 Attention: Vice President & General Counsel Elan Pharmaceutical Technologies Telefax: 353 1 7094124 SCHEIN at: Schein Pharmaceutical (Bermuda) Ltd. C/o Grosvenor Trust LTD 33 Church Street Hamilton, Bermuda Attention: Chairman Telefax: 1 441 292 5152 With a copy to: Schein Pharmaceutical Inc. 100 Campus Drive Florham Park New Jersey 07932 Attention: General Counsel Telefax: 973 593 5152 or to such other address(es) and telecopier numbers as may from time to time be notified by either party to the other hereunder. 17.11.2 Any notice sent by mail shall be deemed to have been delivered within 10 working days after despatch and any notice sent by telex or telecopy shall be deemed to have been delivered within 24 hours of the time of the despatch. Notice of change of address shall be effective upon receipt. 17.12. Patent Due Diligence - --------------------------- The obligations of SCHEIN under this Agreement are expressly subject to and conditioned upon the completion of SCHEIN's PATENT DUE DILIGENCE REVIEW (as defined below) of the SYSTEM, the PRODUCT and the ENDOREX JV PATENTS, and relevent third party patents with results satisfactory to SCHEIN, under the following terms and conditions: 17.12.1 During the period commencing on the date hereof and ending on June 30, 2000 (the "REVIEW PERIOD"), SCHEIN will promptly conduct or have conducted a due diligence review of (1) coverage of the ENDOREX JV PATENTS over the SYSTEM and the PRODUCT, (2) freedom from infringement liability under third party patents (and potential liability under third party patent applications) for the SYSTEM and the PRODUCT as it is intended to be produced and sold hereunder, and (3) freedom from - -------------------------------------------------------------------------------- Page 48 of 56 infringement liability under third party patents (and potential liability under third party patent applications) for the COMPOUND including delivery of the COMPOUND through continuous subcutaneous administration (the "PATENT DUE DILIGENCE REVIEW"). The freedom from infringement review may or may not include features of the PRODUCT and the SYSTEM which are beyond the scope of the ENDOREX JV PATENTS, at SCHEIN's discretion. The PATENT DUE DILIGENCE REVIEW shall be for the entire TERRITORY or any portion thereof that SCHEIN, in its sole discretion, determines is necessary. Each Party shall provide reasonable cooperation to the other Party during the PATENT DUE DILIGENCE REVIEW. 17.12.2 Upon expiration of the REVIEW PERIOD, SCHEIN shall confirm its acceptance of this AGREEMENT, in which event the conditions contained in this Clause 17.12 shall be deemed fulfilled and the AGREEMENT and its provisions shall remain in full force and effect unless SCHEIN determines in good faith that (a) the SYSTEM infringes, or is reasonably likely to infringe, any third party patent in the TERRITORY, (b) the ELAN PATENTS do not cover the SYSTEM, (c) the ELAN PATENTS covering the SYSTEM are not valid, or are reasonably likely to be found invalid, in which event, SCHEIN shall be entitled to terminate this AGREEMENT, or (d) the delivery of the COMPOUND through continuous subcutaneous administration infringes or is likely to infringe any third party patent in the TERRITORY, in which event this AGREEMENT (except for the provisions of Clause 17.1 hereof which shall survive), shall be deemed terminated, null and void and of no force or effect with no further obligation on either party hereto. IN WITNESS of which the parties have executed this Agreement. - -------------------------------------------------------------------------------- Page 49 of 56 SCHEDULE 1 ENDOREX JV PATENTS
- ------------------------------------------------------------------------------------------------------------ File Number Brief Description Country Status - ------------------------------------------------------------------------------------------------------------ EMT 13 Original Medipad Australia Granted (693136) [********] [********] [********] [********] Israel Granted (111685) [********] [********] New Zealand Granted (276485) Taiwan Granted (079227) United States 2 Granted (5,527,288; 5,848,991[********] South Africa Granted (94/9185) - ------------------------------------------------------------------------------------------------------------ EMT 19 Medipad-Vial on board, needle on the periphery [********] [********] [********] [********] [********] [********] Ireland Granted (77523) [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] United States Granted (5,814,020) [********] [********] South Africa Granted (96/7502) - ------------------------------------------------------------------------------------------------------------ EMT 24 Delivery Needle [********] [********] [********] [********] [********] [********] Ireland Granted (80772) [********] [********] [********] [********] [********] [********] South Africa Granted (97/5065) [********] [********] Taiwan Issued (096579) [********] [********] - ------------------------------------------------------------------------------------------------------------ [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] - ------------------------------------------------------------------------------------------------------------
________________________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 50 of 56 - ------------------------------------------------------------------------------------------------------- [********] [********] [********] [********] [********] [********] [********] [********] [********] [********] - ------------------------------------------------------------------------------------------------------- EMT 33 Improved Method of Packaging a Drug Delivery [********] [********] Kit [********] [********] South Africa Issued (98/5188) [********] [********] [********] [********] - ------------------------------------------------------------------------------------------------------- [********] [********] [********] [********] [********] [********] [********] [********] - ------------------------------------------------------------------------------------------------------- EMT41DES Design of Medipad Housing (3ml) United States Granted (D404482) - ------------------------------------------------------------------------------------------------------- [********] [********] [********] [********] - -------------------------------------------------------------------------------------------------------
All countries are initially designated when filing in the European Patent Office or the Patent Cooperation Treaty, and are then selected during the regional or national phase. _______________________ [********] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - -------------------------------------------------------------------------------- Page 51 of 56 SCHEDULE 2 COMPOUND PATENTS NONE. - -------------------------------------------------------------------------------- Page 52 of 56 SCHEDULE 3 PROJECT To be agreed upon by the Parties. - -------------------------------------------------------------------------------- Page 52 of 56 SCHEDULE 4 PROJECT SYSTEM SPECIFICATIONS To be agreed upon by the Parties - -------------------------------------------------------------------------------- Page 54 of 56 SCHEDULE 5 PRODUCT SPECIFICATIONS To be agreed upon by the Parties. - -------------------------------------------------------------------------------- Page 55 of 56 Executed by SCHEIN PHARMACEUTICAL (BERMUDA), LTD. on 2/nd/ February, 2000 By: ________________________________ Name: ________________________________ Title: ________________________________ Executed by ENDOREX NEWCO, LTD. on 2/nd/ February, 2000 By: ________________________________ Name: ________________________________ Title: ________________________________ - -------------------------------------------------------------------------------- Page 56 of 56 -----END PRIVACY-ENHANCED MESSAGE-----